Value-Based Pricing For Professional Services

How do you determine how much to sell your service so that you can maximize your business’s profits?

Tax And Advisory Services Arizona

            Tax And Advisory Services Arizona

Do you have a pricing strategy?

Do you have, and more importantly do you follow, a systematic approach for assigning a price to the professional services you are in the business of providing?

If the answer to any of these questions is “no” or sounds like a resounding “huh,” then this article may contain some valuable insights on how implementing value-based pricing model could be one of the more profitable decisions you could make for your business. 

Selling your services for the right price is imperative if you plan to survive. Just “shooting in the dark” is nothing short of gambling that you have it right. Your selling price directly impacts your revenues, cash flows, profitability, and your ability to pay your bills. Without a profitable selling price you could eventually go out of business.

What Is Value-Based Pricing For Professional Services?

Value-based pricing, as noted in this definition, means determining the price of a service based on the benefits it provides for the consumer. You are essentially attaching a price to your service based on what the client thinks the service is worth. This approach contrasts the typical model that bases price on cost or hourly rate. When you are using value-based pricing you are trying to reach equilibrium where you are maximizing your revenue, yet charging the customers an amount they are also willing to pay. 

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What Are Some Of The Benefits To Value-Based Pricing?

Because of value-based pricing’s focus on customer research and understanding, the pricing model is a valuable method for understanding and serving your customers better, as noted by Cleverism.

In order to determine the price, you’ll need to survey customers and improve your understanding of the things they are looking for with the service. This enhanced understanding won’t just help you determine the price, it’ll also help you provide better service. This also translates into a huge benefit to the customer.

Using accountants as an example, value pricing involves setting a fixed price in advance for a service measured by the value it creates for the client. 

For accountants who have always billed by the hour, as Firm of the Future notes, value pricing requires a paradigm shift. Instead of thinking first of the cost (in hours) of providing a service and basing the price from the cost, the accountant, instead, thinks first of the value to the client to create the price, then makes sure that the price is justified by the accountant’s cost.

In other words, focusing on the value added to the client and providing a fixed price infuses confidence into a more effective selling process as Firm of the Future observes:

Clients are more comfortable with price certainty,which isa feature of value-based pricing. If you are billing by the hour, you may have many clients who are accustomed to, and feel okay, with that arrangement. However, you may also have clients who cringe when they open your bills (though they don’t say anything) or potential clients who decide to do business elsewhere over the fear that the bill will be more than your estimate.

Drawbacks of Value Pricing

Value pricing can be more tedious at first, especially as you work to clearly grasp client needs, define the scope of the work, pin-point value-adding opportunities that your customers might not even know they need, and then zeroing in on a price derived from the client’s perception of the value received.

As noted by this writer’s comparison, value pricing is not simply a matter of artificially marking up a service or product. It requires an understanding of what customers want and need, and the ability to provide that for them. The disadvantage to value-based pricing is that it alienates the customer base motivated by affordability.

Conclusion

Value-based pricing takes a lot of hard work to implement and maintain. It does seem, however, that significant benefits can be reaped from value-based pricing in terms of increased profits and efficiencies for the service provider and its customers.

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Is a Mortgage That’s Been Pre-Approved Guaranteed to Fund?

Tax And Accounting Services Arizona

              Tax And Accounting Services Arizona

In the real estate lending world there is typically something called a “Pre-Approval” letter or a “Pre-Qualification” letter. The purpose of these letters is to communicate to the parties in the transaction that the borrower (whoever is trying to get financing), based on preliminary information supplied to the lender, will successfully obtain funding of the mortgage for which the borrower has applied.

In some lending markets there is no difference between an approval letter and a qualification letter and they are considered to be identical animals with different names. However, depending on the real estate lending market in question, there can be a meaningful distinction between the two. For the sake of discussion, we’ll just ignore the distinctions and assume that we are in one of the markets that operates using only a “pre-approval letter.”

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What makes things interesting is that there is a time lag between when the pre-approval letter was issued and when the loan hopefully funds. A lot can happen between these two points in time that would negatively affect the risk complexion of the borrower and other factors that would cause the lender to back out of the transaction. Thus, the pre-approval letter is not a guarantee that the desired loan will fund.

