What question should a fee test answer?
A seller may believe the practice is underpriced, while a buyer wants evidence about what clients will accept and what delivery will cost. A defined test can inform that discussion. The operations hub treats pricing as an operating experiment whose results need records, rather than an automatic add-back to historical earnings.
A pricing cohort test is a documented evaluation of revised service terms and fees for a specified group of comparable clients over a stated period, including the clients that decline or leave.Specify the question before beginning. The firm may be testing a rate, a package boundary, a billing schedule, or a move to a different service model. Changing several factors at once can make the result difficult to interpret. Identify which changes are intentional and which differences need to be controlled or disclosed.
How should the client group be defined?
Choose criteria such as service package, current fee range, complexity, information quality, tenure, and delivery pattern. Record the full eligible group and the reason for inclusion or exclusion. Do not remove unsuccessful clients afterward to make the cohort appear stronger. The final result should describe the same population that was defined at the start.
Consider owner relationship dependence. Clients who have worked personally with the seller for decades may respond differently after a transfer. A test while the seller remains in control can provide useful evidence without proving post-closing acceptance. Explain that distinction when using the results in a transaction forecast.
What baseline should be preserved?
Record current accepted terms, billed fees, collections, credits, delivery hours, review effort, and relevant service issues. Choose comparable periods that reflect the service cycle. A monthly CAS package and an annual tax assignment require different timing. Preserve the underlying data so a buyer can reproduce the calculation.
The IRS Publication 538 discussion of accounting methods distinguishes cash and accrual methods for federal tax purposes. A pricing analysis should likewise label whether a figure represents billing, earned revenue, or collected cash, while using the appropriate accounting review for the actual firm. These measures can differ during the implementation period.
How should revised terms be communicated?
Review the existing agreement and the appropriate process for changing it. Explain the services, responsibilities, timing, and revised fee clearly. The professional liability program’s engagement letter guidance discusses those subjects as part of engagement documentation. It does not establish a universal notice period or amendment rule for every agreement.
The scope change guide helps connect the price to the actual service promise. A client accepting a higher price for additional work is different from a client accepting a higher price for unchanged work. Record the distinction so the test does not misattribute the result to pricing alone.
Which outcomes should be tracked?
Track each client’s response, effective date, first revised invoice, payment, credits, disputes, workload, and continuation. Use consistent status definitions. An unanswered notice is not automatically acceptance, and acceptance is not the same as collection. Counsel and the responsible advisors should determine how the actual terms can be changed and evidenced.
| Measure | What it shows | Limit to avoid |
|---|---|---|
| Accepted terms | Documented client response | Confusing a proposal with agreement |
| Revised billing | Implemented invoice amount | Assuming cash was collected |
| Collections and credits | Realized payment pattern | Ignoring disputes or reversals |
| Delivery effort | Resources used | Treating added service as pure margin |
| Departures | Observed loss of engagements | Dropping unsuccessful clients from the denominator |
Record relevant qualitative observations with the numbers. A client may accept the fee but request a different package, reduce frequency, or move work elsewhere. Those changes can affect revenue and effort differently. The revised engagement should be understood on its actual terms, not classified simply as retained or lost.
What does a simple illustrative calculation show?
Suppose a fictional cohort of 20 monthly clients initially pays $500 each, producing $10,000 of monthly billing. A proposed $550 fee is accepted and implemented by 18 clients, while two leave. Revised monthly billing is $9,900 before credits or collection differences. These invented figures illustrate why a higher individual fee does not necessarily raise total revenue.
Assume instead that all 20 accept but the package adds two hours of work per client. At an illustrative $60 direct labor cost per hour, the added 40 hours cost $2,400 against a $1,000 billing increase. This is not a real margin estimate. It demonstrates why scope and delivery effort belong beside price in the test record.
How should collections and disputes be interpreted?
The professional liability program’s billing risk guidance discusses clear payment terms and risk considerations around collection practices. It provides practical risk guidance, not a probability that a specific client will dispute a charge. Review payment terms and escalation with the appropriate advisors.
The collections policy guide distinguishes a billed amount from its expected and actual realization. Track delayed payments and credits through the observation period. Do not count disputed increases as recurring earnings merely because the invoice remains open. Identify whether a collection issue relates to the change, ordinary seasonality, or another documented cause.
Which comparison errors should be avoided?
Do not compare a tax-season quarter with a quiet quarter without explanation. Adjust the analysis for service changes, client additions, departures, and timing using a method the buyer can follow. Preserve gross results before any analytical adjustments. A favorable adjusted figure should not hide a weaker actual cash result.
Selection matters as well. A small group of easy clients may provide a useful initial implementation test, but it does not represent the entire book. State the population, dates, and differences. External market rates, if researched, require their own sources and scope comparison rather than being inferred from the firm’s internal experience.
What operating exceptions should be reviewed?
Identify extra meetings, rushed work, informal discounts, and owner intervention arising during the test. The workflow exception guide provides a way to classify these events. A revised price that depends on substantial seller attention may behave differently when a successor manages the relationship.
Separate the test design from staff compensation or performance judgments. Staff may be carrying out revised terms that create additional work. Understand that work before interpreting hours as inefficiency. A useful experiment answers a commercial question while preserving professional service quality and appropriate treatment of clients.
How should the results appear in a sale discussion?
Provide the defined cohort, baseline, communication and acceptance evidence, implemented billing, collections, workload, and departures. Clearly label any forecast extrapolation and its assumptions. Historical earnings should remain reconciled to actual records. A supported opportunity can be valuable to discuss without being disguised as completed performance.
The buyer can then test whether the evidence applies to the remaining book and the proposed transition. A fee experiment does not guarantee a price premium or future acceptance. It offers a bounded record of what happened under stated conditions, which is more useful than a general claim that every client could simply be charged more.
A few common questions
What else should you know?
Can a proposed fee increase be included in historical earnings?
A proposed change is not historical performance. Show the actual billed and collected results separately from forecasts, and identify when revised terms were accepted and implemented. A buyer may evaluate a supported future opportunity, but it should not be presented as an earned adjustment merely because the seller believes clients will accept it.
Should the test cohort include only the most loyal clients?
That choice may answer a narrow question but cannot establish broad acceptance across the practice. Explain why clients were selected and which service, tenure, or relationship characteristics differ from the remaining book. Include departures and exceptions in the record. Avoid generalizing favorable results from a deliberately easier group without identifying the selection limit.
Is billed revenue enough to measure a successful fee change?
No. Review collections, credits, disputes, service effort, and client retention alongside billing. A higher invoice can coexist with slower payment or additional work. Use comparable periods and explain the accounting basis. The relevant operating result depends on what was delivered and realized, not only the amount entered into the billing system.
Does this test establish the market price for accounting services?
It describes results for the defined clients, service terms, firm, and observation period. It does not establish a regional market average or another practice’s pricing capacity. Use the evidence to evaluate this firm’s assumptions, and research external comparisons separately with clear scope and vintage limits. Do not turn one cohort into a universal benchmark.
Which sources support this guide?
Primary rules and guidance support the factual statements in this article. The worked examples and decision frameworks are original educational analysis.
- Frequently Asked Engagement Letter Questions for Accounting Firms of All Sizes — AICPA Professional Liability Insurance Program
- Bad billing practices can affect malpractice risk — AICPA Professional Liability Insurance Program
- Publication 538: Accounting Periods and Methods — Internal Revenue Service