257 The Do’s and Don’ts of Surge Pricing in Firms

Surge pricing. Virtually every accounting firm has some constraint, be it tax season, be it the fact that all of my clients want.

Their month end close unlike the second day of the month.

How do we manage this though?

Can we charge people extra for the fast lane?

Is that a good idea? What are the situations where it makes sense and doesn't make sense? I put out a call on social.

Media and actually got responses from a.

Ton of people who actually do this in practice. So I'll share some of their thoughts. I'm going to share some of my thoughts and we'll run through the do's.

And don'ts of surge pricing. Come on in. Let me just start with what people.

Shared online because I was actually surprised how many people do surge pricing and simultaneously how many people have never done surge pricing but are extremely opinionated on the matter.

Maybe that shouldn't have been surprising. So I'll run through just a bunch.

Of examples of different things people are doing. This is a tax pro. I charge an extra fee for all corps that show up after 7:15. About midway through the extended filing season. Had one person show up on 9:1 and was very upset that we were going to charge them an extra 1000 bucks. Said they would rather pay the late filing penalty than pay us extra. A great reminder not to build your systems around your idiot clients. The fact somebody had that reaction probably shouldn't impact your decision making. We're optimizing our firm systems for our our best clients and the clients we want to attract in the future. We've done it before as a sliding scale factor that's multiplied by the engagement letter price higher factors, you get closer to a deadline. It does work, but I'd argue it's just one tool to smooth out the workloads. So like the price continues to go up the nearer it gets to the deadline. Charge three times the standard fee if people want to cut in line. I've been moving to a 35 to 50% premium for any tax work done before 415. That includes all 1040s and any business returns for which we don't handle the bookkeeping and encourages extensions and tax planning and has helped lighten the load during tax season. So pretty much anything filed during your busiest time charging a markup. We did this on our in our cast practice for letting people pull the like estimated close date forward. Talk about whether or not that was a good idea later. The flip side, I've seen a discount for extending another we charge less in February than we do in April so it's More like a very early filing discount this one. They just charge an extra pile of money if it's anything after, after September. This was a good one. Early in my practice I did have surge pricing. I no longer have surge pricing and instead have strict internal deadlines to guarantee the 3:15 or 4:15 filing deadline. If they miss the internal deadline they go on extension. During the extension season there is a final internal deadline. If they miss that, they'll be filed late. For those that miss it, it does suck. But it's also a life lesson. We have deadlines for a reason. We inform clients about our internal deadlines and clients need to consider those deadlines when compiling and sending their tax docs. That's a good one maybe to kind of round this out big. My big kind of overarching thoughts is it's a band aid for an underlying problem. But that doesn't mean that it can't be a solution or even a short term solution. In a perfect world I think everyone would agree. No, we've, we have, have perfectly managed the workload throughout the entire year so that we have or the entire month so that we have a perfect balance of work that's happening consistently and, and that is in my belief that is achievable. Reality is nobody's, a lot of people aren't there today so would it make sense to do some sort of surge pricing or, or discounting in the short term? I think the ultimate solution which needs to get the like you know, 80% of your, of your attention the underlying problem I've frankly the best solution in my opinion is scheduled work which we spent a whole week on a month, month and a half ago this upcoming Sundays a main channel video is all about this. If your firm encounters like annual cyclicality, proactively scheduling when you do that work with your clients taking more control over capacity like eliminates this problem. You still have busy times and all that, but you at least have control over when you do all that work in the context of a month end close, getting away from the month end close actually being the thing that the client is clamoring for, uh, and instead moving towards more sort of real time reporting to take the pressure off. When am I going to get my financial statements that I don't even understand and I get like one or two numbers from? I think that's ultimately the solution there. The reality is even if you turn around a set of financial statements on the third of the month, you're 33 days out from, you know, the first day's activity in that reporting cycle. So even if you somehow get all of your clients out, all those financials done within the first three days of the month, and then your team, I don't know, seemingly has nothing to do the rest of the month, even if you did that even fast financials are out of date. So figuring out how to get closer to near real time reporting of the metrics that actually matter to clients, which isn't the entirety of the financial statements because they don't normally know how to read those. Still got to do the financial statements eventually. And there are still important things that can only be gleaned from a completed set of financial statements, but that is not most of the things that your client's looking at. That's kind of my best tip for the entire practice, getting away from that month end close bottleneck. So most attention should go to resolving the underlying issue. But in some cases maybe you can't resolve it completely or you're not there yet. So what do you do? I'll put a link to it in the show Notes There was a On the accounting podcast, Blake and David talked about some surge pricing stuff a few weeks ago. One of the a really interesting story they shared is Wendy's recently told investors that they're going to begin experimenting with dynamic pricing on their menu board. So menus will be screens, price will change throughout the day, and they'll experiment with how to kind of set those prices in a more dynamic way. Investors were pumped.