As noted here, a pre-approval is conditioned upon the assumption that your financial circumstances will remain the same between the time you apply and the time you close your loan. If you lose your job, if you take on other significant credit, or if you default on another loan, you may be denied a mortgage despite your pre-approval.

Here are examples of some specific ways to avoid losing your mortgage after pre-approval, as explained by Yahoo:

• Watch your spending
• Don't Borrow From Your Credit Card for the Escrow Deposit
• Don't Change Jobs & Maybe Even Stall a Promotion
• Avoid Getting Another Loan
• Stay Married

As already noted, getting pre-approved for a mortgage is a smart step for any homebuyer. When you apply for pre-approval, the bank checks your credit and asks for all your financial documents. The pre-approval letter gives you confidence that the bank wants to lend to you, and it will also tell you the limit on what you can borrow. It sets a helpful parameter and expectation for you as you search for a new home. However, a pre-approval letter does not guarantee that you will end up with a mortgage from that lender, who may ultimately decide to deny your loan request.

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Trump’s Tax Plan Unleashed

President-elect Donald Trump has taken the “bull by the horns,” so to speak, and proposed a sweeping tax reform plan that will diminish what goes to the US Treasury in the form of tax revenues in the hopes of stimulating the economy. It should be worth emphasizing that the Trump tax plan is merely a proposal at the time of this writing, and Congress must still approve any final proposal that Trump and his cabinet create once Trump is sworn into office.

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What follows is a brief discussion surrounding some of the more significant elements to the Trump plan.

Individual Tax Cuts

Trump has proposed cutting the tax brackets to three: 12%, 25%, and 33%. He would also eliminate Obamacare’s 3.8% net investment income tax. As a result, the top rate would be 33%, with the top rate on capital gains and dividends a firm 20%.

In addition, Trump’s tax plans call for slashing itemized deductions. Under Trump’s plan, personal exemptions are eliminated. High earners already do not deduct personal exemptions due to the phase out, so this should have little impact.

More consequential, though, is that itemized deductions would be capped at $200,000 for married couples, as noted by Forbes.

Business Tax Cuts

Businesses are supposed to be in for big tax cuts. Corporations currently pay 35%. President-elect Trump would cut it to 15%, but he would also eliminate most business deductions. Instead of depreciation over many years, Trump would allow up-front deductions, but forget deducting interest on debt, he has suggested.

LLCs, partnerships and S corporations would have changes too. Trump has suggested that the owners of these entities should pay the same 15% rate as corporations. Astoundingly, that could mean someone taxed at 39.6% or even 43.4% on flow-through business income could see their tax rate slashed to 15%! Of all the proposed tax changes, this one—if it happens—may be the most momentous.

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Pass-Through Taxation in the Trump Plan

An excellent summary found on TaxFoundation.org notes how one particular policy question that has received quite a bit of attention is the tax rate on individual income derived from pass-through businesses such as LLCs, partnerships, and Sub-S Corps. Tax Foundation makes the following points:

1. Pass-throughs are businesses that pay their taxes through the individual income tax code rather than through the corporate code.

Under current law, such businesses distribute all of their earnings to their owners every year, and such earnings immediately appear only on the owners’ tax returns. They are taxed at ordinary individual income tax rates.

2. In contrast, traditional C corporations can retain earnings without distributing them immediately to any particular shareholder.

This allows shareholders to defer, but not permanently avoid, personal income tax liability on the gain in wealth that is tied up in the corporation. A substantial tax drawback to C corporations, though, is that they have to pay two layers of tax: an entity level tax on retained profits, and the personal income taxes for the shareholders who receive the profits when they are disbursed

3. However, there are multiple interpretations of the plan because the plan is not finalized.

The topic can be confusing because there are multiple interpretations of the way that pass-through businesses would be taxed under the Trump plan.

As Tax Foundation notes, one particular tax rate--the individual income tax rate on pass-through business income--is not clearly specified in the current plan:

Assuming that the individual income tax rate on pass-through business income is the same as the rates on other individual income, the Trump tax plan would reduce federal tax revenue by $4.4 trillion over the next decade. But if the tax rate on this income is instead intended to be the same as the tax rate on corporate business income, the plan would then reduce federal revenue by $5.9 trillion.

Currently, the clearest understand of the current plan is as follows:

• Pass-throughs are not eligible for a single 15 percent tax rate on the individual income that their owners report.
• At best, they may be allowed to adopt some kind of tax status similar to that of C-corporations, either on a temporary or permanent basis.

