Pricing tax planning services can be a complex task for tax advisors, particularly when aiming to ensure fees are fair, transparent, and reflective of the value provided. The ROI Pricing Method is designed to achieve just that—assigning fees that reflect the real value of tax planning work while keeping compliance and best practices in mind. Unlike traditional pricing methods that may rely on percentages of tax savings, this approach focuses on the work involved and the overall value created for the client.
What Is the ROI Pricing Method?
The ROI Pricing Method is a strategy used to determine the fee for tax planning services by taking into account various elements that reflect the value provided to clients. Unlike percentage-based fees, which can lead to compliance issues for CPAs, this method avoids charging based on a percentage of tax savings. Instead, it evaluates the different components of the work required, considering the time and resources necessary to implement each strategy in a tax plan and ensuring profitability for the advisor.
This approach ensures that fees are calculated based on value—not just the outcome—thus aligning with the ethical and legal standards set by the AICPA and other governing bodies.
Key Components of the ROI Pricing Method
The ROI Pricing Method considers four key variables to assign a value to tax planning work:
1. Intangible Benefits
The intangible benefits of a tax plan refer to the additional value the client receives beyond tax savings. These can include other services they are utilizing, broader financial benefits, or support provided throughout the year.
- Price Adjustment: Intangible benefits are considered to determine whether a price break should be offered. For instance, a client receiving numerous intangible benefits may receive a higher price adjustment compared to one with minimal intangible benefits.
- Assessment: Intangible benefits are classified as Low, Medium, or High, with “High” indicating a higher level of additional value, thus resulting in a greater reduction in overall pricing.
2. Complexity
The complexity of the tax plan is another crucial factor. Plans with numerous moving parts, intricate strategies, and higher levels of coordination require more time and resources.
- Fee Impact: The more complex the tax plan, the higher the cost due to the increased workload involved in ensuring all elements are correctly implemented.
- Assessment: Complexity is evaluated based on the number of strategies and intricacies that need to be accounted for. More work means greater time commitment, leading to an increase in the overall fee.
3. Risk
Tax strategies that involve unique elements or higher potential for IRS scrutiny or audit are classified as higher-risk strategies.
- Fee Consideration: The riskier the strategy, the more likely it is that the CPA will need to support the client in the event of an IRS inquiry or audit. This translates to more time and resources, which needs to be factored into the pricing.
- Risk Premium: A risk premium is added to reflect the additional work required if a strategy is at a greater risk of being challenged.
4. Urgency
Urgency represents how quickly the client needs the plan to be implemented. For example, a client approaching the advisor at the end of the year and requiring immediate implementation of multiple strategies will require the advisor to prioritize their needs over other clients.
- Opportunity Cost: Urgent requests require the advisor to allocate resources quickly, which may impact other scheduled work. Therefore, a premium is added to reflect the opportunity cost.
- Fee Adjustment: The more urgent the request, the higher the fee, as additional resources are marshaled to complete the work on time.
How the ROI Pricing Method Is Calculated
The ROI Pricing Method calculates fees by assigning a value to each of the above components, factoring in the time required for implementation and adding a markup for profitability. This value-based approach considers both tangible and intangible benefits, ensuring that the fee is reflective of the comprehensive value provided by the advisor, rather than being solely outcome-based.
The method uses a weighted average of the factors—including financial gain, complexity, risk, and urgency—resulting in a pricing structure that is transparent, justifiable, and fair.
When Is the ROI Fee Charged?
Fees based on the ROI Pricing Method are charged upfront, based on the value proposition of the tax plan rather than the final outcome or savings. This ensures that the fee structure is aligned with ethical standards, as opposed to being contingent on the final savings outcome, which would be considered a prohibited contingent fee under AICPA rules.
Charging upfront based on value also provides greater clarity for the client and prevents misunderstandings related to billing.
Why the ROI Pricing Method Works
The ROI Pricing Method was developed based on years of experience and the collective best practices of leading tax advisors. It represents a standard for pricing advisory and tax planning services that ensures profitability for the advisor while being fair to the client. This method is so effective that the AICPA is in the process of adopting it as their standard for value pricing, recognizing its value and efficiency.