Everyone else was pissed.

Like it was just a masterclass in how to not communicate something like this. It felt, I don't know, like abusive to customers. The notion that they could expect something to be one price and then turn up at the store and look up at the board and see it's a completely different price that just totally ticked people off. Now the vernacular surge pricing is generally perceived like negatively, but the reality is dynamic pricing is literally all around us. It happens absolutely everywhere with software. Virtually a hundred percent of software is dynamically priced. There are discounts, there are codes you can use. If you linger on the website or you do xyz oftentimes the price will will change depending on the type of user that you are. You can get different prices. There are areas where this is normalized and areas where it's not normalized. But there are also ways to communicate it and frame it that are just going to piss people off and ways that will not create as much friction. Just a few examples of like different types of quote unquote surge pricing or dynamic pricing is probably the better thing to call it, uh, dynamic pricing by, by group. For example, discounts for elderly, for veterans, different pricing for different types of industries. Dynamic pricing by time, particularly in physical goods, you're trying to get rid of old inventory. This may be the closest thing to what we're talking about is, is selling the same thing at a different price depending on when it's happening. Cost plus is dynamic pricing. You're trying to protect against the changing costs of the supplies, the work that goes into it. That is dynamic pricing, competitor based pricing. So price matching, value based pricing is dynamic pricing. Price skimming is something companies do where they will start by pricing a thing at the top of the market to like, just skim off the people who are willing to pay the most first and then work down from there. So you start at the top, you skim off the folks that will pay the very most for it. You step the price down a bit, you skim off the next layer of folks who will pay a lot for it. So that at that point, like virtually every customer is paying almost the max of what they would be willing to pay. That's called price skimming. Bundle pricing is an example of dynamic pricing and penetration pricing. That's usually when a, when a company comes into a new market and they will underprice it for a while to create problems for their competitors before ultimately increasing the price down the road.

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Learn more at the link in the show notes. Most things in life, in fact more things than not that we buy these days are dynamically priced. But I think normally when we have this like the very surface level of this conversation, people say surge pricing and they think Uber or price gouging, you.

Know, water being expensive in a disaster.