Conclusion

Trump’s plan means big tax cuts, mostly for individual and corporate income. It will cut down the cost of capital as well as the marginal tax rate on labor. The plan will change incentives to work and invest, and, in the long run--as the Tax Foundation explains:

• The U. S. economy would increase
• Wages would be boosted
• Full-time equivalent jobs would increase

In summary, it would boost after-tax incomes for every income group, but also decrease revenue to the United States Treasury.

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Know Your Tax Responsibilities

It is crucial to understand your small business’s tax responsibilities, and there are real risks if you do not. Mismanagement of your tax obligations can ultimately lead to liens, bank levies, collections and wage garnishments, just to name a few of the potential risks. A tax lien, and the collection process it entails, can damage your credit and force you to work through many obstacles and headaches, including the task of requesting a certificate of release. It can also adversely affect your chances of obtaining financing for your business. Simply put, an I.R.S. tax lien means putting your business at the increased risk of failure.

Do Certain Types of Businesses Have More Risk?

Many wonder if certain types of businesses--i.e. specific industries, business structures, number of employees, revenues of business-- are more likely than others to be at greater risk because their tax liability is more complicated and difficult to decipher.

However, greater complication doesn’t always mean greater risk.

In general, the larger a business is in terms of revenue the more sophisticated it should be in terms of implementing policies, procedures, and internal accounting controls that should reduce the risk of not understanding its tax liability--but not always. The opposite would be expected to be true the smaller a business is in terms of revenue. Smaller businesses tend to be more fixated on developing more business and "surviving."

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Some businesses even have different classes of employees. For example, an employee working the graveyard shift might be paid different rates than another employee performing the same task who is working a normal 8 to 5 shift. This risk can be managed in part, however, by engaging an outside service bureau specializing in processing the payroll of clients, as discussed below.

Important Federal Tax Exposures and the Question of Independent Contractors and Employees

The I.R.S. is responsible for collecting employment taxes, which includes federal income tax and unemployment insurance. The classification of independent contractor or employee has a significant impact on the amount of money concerning these types of taxes.

The I.R.S. periodically conduct audits of businesses to ensure that workers are properly classified as either independent contractors or employees. In the event of such an audit the burden of proving that a "worker" is an independent contractor, and not an employee, rests on the shoulders of the employer.

Over the years, courts have identified on a case-by-case basis various facts or factors that are relevant in determining whether an employer-employee relationship exists. In 1987, based on an examination of cases and rulings, the I.R.S. developed a list of 20 factors that may be examined in determining whether an employer-employee relationship exists.

Unfortunately, there's a lot of "wiggle room" involved with applying the 20-factor test, so it is advisable to seek the assistance of an experienced tax attorney in order to obtain a more objective viewpoint of the particular circumstances at hand.

Common Mistakes that Business Owners Make

The following issues outline some of the most common errors that business owners make as they attempt to manage their tax responsibilities:

• Income tax

Filing your tax return after the mandated filing due date: a penalty can be imposed for failing to file a tax return by the required due date. This penalty is imposed in addition to the penalty and interest imposed for failing to pay the taxes you owe.

• Estimated tax

Estimated tax is used to pay both income tax and self-employment tax, as well as other taxes and amounts reported on your tax return. If you do not pay enough by the due date of each payment period you may be charged a penalty even if you are due a refund when you file your tax return.

• Self-employment tax

Being "self-employed" does not mean carrying a regular full-time business. A part-time business (for example fixing bicycles in your garage) in addition to your regular job or business may also qualify as being self-employed.

• Employment tax

Federal and State withholding taxes are employment taxes deducted from employees' gross pay to arrive at the employees' net pay. The withheld taxes are the property of and belong to the employee. In some cases, employers will "borrow" (for whatever purpose), rather than remit to the taxing authority, these Federal and State withholding taxes. Employers can be found personally liable for withholding taxes actually withheld from employees' paychecks that are not remitted to the taxing authority.

Final Thought: Establish a Routine and Plan Ahead with Projections

The businesses that successfully navigate their tax responsibilities are the ones that implement a routine of "tax planning." Get a head start on the process by doing income and expense projections so that you can budget for your inevitable income tax liability and avoid any unpleasant surprises.

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