Lots of exciting AI action this week in the world of accounting including a bit of a frenzy I set off on LinkedIn on my vision introducing “Pricing 3.0”.

Introducing Pricing 3.0: Turning Your Services Into Products

How do you price your services?

At first there was Pricing 1.0 for figuring your accounting fees (not super profitable).

Then there was Pricing 2.0 (better margins but hard to sell your firm).

Now there is Pricing 3.0 which I believe will be the future of accounting.

It's a win-win in terms of premium margins and boosting your firm exit valuation.

This is not an overnight strategy.

If you’re just looking to just “boost your margins” or “increase your fee” stick with Pricing 2.0.

If you’re in it for the long-haul (like me), you’re going to want your firm to actually be “sellable”.

Not only should you know what your firm is worth today, but what levers to pull to increase its valuation (hint: it involves doing less work, not more).

My newsletter last week was all about firm exit strategies so today I’m diving into pricing frameworks.

Introducing Pricing 3.0

Pricing 3.0 taps into valuation strategy and can be the difference in selling your firm at a 0.75 - 1x multiple or a 2X+ multiple.

Maybe you ‘re still using Pricing 1.0 strategies.

Like cost-plus or hourly billing.

It's time to evolve to Value-Based+ (VB+) or as I call it “productized services” for profit margins that can compete with the valuation of a tech software-as-a-service (SaaS) business.

Wait, what SaaS? Huh?

Let me explain.

I happen to be the cofounder of two profitable SaaS platforms in the accounting space.

I see the SaaS model as the future of accounting.

You see, most accounting firms rely on outdated pricing models that cap profitability.

But innovative firms are adopting advanced strategies that capture income from products and tiered services.

Let’s dive in: 👇

Pricing 1.0

Cost-Plus

Simple: You take what it costs to offer your services and add a percentage to that amount to determine how much you should charge clients in order to make a profit.

Advantages

• Simple to implement and easy for clients to understand

• Still allows for profit if your expenses are variable

Disadvantages

• Doesn’t take competitors into account

• Hard to figure out proper margins

Flat-fee Pricing

Fees remains constant no matter how much time and resources you devote to a project. This approach can work well for pricing basic or repetitive services such as preparing simple tax returns. It doesn’t work as well for more complex projects like audits or FP&A.

Advantages

• Simple to implement and easy for clients to understand

• You and your clients know what to expect

Disadvantages

• Inflexible

• Doesn’t always reflect as much value as clients get from your service

Competition-Based Pricing

This is comparing your offering to that of your competitors.

Advantages

• Can help prevent losing out to competitors

• Can help you market your services

Disadvantages

• Prices could be set too low

• Sometimes creates a passive mindset toward pricing rather than proactive

Hourly Billing

Billing clients requires firms to track every hour spent on a project. Then you present a list of services performed along with the hourly rate for your client.

Advantages

• Simple to implement

Disadvantages

• Leads to a surprise bill for clients at the end of an engagement

• Doesn’t always reflect the value your firm can offer

Pricing 2.0

Value-based Pricing

Value-based pricing is when you price your services based on what your clients are willing to pay, or the value they perceive in your service. Often a tiered or menu-based pricing mechanism is employed.

Advantages:

• Can improve client loyalty and sentiment if used effectively

• Helps prioritize clients

• Very effective went levering “price anchoring” techniques

Disadvantages:

• Requires you to have a deeper discovery call or consultative approach to sales

• More complex to implement and maintain

Pricing 3.0

Productized Pricing

This is a combination of value pricing and creating products out of your services that require less work to fulfill and can operate passively. This results in the highest profit margins since it includes “build once, sell twice” products such as courses, communities, and platforms.

Advantages:

• Higher profit margins

• More passive income streams

• Scalable growth

• Monetizes the prospects not yet ready to hire you

• Can increase the sales multiple when selling your firm, as productized services are more valuable

Disadvantages:

• Requires upfront investment to create products

• Need to develop a “product mindset”

What's next?

This is the question of the decade. The “money shot “ question.

This may sound blasphemous but I believe the future of accounting compliance and maintenance service will be free.

Not free as in the IRS “Free File” tax program but free as in charging a fee for tax preparation or bookkeeping will no longer be a sustainable business model in itself.

These compliance and maintenance services will be included in a base level product offered by most small to mid-sized firms.

The real revenue model and value capture will be on the services that AI will not be able to seriously compete with human accountants on anytime soon including tax advisory, outsourced CFO, FP&A, audit, valuation strategy and higher level advisory services.

Be sure to follow my LinkedIn this coming week as I deep-dive on this new Pricing 3.0 model, productized pricing and the rise of the productized accountant.

1. How To Profit From FP&A Services [LINK]

   

2. Should You Show Your Fees on Your Website? [LINK]

3. The Rise of the ChatGPT-Powered Accountant [LINK]