Posts Tagged ‘fees’

Pricing Your Product in Your New Business or Side Hustle

Finding the right price to charge for your product or service will determine the success of your business. Learn how successful businesses find the price that maximizes profits.

Finding the right price to charge for your product or service will determine the success of your business. Learn how successful businesses find the price that maximizes profits.

“Start a side hustle or small business” is a common refrain when working to reduce debt or retirement planning is involved. It all sounds easy on paper until you realize most businesses fail within a year or so.

The problems with starting a business are myriad. Most businesses fail because they either have too little or too much business and the problems begin with the price or fee charged the customer.

Yes, some businesses fail over financing and other financial issues, but price frequently is the destroyer of small businesses. Charge too little and you end up with too much work and no profits to show for the effort; charge too much and nobody will even waste their time kicking the tires to see how good you really are.

The type of business also plays a role in pricing. A cheap attorney or doctor (or accountant!) is never a good idea. Even if it is a good deal you are unlikely to trust a cheap attorney. But what if you have a side hustle dog sitting? Is cheaper better then?

Then we get the loss leaders. Using our dog sitting example, do you offer a free trial to get clients in the door? It might work, but it costs the business owner money and time to promote in such a fashion. Research also indicates it is a poor way to promote your business.

Too Good a Deal

When I started my practice in the 1980s I subscribed to the “cheap is better” promotional school of thought. I was the first guy in town offering free e-filing for federal and was the only guy who could offer state e-filing the first year it was available because Wisconsin wanted to test their program with firms that offered the service for free and had no fraud cases. I fit the bill and the rest is history.

The free e-filing is a good example of giving something for free to grow your business. I still was paid for preparation services; only the e-filing was free. The benefit cost me nothing and saved time. My software provider only charged me a dollar and I saved that in toner and paper not printing copies to send to the government. This also saved time so I was a net winner. The best deal around town outside my office was $25 for e-filing. By the time other firms caught on it was too late. I was well established and well known for my progressive business ideas.

There was still one small problem. I prepared tax returns for a low fee. The goal was to grow the business fast and large. This is a massive problem when the service provided frequently required I personally work on or review most tax returns. I was providing value added service but not charging for it. That led to long hours and lower profits. Something had to change.

Quality or price, you can't have both. When you provide high quality service you deserve a higher price. See how professionals set price to maximize profits.

Quality or price, you can’t have both. When you provide high quality service you deserve a higher price. See how professionals set price to maximize profits.

By the time my practice reached 2,000 returns I was exhausted. Sure, anyone in the office can prepare a return. So can any other tax office. But not many can reduce a clients tax liability legally the way I can. That takes experience, skill, research, and most of all, time.

Around the year 2000 I was preparing about 1,600 individual returns  with another 400 business returns, amended returns and returns from prior tax years. Many clients walked in the door when I was giving my services away and I wasn’t bringing their fee to a reasonable level fast enough to regain my sanity. That, and attempts to increase prices brought loud complaints. It was exhausting. People wanted more and more without paying for it. Worse, clients didn’t take my advice seriously! What was it worth anyway? I gave the consulting away for fee and clients treated it as worth exactly that much.

The first year I decided to make a draconian cut. The tax software I use allows me to pull reports based on time spent preparing the return and the fee charged. I ran a report showing the least profitable to most profitable clients. To my surprise I had almost 400 clients that were money losing accounts! (I know, I know. I’m not proud of it either.) Those 400 clients were send a letter kindly asking them to leave.

That was the best tax season in years. Prices were not increased much, but the money losing accounts were out so I had time to breath and profits actually climbed because expenses dropped faster than revenue.

The next year I raised fees significantly. My real clients stayed. Fewer people left than I anticipated. Something else also started to happen. Clients, especially business clients, started saying it was about time I raised my fees so people would start respecting my work. Clients saw what I was blind to! People actually wanted to pay me more because they saw value and all the bottom feeders were sucking me dry, hurting the serious clients. In hindsight, I’m feel great gratitude these clients were willing to wait until I regained my sanity.

Perceptions of Value

How much do you value the endless supply of news online? Do you trust it? What if you pay for a newspaper? If you are like most people, paying for something causes you to value it more. It may have something to do with the sunk-cost fallacy businesses fall prey too. Regardless, we understand “free” does not bring out the best. A free report is valued lower than a report you pay for and for good reason. When a payment is made/received all parties expect a certain level of value to be provided.

