When starting any business, getting the price right is one of the hardest things to master.
When I am talking to groups of potential AAT bookkeepers or accountants who ask ‘how much should I charge’, I always answer with two responses: “I can’t tell you” or “it depends”.
That might seem like a bit of a ‘cop out’, but the truth of the matter is, it’s true!
However, this does not mean that we can’t work out a reasonable figure after doing some research, but I’ll say it again – I am not going to give you that figure, you will need to work that out for yourself.
So what do we need to consider when we are setting our fees?
Know your local market and your competitors
Where you are based will have some influence on what you are able to charge. Businesses who are situated in more affluent areas will generally be able to charge a higher price for a comparative service to similar practice in a very rural community.
The type of potential client will also have an effect. For instance, if you are dealing mainly with small family start-up businesses, they will generally be less able to afford your services than a larger, more established business.
On the other hand, if you were the only bookkeeping business for miles around, your services will be much more in demand, so this could potentially generate a higher fee.
All of this means that you will have to do some research on the local competition. Check out their websites and any business literature. This won’t give you a definite answer, but will certainly help to give you some guidance.
You will also need to investigate what the likely level of potential work is. You can do this by visiting local industrial estates, checking local business directories, trade directories and “Googling” local business.
People set up their own bookkeeping businesses for many reasons and it’s not always to make lots of money. It might be that you are trying to gain a little extra income, maybe to pay for a holiday, or for some other “luxury”, in which case, price is not quite as critical, as it would be if you were trying to achieve a more sustainable growing business.
If you are going to need to depend on this income, then try these steps:
A – Decide how much you need to earn in a year
B – Decide how many hours you intend to work in a year – don’t forget time off like holidays, illness, travelling, CPD etc.
A/C – Divide one by the other and you will have an approximate hourly rate, for instance:
B 20 hours per week for say 46 weeks 920
A/C £20000/920 hours = £21.74 per hour
Don’t forget that the above method doesn’t take into consideration any overheads such as software and telephone, nor does it allow for hardware and setup costs.
And finally, don’t forget the hours above are for hours worked and do not include thinking time, planning, your administration and all of the other elements of running your business. So, when you estimate the hours that you are prepared to work, be realistic about how many chargeable hours you can actually accommodate. You need to allow time for family and friends as well.
Don’t undersell yourself
Above I mentioned the importance of checking out your competition. The temptation here is to think about undercutting all of your competition because this should guarantee that you will get all of the business, right?
This could be the case but depending on how low you need to go, you will probably end up being extremely busy and not earning enough to meet your requirements. You will also get recommendations to clients who are only prepared to pay for your low prices. Conversely, businesses might question why your price is so low and this might appear to be an indicator of an inferior service.
So don’t be afraid to be firm about your pricing. Whilst it might be hard to initially turn business away, in the long-term it will pay dividends.
One compromise you could consider is to quote your normal price and then maybe offer a discount for the first few months, whilst the client confirms what a wonderful service you offer and then revert to your normal price after this ‘trial period’.
On some occasions, you may find that your client will be interested in some additional services. You could be asked to perform simple day-to-day bookkeeping services. How about if you offer to also produce some monthly accounts to enable the business owner to value how their business is progressing. Maybe you could advise the client on how they could streamline some aspects of their business or how they could save some money. These “value added” services will sometimes command a higher rate, even if they don’t they will help to provide additional valuable income for you.
This is another way of generating additional income. You might have a relationship with an accountancy software provider where you have negotiated a reduced price for their packages. In this case you could pass the cost onto your client, with a small mark-up. The nice thing here is that once this process is in place, you will be earning some additional income with little or no effort.
Fixed fee versus hourly rate
There is often a debate as to whether you should charge an hourly rate, or a fixed price (based on an hourly rate).
There are arguments for and against both methods.
Benefit of fixed price – certainty for you and the client as there will be no unexpected increases.
Drawback of fixed price – if you get this wrong, you run the risk of not getting paid for all of the hours you work, although, if you get this right and your efficiency improves your average hourly rate will increase, so potentially a benefit as well. It is tricky to determine a fixed price initially so consider working at an hourly rate until you can become reasonably certain of the average hours that you will need to charge on a regular basis.
Benefit of hourly rate – you can usually guarantee that you can charge for all of the hours that you work.
Drawback of hourly rate – your client might challenge any additional hours above the norm, whether they are legitimate or not. This can often lead to fee disputes.
Don’t forget price increases
And finally, don’t forget that you will need to allow for price increases. You should have a method of increasing your prices so that you can keep pace with inflation.
One method you could consider is to quote and agree your initial price, which would appear on your engagement letter with a provision for an annual inflationary increase. This will help to mitigate against any arguments when the time for the increase arrives.
Whatever you decide with regards to pricing please remember not to undersell yourself. Keep in mind that you have worked long and hard to achieve your professional membership so it is only fair that you are rewarded appropriately.
Henry Cooper FMAAT was AAT's 32nd President.