How to raise the rates you charge clients
You should be billing what you’re worth — and raising prices isn’t as hard as you might think.
June 10, 2013
Editor’s note: This column is an excerpt from the book Bill What You’re Worth, by David W. Cottle, CPA.
Suppose after performing the analyses in chapter 2, “How Much Do You Really Earn?,” you decide your prices are too low. (Note that although this book uses the phrase “raise price,” when you discuss prices with clients, you never “raise” prices, you always “adjust” prices.) So, how do you raise them? You raise prices by raising prices.
Example: You charged Tina Taxpayer $565 last year, and you think she should pay $700 this year. Just do the work, and invoice her $700. That’s only about a 24 percent increase. Most people have no problem with increases of less than 25 percent to 30 percent.
Example: You charged Clark Client $475 last year, but, after reading this book and looking back at the value of what you did, you think you should have charged $750.
If Clark’s past record holds, this year will be even more complicated, perhaps to a fair price of $800 or more.
After Clark brings in his information this year, but before you start work on it, you say, “Clark, I went back and looked at what we charged you last year, and I realize that we should have charged you $750 for the work we did. Also, we have made some adjustments to our prices since last year. This year, it looks like the price for your return will be about $800, assuming it is no more complicated than last year. If it is more complicated, the price may be higher. Because this is significantly higher than we have charged you in the past, I wanted you to know about this price adjustment before we started work.”
If Clark has a problem with a $750 or $800 price, it is better for you to find out before doing the work. This gives him the opportunity to take his business elsewhere and gives you the opportunity to stop working for less than you are worth. It’s as simple as that.
Do you have to ask permission from most of your clients? No. Do you have to notify your clients? No. Just do it. Just go into your time-keeping system and raise your chargeout rates to whatever you feel is fair—even if you don’t discuss the concepts in this book with your billers.
How to make “balanced” changes
I have heard accountants say, “I can’t increase my rates because I only get 95 percent of standard now.” Few accountants get 100 percent of standard consistently. Instead, I would advise that accountant, “Pat yourself on the back for that 95 percent realization, and raise your rates 15 percent.”
You can increase effective chargeout rates if you maintain the same realization and increase your average standard chargeout rate or maintain the same standard chargeout rates and increase realization. But if realization is over 90 percent, you will get only modest revenue gains with realization increases. Often, the best way to produce a desired increase in effective chargeout rates with the least change in operations is to make balanced changes in each of the following two factors:
My empirical observation is that the highest effective chargeout rates seem to be achieved with higher standard rates and realization rates somewhat above 80 percent. I usually recommend my CPA firm clients target about 85 percent.
If you do it the right way, you can normally increase rates 10 percent to 15 percent for employees and 10 percent to 30 percent for some owners, and clients will not even notice the change.
“But my fellow owners will never go along with that large a rate increase”
Another way to increase prices is to increase your employees’ rates by $2 each month and your owners’ rates by $5 each month until you get them as high as you want.
One client couldn’t bear to raise rates all at once. So the firm raised partner rates 20 percent, employee rates 10 percent on Oct. 1, and then raised all rates another 10 percent on Jan.1. Their realization remained about 99 percent.
Remember, most people equate high prices with high quality, especially if they have little else by which to judge value. Generally, the more people pay for something, the more valuable it is to them. Because professional services are an intangible that most clients cannot evaluate, they often evaluate them based on what they pay.
David Cottle, CPA, consults with professional firms on profitability improvement, partner compensation, marketing, client service improvement, and strategic planning and management. He also provides advice at retreats, speeches, and seminars.