Scenario, like that's where, where people's minds go. There's much more to it than that. But those, those are also great examples of how the backlash of doing it wrong can be like really impactful. Now one misconception here that you see actually a whole bunch of different examples of is folks will make a change like this and say, well, at the end of the year, this actually increased our billings by, you know, some vanity metrics. This was a really smart decision, like tacking on some extra fee. And then you're like, why would we ever get rid of this? Oh, great example of this. Actually. I worked at several small firms that tacked on this. They called it all sorts of different things. Software charges, computer processing charges. It was like this arbitrarily calculated thing. Then in both cases came from the tax software. And it was a collection of like, what were the forms that were on that software? Because at some point in time they paid some software renewal bill. And this is like, oh, this is so expensive. Or maybe even clear back to when they first started paying for software, they're like, how are we going to pass this through, through to the clients? And they did this back of the napkin calculation of like, okay, we have umpteen number of clients. Here's the cost of this thing. We gotta spread some allocation of this across a bunch of different clients. And then over the course of decades, it just continued to evolve arbitrarily and was just this flat thing that got added. Well, actually it wasn't flat. It was calculated oftentimes based on like what tax forms they had or some combination of factors. And it was just added to invoices. And I still recall in the early days of my firm of being in the profession, we'd get to the end of the year and somebody would be like this, this processing charge was X hundred thousand dollars for us this year. And it was like, wow, great job. I'm sure glad we have that processing charge. This would also Come up anytime, you know, anybody pushed back against like why are we like is this having this processing charge actually creating more work in the billing process? Like do we really need to, to do this arbitrary thing? And then everybody would say, well, did you see how much money it was last year? We're not just going to stop doing that things. There's a bunch of examples of stuff like this. I would argue credit card fees to a degree are like this, where we can get to the end of the year and we're like, sure, sure glad we did that. When oftentimes these changes actually happen in lieu of like increasing prices on everybody. So for example, if you're going to roll out a surcharge for folks that are filing during the busiest time of the year, oftentimes when we do that, we'll make a concession to say, well, we would normally increase your prices, but because you normally file during the busy season where you're now going to have to pay extra, we won't increase them this year because we know you're already going to have to pay more due to this surcharge, for example. And so we add on a surcharge while simultaneously charging less, you know, across our entire client base or across an entire client group. So that on the whole we actually aren't going anywhere. Or we might be going backwards, but.

We now have this carve out that.

We call this, you know, additional amount of money. I would argue this is largely the case for credit card fees too. Decent counter argument to that is it's selective. If you pass through credit card fees, then it's only the clients who are paying you with a card that pay that fee. I don't go too far down that rabbit hole because people have strong opinions on how you manage card fees. But any like onesie twosie things like this I think usually miss the point. This is one of the big time sucks of, of hourly billing as well is you're running a business which is a collection of a whole bunch of different projects and making decisions to optimize for the profitability of the business as a whole can also oftentimes mean simplifying all the little granular things within that if it means that the business as a whole ends up in the same place. So for example, when we moved over a thousand tax returns from hourly billing, hourly pricing to value pricing, the pushback you always get is, well, how do we do this in a way that's fair for the folks that bring us a mess versus the people that don't bring SMS in Our case, we actually started our quote unquote value pricing at more or less what they've paid us in the past. I was actually kind of capturing in that starting price that we put them at. But to a large degree it kind of doesn't matter. If you think about your business across like business groups, is our revenue going to come in where it needs to come in? Our costs going to come in where, where it needs to come in? If it does, does moving away, for example, from hourly billing reduce a whole ton of work?

In our case it did because the.

Partners would sit down and they would.

Bill every single little project one by.

