Growing your accounting practice, part 4
How tax compliance adds to your bottom line
This four-part whitepaper examines the changing accountancy landscape and takes you step-by-step through the considerations for adding tax compliance to your current array of services to spur growth and evolution in your firm. In Part 4, we take you in-depth into the staffing, sales and marketing, and subscription pricing strategies that will help your growing firm succeed.
Chapter 4: Moving to the new business model
A key step in building and expanding your tax compliance services is to define
your go-to-market strategy. Some firms establish an outsourced compliance practice by offering a complete set of services at the outset.
Others grow a compliance practice step-by-step, introducing new compliance services over time.
Whether you start slowly or go all in, there are three elements to consider — people, process, and profit. The exact construction of this value equation will be unique to your firm and business practices, but we can break it down this way:
Many accounting practices that see hyper-growth structure themselves as a typical corporate business, with specialized departments and roles. These roles are aligned along the client journey and have their own metrics and goals. This is in contrast to the traditional partner model of an accounting firm, where the owner/partner plays a diverse set of roles, including finding and managing clients and possibly even doing some of the accounting work.
Under the corporate model, you tend to have dedicated/designated roles for specific functional areas, such as business development, marketing, sales, and customer support. Each of these roles has its own tasks and metrics. For example, metrics for business development are focused around outreach to prospects while customer support is measured by client satisfaction and retention. Each role may require different skill sets and compensation packages.
The role of the owner/partner in this model changes significantly, as he/she focuses on acquiring new sales talent, training, creating new services, and gauging market needs. In other words, the owner becomes more entrepreneurial.
Jason Blumer, CEO and Founder, Thriveal
Advantages of a corporate structure are many. For example, clear definition of roles means that staff are specialized according to their strengths. Another benefit is the ability to scale easily. You can add resources in specific functional areas as demand grows.
Peter Cullen, CEO, Core Performance Consulting
More than ever, marketing plays a key role in the business world. According to studies, over 2/3 of prospects review and evaluate vendors before reaching out. They do this by going to the websites of vendors, asking peers and friends for input, and consulting industry influencers.
Denise Loter-Koch, CEO, ebs Associates
In the past, your marketing team’s role was focused on creating awareness and demand for your services while sales was tasked with educating prospects and carrying that relationship all the way through to the final purchase of the service or product. With the availability of online marketing and branding content, today’s clients are generally more self-educated than in the past. The wealth
of online information enables clients to be in greater control of doing their own research and assessment. Therefore, the role of marketing has expanded, guiding prospects through your offerings and other purchasing decisions, including them consulting online reviews and peer-to-peer evaluations. Sales, on the other hand, gets involved at a later stage in the purchasing cycle, or prospects simply buy online without direct involvement of your sales team.
When prospects have easy access to information and can compare offerings and vendors, part of the sales activities shift and become marketing activities. The sales effort moves down the funnel. A growing accounting firm will need to add more marketing “muscles” to generate sales leads, to drive brand, and to be easily found. When adding or increasing your sales function, you should also consider how sales will have a stronger marketing function.
A critical aspect of building a successful compliance practice is to base it on a viable profit model. The traditional accounting firm used an hourly model, billing clients based on the time it took to perform services. There was a constant need to rebuild the book of business — as projects were completed, new work already needed to be lined up to keep revenue flowing. In addition, the perception of the value of those services was assessed based on the time spent, not on outcome or impact of the work delivered.
Over the past few years, an increasing number of accounting firms have switched from hourly billing to a subscription model. Offering your clients a subscription model allows you to build a more dependable recurring revenue stream since clients now pay monthly or annually. Also, the subscription model lends itself to value pricing, where clients pay for outcomes, like work completed, rather than just time spent.
This client-friendly model helps improve satisfaction as clients now pay for the value received. Another benefit of this subscription model is that revenue is more predictable, making forecasting of financial goals more reliable.
You may find some challenges in the transition to this new pricing model. The most important to master is how to establish the correct pricing levels for your services. When moving away from a time-based model, the value of,your services may be perceived differently by each client. It may take some exploration and adjustment to find the right pricing levels that work for the majority of your clients.
Mathew Heggem, CEO, SUM Innovation
Subscription pricing example
Accounting firms with subscription models tend to offer multiple tiers of service packages. Once a client is familiar with your firm’s offerings, you can upsell them to more comprehensive service packages with a higher margin.
These packages, sold as 12-month subscriptions, often include incentives and promotions to entice clients to try before fully committing. If filing returns is one of your firm’s services you may, for example, offer a trial package with three free returns. Or, offer the first month’s service at no charge. With the client actively engaged, you can observe their behavior during the evaluation period and gain valuable insights for ongoing interactions. This loss-leader approach lets the accountant establish credibility and goodwill while building a new client base.Each firm will have their own pricing tiers and unique service packages that fit their circumstances and expertise. Here is one example of a three-tier package.
