We manage over 100 clients in our accounting practice. We have always struggled with fee increase proposals. Why is that? We were simply afraid of the outcome, that is, losing the client.
Yet, sometimes it is better to lose an insufficiently profitable client, in order to create space for new, profitable clients.
It is impossible for all the clients in accounting practice to be equally profitable.
All of us as accountants face the syndrome of a client who consumes a lot of our resources (such as time), but their fee doesn’t match the services.
Here is how you can increase these clients’ fees.
1. Track the Hours You Spend on Clients
The key is in tracking what we get from the client compared to the resource we have invested in their project.
Time is the key resource in our services.
Therefore, to have a basis for the decision of the clients whose fees should increase, we must monitor the resources and time we have spent on said clients.
Here’s an example:
Client A: monthly retainer fee – $1000, total hours spent per month 25
Client B: monthly retainer fee – $800, total hours spent per month 8
It’s clear that Client A is a good candidate for a fee increase because we only make $40 per hour with them. meanwhile, we make $100 per hour with Client B.
2. Identify Profitability per Client
Sometimes we aren’t even aware of the profitability per client.
You shouldn’t risk too much by increasing the fee to those clients who bring a large profit to the company or have a large profit margin. You should do your best to keep them, especially if they’re fee-sensitive.
Hence, the focus should be on insufficiently profitable clients when considering increasing fees.
Profitability can only be calculated if you track hours per client. Here is how to calculate your profit:
Client Revenue – Client Cost (hours spent x pay rate)
Client revenue is a well-known category – it’s simply the amount you’ve billed to a client.
For cost calculation, you’ll need information about the accountant’s pay rate (this is also a known category – it is calculated by dividing the gross salary by the accountant’s monthly hours).
We get the cost when we multiply the number of hours of all accountants working for the client by their pay rate.
If we have a simple time tracking tool, it’ll automatically calculate the cost per client. Additionally, it’s possible to include the overhead rate besides the pay rate.
This way, we will get net profit instead of gross profit, which is an even better indicator.
3. Analyze all Tasks Done for an Unprofitable Client
Once you have identified a candidate for a fee increase, we can proceed to the next step.
It is very important for us to have an answer to the client’s question about the price increase.
Hence, it is important to have a good proof. The list of all the tasks with time spent on them can be one of the arguments.
This is how we can transparently show our engagement to the client, and that we should be paid more for that engagement.
All the tasks should be listed within an hourly structure.
There are two key questions we are looking to answer:
- Are the tasks within the scope of engagement?
- Is an unusually large amount of time spent on a task within the scope?
If you determine that you’re providing a service that isn’t specifically defined by the scope of engagement, that can be a great opportunity to present the reasons for the price increase to the client.
If you spend a lot of time on a specific task, and can’t reduce it internally, it’s clear that you’ll need to communicate to the client that you must increase the price.
4. Desirable Conditions for a Fee Increase
The first condition has been detailed above. Therefore, a candidate for a fee increase is a client with an insufficient profitability level.
Here are the other conditions. They are not mandatory but are important from the aspect of certainty that the client will accept the fee increase
- The Client Getting the Fee Increase Isn’t Fee-sensitive
If the client is fee sensitive, them accepting the increase is highly unlikely. For example, these are the clients who have asked for discounts or objected to billing for additional services in the past.
This is why you need to have transparent arguments on why the fee is increasing.
- The Client Is Satisfied with Your Service
Whether a client will accept the price increase or not depends largely on whether they’re a satisfied customer.
If there were instances where the client wasn’t satisfied with your accountant’s work, there is a high probability that they will not accept a fee increase. Therefore, we suggest ensuring the client is satisfied with the service, so they’re ready for a fee increase.
- You’ve Worked for the Client for a While Without Fee Increases
If you haven’t changed your prices in years, you should definitely take that as a price increase factor. Considering the inflation level, your prices should be aligned with it.
5. How Much Should We Increase the Price?
Let us return to the example above.
Client A has an actual billing rate of $40 per hour, while Client B has $100 per hour.
The company average is $60.
The conclusion is that if we want to ensure an average at the company level, we need to adjust the client’s fee so that the monthly retainer ensures an average of $60 per hour.
So, instead of a retainer of $1000 per month, the price should be:
25 hours x 60 = $1500
However, you should keep in mind that by increasing fees you should also ensure the desired margin. That is why we must have records on monitoring the labor costs per client.
In some cases, the hourly rate will be lower – $30 for example – and it can be managed by the accountants with the minimum pay rate, so the profit margin will be high.
6. Communicate the Fee Increase Proposal
Once you’ve selected the candidates for the fee increase, you’ll need to present the increase plan to those clients.
During the negotiations, you should have all the arguments with you:
- A full list of tasks that were finished in the previous period accompanied by the number of hours
- Activities beyond the scope of engagement, and many hours go into those tasks
- The instances that required an increase in the workload for the client
- The increase in the number of transactions with the client
- How many more hours we are spending due to the increase in the volume of transactions
The manner and form of communicating the price increase are crucial.
When it comes to larger clients and those which could be fee sensitive, you should organize a meeting
You should never prefer informing the clients about the planned fee increases via email.
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