We need to do a good job and then charge accordingly. If we don’t charge enough then we have to take on more clients to cover our costs, which means that we don’t have sufficient time to do our best work. It doesn’t help the elusive work-life balance either.

Not only that, but each extra client comes with an administrative burden. It is more efficient to have fewer clients on higher fees than to chase numerous cheaper clients.

Furthermore, the recent recruitment shortage and cost-of-living crisis have led to increased wages that need to be reflected in our fees. It is important not just to set good prices at the outset, but also to increase those each year in line with inflation. 

How do you set your prices? 

At my firm Minerva Accountants we try to work on fixed fees. This means no nasty surprises for clients as the fee is known in advance. This makes it easier for both the client and the firm to budget. It also makes it easier to organise monthly repeating invoices and payments, which smooths cash flow for both client and accountant.

The traditional model of hourly charge-out rates used to be based on thirds (rate = 1/3 salary + 1/3 overheads and 1/3 profit.) Increasing use of technology means that software costs have risen and, although we may have fewer staff, they are generally of much higher calibre. At Minerva, our salaries are just over 40% and software nearly 10%. We don’t have a physical office so our other overheads are around 20%, of which training is one of our biggest costs.

This means that, for a modern business, the old model is of limited use. For that reason, it’s important to check that your own model is still right for your cost base. If you’re a sole practitioner taking a slightly reduced salary topped up by dividends, it is important to base your personal charge-out rate on a commercial salary. When bearing the business risk and hassle, you need to be remunerated accordingly.

Handling out-of-scope work

If you are doing compliance work then it is important to define your inputs in your engagement letter. For us this is an analysed and reconciled bank account on Xero. The outputs are also well known. This is what makes it easy to offer fixed fees for this type of work. 

But how do you handle out-of-scope work when the client bank isn’t reconciled or the client asks for something extra? Any improv class will teach you the power of the phrase “Yes, and…”, but we don’t need to improvise fees. The appropriate response is “Yes, and that will cost…” 

What is value pricing?

Value pricing means fees based not on cost, but on the value we can provide to the client. This is a great way of charging for advisory work, which can make it quite lucrative. But few clients see value in our compliance work. Keeping them legal and giving them peace of mind is about as good as it gets. 

How can you go about changing prices?

First, work out what your fees should be. You can use software such as GoProposal or Practice Ignition or just a simple spreadsheet.

It is easiest to start with new clients. Prices can be presented at your initial meeting so that you can counter any arguments straight away. You might also want your prices on your website. These can be minimum or sample prices but, as Bryony Thomas of Watertight Marketing says: “Customers want to know if they’re in Primark or Prada.”

Then work out the correct fees for your existing clients. Depending on the client, you may wish to do a large increase straight away or spread it over two years. You can communicate this very simply in a letter or email in the same way that you receive your own annual increase for things like insurance. There is no long-winded explanation, just the new fee. This is a standard price increase, not a negotiation. If you haven’t reviewed your prices in a while, then you might want a single sentence explaining that you have reviewed their fees, which have been unchanged for X years, and their new fee is £Y.

We include an annual price increase in our engagement letters and we implement it each year so that our prices don’t get out of date.

But it isn’t just about increasing prices. Check that your clients are getting (and paying for) all the services that they need. You might also find the odd client still paying for redundant services so they can benefit from a more appropriate fee.

It is right to charge clients a professional fee for a professional job. Competing on fees may lead to a reduction in standards so charge a decent fee and compete on quality instead. You’ll enjoy your work a lot more.

Della Hudson is a mentor, business author and ICAEW Council member.