One, the most, you know, time scarce people in the entire firm. And then we'd have our admins doing all this work of manually invoicing and then chasing down people for AR and all that stuff. And that was a good example of where on the macro level you can make a decision for the business that would get the business to the same place while being able to eliminate a whole bunch of the cost of and time that went into administrating that thing. And this is probably the biggest don't when it comes to doing some version of surge pricing or discounting, whatever dynamic pricing, let's call it, that is don't increase your administrative burden or don't offset this with some sort of partial discount or, or in lieu of some price increase you would otherwise do to like make this medicine go down easier. I think if you do that, it kind of defeats the purpose. Right? Another don't let me. I'll go through my don'ts and then I'll circle back to my do's again being clear that like this is kind of a band aid for the underlying problem. And, and we don't want to give, we don't wanna make the mistake of giving the band aid as much attention as the actual underlying problem. Right. I actually think that last comment really summed it up nicely from the person who said they used to do it, but they've now moved to focusing on how can they manage workflow and just holding clients accountable to deadlines. And sometimes we wanna be the hero and be accommodating for everybody. But also tax agencies have deadlines, right? Like there's things when, there's times when things have to be done. Is it unreasonable that we shouldn't be allowed to have deadlines as well? That we should bear the pressure and the urgency and the risk of having to expedite things for our clients because they couldn't follow the deadline? I don't know that I want to bear that risk. Anyways, my next don't that I jotted down here. Don't offer incentives where there needn't be incentives. For example, my big business clients, even just business clients in general. My advice was generally to wait as long as possible to file because you have more information about the following year that could impact the decisions that you make in prior year's tax reporting. In my opinion, there is virtually never a reason to file earlier, but there are very often reasons to file later. So if there's no reason why I absolutely need to file right now. But there are very often benefits to waiting because you have more complete information, then the default answer should be to wait. Now. You still got to pay the tax in and all that, right? But there's no reason to hit that button until you absolutely have to. Sometimes you have exceptions, like somebody's getting a mortgage or something like that, but that's the exception. So don't offer incentives where there needn't be incentives. There's, there's certain clients that love getting that thing done. Like, you know, through this sort of it's, it's nice to have it done sort of feeling that's not a reason to get something done. Like they need to defer to the advisor on when you recommend getting it done. I get that it feels good to have it done, but the fact it feels good shouldn't override what is like the technically, technically best thing for you.

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Don't make your prices feel negotiable. Oof. At no point do you want to make your clients feel like, you know, this can be a thing that you're just constantly doing back and forth on and if they're not aware of some sort of surcharge or discount structure and it just kind of comes up in the course of doing business and you're like man, I can do it but it's going to cost another thousand bucks. It can open that. Like you do run the risk of opening that can of worms where they're like that's a thousand, but how about 500 bucks? And now your fees are negotiable and like that is something that will always be living kind of in the back of your client's head.

Fourth, don't let this lead to clients.

Taking liberties because oftentimes paying extra and saying yes, we will do this exceptional thing if you give us a pile of cash then allows for them, or at least makes them feel like they have the permission to make these ridiculous and unreasonable requests of not just you, but of your team. And if you work for a legacy firm, this is something that can be incredibly frustrating. The business, the firm owner is like, yeah, no, I guess, Steve, I'll do this for you. You gotta pay this extra X amount. But at the end of the day, it's the staff that pays the price for that, not the firm owner. So another variable in all of this is most firms, the teams are not incentivized on production. Their pay has no connection to like actual production. And so the right answer here is to a degree impacted by, well, if we're going to charge another 30%, but my team is paid on production. What does my team think about that? Are they like, no, I'm actually cool like working some extra hours during busy season if it means my production based pay is going to be higher. Where this sucks. Like the worst version of this is when the firm owner makes that decision because they're afraid to say no and disappoint that client. They're like, see you later, I'm heading home for dinner and the whole team's left. Like, okay, well I guess we'll just do this impossible thing now. That's really frustrating. Last don't. When you. This happens anytime you have like cutoffs and deadlines. Don't get duped by half baked submissions from your clients because if they have to have everything in by a certain date, what you will often find is they will turn up with like half of this stuff and they're like, just.

Got it in under the line, here you go.

And then you get into it and you're like, this is like a totally half baked effort and it does not give me what I need to actually do the work. This is where explicit request lists really come in handy. You literally have tasks that are, Here are all the things that you need to get me. The value of that is you have an like mutually agreed upon list of here's what getting me complete information is. And until you define what complete information is, you kind of open the door to debate over, did I get you? Did I really get you everything or not? I well, I got you 90% of the stuff. Like, isn't that enough? Well, I got you 70% of the stuff. Isn't that enough? That's just a debate that I don't want to have. And so I want to Give them an explicit checklist. Here are all the things that you have to get me by this time frame. And if you don't have this thing then you're indicating doesn't apply this year. The fact that a client really wants to get a return earlier or really wants to get it in under that deadline. If they don't have all that information or if they don't go through the work of gathering all of that information, that is not my fault that it is not ready yet. That is just their circumstances and I don't need to bear the risk of that myself.