But free works so well! But not really. In my line of work I see plenty of businesses. I know what does and does not work. The “free” thing has been done to death. The philosophy has destroyed more businesses than any other policy I know of. Free meals mean nothing to a restaurant if the food is no good. All free does is sink your boat faster.

Back to our dog sitting example. Giving away a free day when you have no way of creating more time is a rabbit hole you do not want to fall down. Instead, a free doggie treat might be a better way to promote the business. You still charge your regular fee, but you give something extra of value. The perception of value remains intact. The people who would turn their pet over to a free service are not the kinds of clients (and dogs) you want.

 

Finding the Right Price

Over the years I tried many methods of pricing my services. Checking the competition and pricing comparatively is the most common method of pricing I see and used it myself in the early days. It’s also the worst, except for the free or super cheap thing we talked about above.

Setting your prices/fees similar to or a nickle below competitors means you get paid nothing for any added value you provide. Here we are again at the trough of free stuff. If you charge what the other guys charge what is the incentive to use your product or service? If you provide greater value there is a reason to patronize your business, but you don’t get paid for the superior product if your only pricing method is to undercut competitors.

All these pricing issues lead to two problems: 1.) you are either too busy (or people don’t trust you’ll do a good job) due to your under-priced goods and services which leads to poorer quality as you are run raged, or 2.) your fee becomes over-priced compared to what competitors are selling due to market changes before you differentiate your product.

You can’t win if you do not differentiate your product or service. The differentiation is where the value is created and where clients are happy to pay your fee even if it is high.

There is a better way and I learned this trick from two men I highly admire: Seth Godin and Tim Ferriss. Seth Godin is well known from his numerous best-selling books; Tim Ferriss from his books and podcast.

Recently Tim invited Seth to join him on his podcast. It may have been the most important podcast I ever listened to.

Seth shared his method for setting prices for his speaking engagements. He said he only has two prices: free and full price. If Godin really wants to do the gig and if it is for a good cause he will sometimes do it for free. Otherwise his fee is full price, no discounts.

Wonderful! But how does Seth Godin find his price? Simple. He started by setting his price so a few people would hire him. Once someone—anyone—offered him more that was his new price. As simple as that.

However, this is simple theory, difficult in practice. Godin admits it’s tempting to take a gig when your calendar is empty. It takes time to learn the skill of saying “no” when you have lots of white space on your calendar. But if you don’t stick to your principles you dive head first down the aforementioned rabbit hole. And it is going to hurt really bad.

Higher is Better for Everyone

It may sound crazy, but a higher price is frequently better for the business and the customer! People will pay for quality and those who will not are not the kinds of people you want to serve. Remember, you’re a business, not a slave! You solve problems, fill a need. And do it well! You should get paid for that and paid well. If you don’t it is only a matter of time before you either quit or sacrifice your ethics and provide cut-rate products and services.

The fear business owners have when raising fees is the worry clients will leave. Well, I hope so!

Not everyone wants or needs the higher level of service and quality. Your choice is to produce crap and sell a manure spreader load full of it or to sell a respectable amount you can comfortably provide  at the highest quality money can buy. Either way is fine. But, crap gets old fast while quality instills pride and that carries you a lifetime and makes you feel proud of the work you do.*

Last year my small tax firm prepared around 550 tax returns in total. This is a long fall from the heady days of 2,000+ returns annually. It was the best tax season in years as I worked hard to adjust to my new worldview of a tax office with national exposure. This is easily the most difficult transition I ever went through. There were times I didn’t know if the firm would survive.

Here it is mid-January and I’m nervous. One of my preparers thinks I committed to around 650 returns for this tax season. (Was it that may?) If it’s true I have a real problem. I spent heavily on increased automation and productivity enhancements. However, the clients I serve now are of a different caliber than of the past. These are large returns with serious issues and I’m one guy. (Yes, my team does most of the heavy lifting, but I need to be in the final review process for virtually all returns so clients get maximum value.)

Finding the right price to charge is as important as the service you provide.

Finding the right price to charge is as important as the service you provide.