- The first tier is suited to clients with straightforward tax needs: filing in a single state and requiring basic support levels. This low-priced tier can be marketed and promoted as a “freemium” introduction to entice newer clients who may eventually need to expand their service level.
- The second tier is for clients with more complex needs for multistate filings, up to five states in a reporting period, paired with basic support.
- The third tier is typically for ecommerce sellers with buyers in 20 or more states and with more complex support needs.
In setting prices, you should factor in the costs of the contract with the technology vendor. Your value pricing level should include that service cost in addition to your firm’s markup.
Note that sometimes these basic introductory packages are sold either at or below cost, with the goal that over time the firm can upsell to other services with higher margins. As the marketing strategy changes, you may consider these packages as a marketing cost to acquire a new customer.
Jason Blumer, CEO and Founder, Thriveal
As you define the different variations of your service packages, it is helpful to understand the impact of clients moving from one tier to the next — a practice also known as conversion rate.
Profitability is closely tied to conversion rate. In a subscription service package, often the higher tiers have more built-in profit and more built-in advisory time. So, a growing practice will find higher margins through a mix of upselling clients to new tiers as well as attracting new clients directly into the higher tiers.
As you define your packages and learn from your clients, you will become more comfortable with value pricing.
Mark Magel, CTO, SD Mayer
Key marketing and financial metrics
Here are a few more metrics beyond conversion rate that will help guide your pricing and service portfolio:
- Close ratio: The ratio of prospects to actual buyers. For example, if you have 100 prospects and 10 become clients, you have a close ratio of 10 percent
- Customer acquisition cost: The cost to acquire a new client
- Marketing cost: How much you must spend on marketing to attract a single new client
- Churn rate: The percentage of total clients lost each year
- Customer lifetime value: The revenue that each client brings in over the life of the relationship
These metrics will drive your overall margins and profits. They will also inform how you scale the business and manage growth. Lastly these metrics will help you determine how much funding you need to break even and be profitable.
Let’s bring this all together in a sample ROI model.
ROI model for a subscription-based practice
This model assumes that the client base of a small practice will grow by 35 percent year-over-year, with a churn rate2 of 10 percent. This leads the firm to grow from 12 clients in Year 1 to 108 in Year 5.
Matthew May, COO, Acuity
To calculate revenue, we multiply the combined monthly subscription fees by the number of clients. Starting at a price of $99/month in Year 1, the model assumes an increase in revenue/client of 15 percent due to upselling efforts, so at Year 5 revenue/client is $170. With 108 clients at the end of Year 5 we estimate this model generates $223,000 in five years.
Revenue is balanced by several cost items. In our model, the first is customer acquisition cost, which we assume to be $150/client. As the client pool grows over time, the customer acquisition cost grows to a total of almost $6,000. Other costs include fees to prepare and file returns and costs to support clients. In this model, costs are approximately $15,000/month, with a total of $122,000 over five years.
Using the assumptions outlined in this model, the firm in this example will have a small loss in Year 1. This is the result of investing in and building out their compliance practice. Within a year, the firm breaks even and is cash flow positive. As the firm grows its customer base, it becomes very profitable over time and has solid margins.
This example shows how a firm benefits from the recurring revenue of a subscription-based model, as well as the lower customer churn as economies of scale drive a firm to profitability.
Contact us at A4A@avalara.com for a free copy of the template that you can modify to reflect your practice’s metrics.
In this paper, we outlined the significant opportunities in building a practice with tax compliance services to expand your existing offerings. A trend to outsource and the availability of technology creates new opportunities for you. As tax compliance moves to the mainstream market, understanding your prospect buyer profile and motives as well as having a clear service strategy and a portfolio of proven service packages will help your practice find the right way to not only grow but to thrive.
To learn more about nexus:
To learn more about business registrations:
To learn more about sales tax and product taxability:
To learn more about exemption certificates:
To learn more about preparation and filing:
To learn more about collection and remittance:
To learn more about VDAs:
To learn more about audits :
1 Geoffrey A. Moore (2006). Crossing the Chasm. Marketing and Selling Disruptive Products to Mainstream Customers. Collins Business.
2 More detailed terms and metrics can be found in various publications, including SaaS Metrics 2.0 A Guide to Measuring and Improving What Matters.
Share your story
Let us know how your firm is navigating the changing accountancy landscape. Or share ideas on tactics not covered here. Please connect with us at A4A@avalara.com.
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