Okay, do's do be extremely careful in.

How you communicate this.

Reasonable clients here can understand like your.

Firm is a machine. You are a manufacturing plant. You cannot do the impossible. Everybody can't come to you to the same time at the same time and you do quality work just like in this infinitely elastic scalable way. Two do give people options. Nobody wants to be strong armed into you now have to do this thing and your price is changing as a result. People like to feel like they have control whether they actually do or not. Nobody likes to be told what to do and and how this system is going to change things for them in a way that they don't have any control over. And last and most important, I'm a broken record here. Do continue to work on the underlying problem and there's a bunch of ways to manage the undergoing the underlying problem and how you approach fulfillment and getting the work done. Is there a way that I could pull in part time people or seasonal people?

Maybe part time folks who can work.

At the like front half of the month to get our month end closes done but that person wants to take the rest of the month off after that.

That's not a bad gig, right?

For tax shops.

Is there a way to pull in.

Part time people that just want to work during tax season? There are a lot of offshore groups where you're not hiring a person but you're paying for, you know, returns prepared or something like that. A lot of offshore groups that will just work with you during tax season. So if there's a threshold of what your own team can handle and and you're taking in projects kind of beyond that threshold in the busiest season. Does it make sense for you to pull in an outsourcing group to help you do a bunch of that write up work? You still have the same team reviewing everything so the quality of the output is the same. But many of those outsourcing groups will let you do stuff seasonally. So there's all sorts of different ways to, to manage the underlying problem. Just like give 90% of your attention to that. Not how to best do surge pricing. You know, I think where I'm at right now, I think surge pricing in my opinion is probably just for most firms, maybe a transitional solution. There are still firms who are setting up camp with a business model that is just highly seasonal. When everybody else is shedding 1040s, somebody's going to run a killer business doing 1040s. And I'm like, that's fine with me. There's a lot of people now that say like you just fundamentally shouldn't set up your accounting firm around that stuff. I think it's fine to set up your accounting firm around that stuff. You just need to be aware of the trade offs. So maybe there's businesses like that where search pricing does make sense. Where I was trending and where most people are trending is like what is the most calm and planned monthly and annual cadence for my firm. If you get there, the surge pricing conversation goes away. And don't use surge pricing as a way to accommodate people that can't meet deadlines. Right. And is this a band aid that only applies to your worst clients that cannot follow rules and cannot stick to deadlines and get things done timely? If this is the only people that this impacts, we should not be building systems around these people. We should be building systems that are suited for like our best clients. Right? So we talk about changing to scheduled work. The people who love this most are my great attention to detail clients that can follow instructions and appreciate having a system and a clear like and transparent way of getting something done, those are my great clients. If the purpose of this like surcharge is to penalize the people who won't take my advice when I say no, I actually think you should wait and file in the fall. Or the people who never meet the cutoff dates because they just don't prioritize it and actually get the work done. If I'm building a system around those people, I don't know, that can sometimes be a trap because oftentimes it means making my life harder making putting more pressure on my staff to accommodate my CDNF clients. Right. That's probably not something we want to do. So I don't have like a global perfect answer here. Definitely some things that you should avoid and you should continue working on that underlying problem. But as with all things firm running like not a global, global right answer for everybody here.

Which is why running your own firm is great. If everybody had to run their firm.

The exact same way, like, what would be the point of running your own firm? You know, that's the problem with, like, these universal frameworks for how to do this stuff. If there's a universal framework for all this stuff, wouldn't there just be one machine that we all plugged into? All firms are just homogenized. No, there's different ways to do it.

Thanks for coming and hanging today. We got Q and A Friday tomorrow.

You got any questions, drop them in the comments.

I'll see you there.