Art of Accounting: Increasing fees for next year
“Tis the season for fee increases” is a song I hum every year in late December. This has always been a good time for me to review the year and fee structure with clients.
I have a simple rule about whether you are charging enough: “If, at the end of the year, you’ve made a good living, fully funded your retirement plan, can give generous raises to your staff and have money left over to invest in your practice, then your fees are the right amount.” Even if this is so, it doesn’t mean every client’s fees are appropriate. Also, costs continually increase and realization percentages in most firms can always be higher, hence the need to increase fees.
I always look at an across-the-board percentage increase in rates, prices or retainers as not really a fee increase, but a passing on of increased costs. This merely enables you to remain equal with the previous year going forward. If your fees do not keep up with increased costs, you will fall behind. Even if it doesn’t show up in the next year, your reduced profitability will compound quickly, with not-so-good results.
Another thing to look at is increased services you are performing for clients and scope creep for fixed-price clients. These might warrant an increase greater than the percentage increase. Each client in this grouping needs to be examined closely and raised to the proper fee. Part of this is responsible firm management and part requires selling skills to relate the reasons and value to the client. In many cases the value has been conferred on the client in the past year or years, and you are now catching up so the fee is proper for the ensuing year.
I suggest considering the following, all of which I have done, and continue to do.
- Fixed-fee or monthly retainer clients: Increase the billings across the board by a fixed percentage — 4 percent, 5 percent, 8 percent, whatever you think is appropriate and will work. I include on the bottom on the January invoice a sentence such as, “Due to increased costs and time charges your monthly retainer has been increased X% effective January 1, 20XX.” Depending upon the relationship, you might want to call some clients to discuss it with them. In some cases I use a fixed amount rather than a percentage. I usually round the amount and put that amount in the sentence I include on the invoice. When I use a percent, I increase the fees to the penny with no rounding. For example an $825 monthly amount increased by 5 percent becomes $866.25. When a client asks about the amount, I explain about the 5 percent across-the-board increase and show the arithmetic I used to round it down, so I might have made the new fee $865.00, or $860.00. Either way I was losing revenue and reducing the base that the next increase would be based on — so therefore the pennies. I have never had a problem with this. When you explain it’s an across-the-board increase to pass on increased costs, and clients feel it was fair and they weren’t singled out, you’ll receive the new fee amount.
- Added services or scope creep: In these cases it is necessary to bring the fee up to the proper level. What I do here is prepare an analysis, sometimes going back three or four years to show how the services increased, usually due to added compliance, tax, accounting and/or disclosure requirements. Other times it might be because of turnover issues at the client and added work that was assumed by us. Sure, we are primarily to blame for not acting sooner, but we are doing it now and the increase is warranted going forward. I am much better managing clients now, but when I need to jump the fee up, sometimes as much as 30 to 40 percent, I really do my homework, laying out all of the reasons and segmenting the services with prices, always keeping in mind the cause and value to the client and importance of maintaining the relationship. I previously addressed this issue in a column on Aug. 24, 2015 (see Art of Accounting: Boosting a fixed fee substantially).
- Time-based fees: Increase the rates. Here some rounding is necessary. It is unwieldy to say, “My rates are $383.17 an hour.” Rather, $380 or $385 makes more sense.
Anytime is the right time to increase fees, but the beginning of the year is a logical time and is somewhat expected or anticipated. So, what are you waiting for?
One final comment: Every bill is a value bill since clients always considers the value they receive when they write the check. It is your job to make sure the client always appreciates the value you bring to the relationship.