By focusing on the work involved and the value created, rather than a percentage of tax savings, the ROI Pricing Method ensures that pricing is compliant, transparent, and reflective of the effort and expertise involved in creating a tax plan. This makes it a sustainable and ethical pricing strategy for CPAs and tax advisors.
Avoiding Percentage of Savings as a Fee
Charging a percentage of tax savings as a fee is a practice that can lead to ethical concerns and regulatory issues, especially if structured improperly. The ROI Pricing Method deliberately avoids this approach:
- Not Based on the Exact Final Result: Instead of being based on the final tax savings achieved, which can be unpredictable, the ROI Pricing Method bases its fees on the projected value and work involved.
- Transparency: The ROI Pricing Method clearly communicates to the client how the fee is calculated, eliminating any ambiguity or surprises.
Conclusion
The ROI Pricing Method is an innovative and well-thought-out approach to setting fees for tax planning services. It considers the total value provided to the client—both tangible and intangible—while also accounting for the complexity, risk, and urgency of the work involved. By taking these factors into account, it ensures that tax advisors are compensated fairly, and clients understand the value they are receiving.
Ultimately, the ROI Pricing Method serves as a fair, compliant, and effective way to set fees that reflect the true value of the services provided. Tax advisors looking to adopt a transparent and ethical approach to pricing should consider using the ROI Pricing Method to evaluate and set their fees.
Client Overview: A business client came to us seeking to improve their financial performance. Using our ROI Pricing Method, we identified $100,000 in potential financial gains through strategies like cost reduction, vendor negotiations, debt repayment, and tax savings.
To determine the appropriate service fee, we consider several factors: complexity, risk, intangible benefits, and urgency. The service fee is adjusted based on a weighted average of these factors, ensuring fair and consistent pricing. Below, we demonstrate how these factors impact the service fee and return on investment (ROI).Scenario 1: All Factors are Low – 400% ROI
In this case, all factors (complexity, risk, intangible benefits, urgency) were rated low, meaning the project was straightforward with minimal risks, low urgency, and few intangible benefits (like peace of mind or strategic value).
- Financial Gains Identified: $100,000
- Service Fee (One-Time): $20,000 (approximately 20% of the financial gain)
- ROI: 400% (The client gains $100,000 for a $20,000 investment)
In this case, the project had moderate levels of complexity, risk, intangible benefits, and urgency. The project required a bit more detailed work, moderate risks, and had some urgency, but it wasn’t overly complex or risky.
- Financial Gains Identified: $100,000
- Service Fee (One-Time): $33,000 (approximately 33% of the financial gain)
- ROI: 200% (The client gains $100,000 for a $33,000 investment)
Here, all factors were rated high, meaning the project involved significant complexity, risk, intangible benefits, and urgency. It required substantial time, specialized expertise, and ongoing support to realize the financial gains.
- Financial Gains Identified: $100,000
- Service Fee (One-Time): $50,000 (approximately 50% of the financial gain)
- ROI: 100% (The client gains $100,000 for a $50,000 investment)
The beauty of our ROI Pricing Calculator is that it adjusts automatically using weighted averages across these factors (complexity, risk, intangible benefits, and urgency). This ensures that even when a project doesn't fit neatly into "low," "medium," or "high" categories, the pricing remains fair and standardized.
For example:
- If a project has low complexity but high urgency, the calculator adjusts the weighted averages, balancing the fee to match the combination of factors.
- This creates a consistent, tailored pricing model that reflects the unique circumstances of each client.
Whether a project involves low, medium, or high levels of complexity, risk, intangible benefits, or urgency, the ROI Pricing Method ensures clients receive a meaningful return on investment. With 400% ROI in simple projects and 100% ROI in more complex engagements, our method guarantees value across all types of services.
By using weighted averages, the pricing is automatically adjusted for each individual case, ensuring fair and standardized service fees while maximizing the client’s financial gains.