Fees have steadily climbed. As fees climbed some clients left. Revenue still climbs because fewer people leave than the fee increases. The higher fee allows me to add more value to each return. This means lower taxes for clients so my fee is really free after tax savings are included. But, Dawn, my ace tax preparer, and I will sit with every client this year. The last few years we allowed other team members to handle this. I hated it because I need to know my client better and the new system will allow for it as long as I don’t grow the business too large. (Clients living further away will have more phone time with us.)

The goal is to always provide a better experience for the client. Quality is important as long as the client feels respected. Doing the best work and ignoring the client is still bad form.

And don’t worry about losing all your clients. I’ve experienced that emotion all too often. Let me sooth your nerves with a story: This blog has produced an excessive flow of consulting clients. I love the work and with rare exception the client walks away from the consulting session with thousands or even tens of thousands in tax savings. There is a reason for the high demand.

I consult with new clients from June to December on Tuesdays and Thursdays. The max, I discovered, is two consulting sessions a day. Any more and the research and face time exhausts me too much. (Regular clients can have consulting sessions any time of year, even tax season.)

The past year I charged $275 an hour. When the new consulting season starts in June the fee is $350 per hour. Still a good value when thousands in taxes are saved.

You would think the fee increase would slow things down. It didn’t. June is already filling up six month in advance! Kind readers, please understand. People are hungry for top-quality service and products! They are sick and tired of junk. The more I raise my fee the more people know I’m focusing on increasing the value even more. And they want this even higher value product more!

Let me make one thing clear as we wrap this up. This is not about bilking the client. This is about serving the client at the highest level possible and pushing higher from there. You are good today; you’ll be even better tomorrow as you learn and accumulate more experience. People want that!

The increased consulting fee means I will work slightly fewer hours and, of course, will make more. But cutting the hours just a bit allows me to learn and grow more as I have the time to research ideas and strategies. This makes every hour of my time purchased worth significantly more.

Tax preparation fees are the same. Cheap is NOT better. Cheap means a shortcut was taken. You can’t do it profitably any other way. What you save in accounting fees is lost to your least favorite uncle in Washington. I’m not close to the cheapest. I played that game before. I’m embarrassed to say it because that means my clients were screwed by my lack of experience in those days. If I’d have raised priced I might have done a better job earlier in my career.

As for the dog sitting side hustle: People love their pets and want the best for them. Charge more and include a doggie massage and doggie treats. The dog and the human will thank you for such kind consideration.

As a bonus, you’ll have a profitable and successful business you enjoy running ever day. No retirement for you; you’re already living the dream.

 

* If you work at a job and hate it there is a good chance you work for a company peddling as much crap as they can flush out the door. People who work for companies that provide high quality products or services are almost always a pleasure to work for also.

 

More Wealth Building Resources

Credit Cards can be a powerful money management tool when used correctly. Use this link to find a listing of the best credit card offers. You can expand your search to maximize cash and travel rewards.

Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?

Side Hustle Selling tradelines yields a high return compared to time invested, as much as $1,000 per hour. The tradeline company I use is Tradeline Supply Company. Let Darren know you are from The Wealthy Accountant. Call 888-844-8910, email Darren@TradelineSupply.com or read my review.

Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

PeerSteet is an alternative way to invest in the real estate market without the hassle of management. Investing in mortgages has never been easier. 7-12% historical APRs. Here is my review of PeerStreet.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. QuickBooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

cost segregation study can reduce taxes $100,000 for income property owners. Here is my review of how cost segregations studies work and how to get one yourself.

Worthy Financial offers a flat 5% on their investment. You can read my review here. 

 

The Hidden Tax: Transaction Costs

Living a frugal lifestyle sometimes lends to a false sense of security. We take all the financial precautions to increase our savings rate and invest in broad-based index funds. Before long the net worth starts reaching for the stars and we feel good about ourselves.

Now, we decide, might be a good time to get a second car or trade for a new one. Moving to a smaller home, across town or to another state or country, sounds tempting and easy to do with your nest egg growing faster than you are spending.

Your habit of caution is well defined. There will be no stupid tax in your future! Careful planning leads to good decisions. You look before you leap.

Then it happens and you never even saw it coming. You paid a stupid tax without even realizing it was there.

How the Government Robs Smart People

Smart people know how to avoid spending half their income on taxes. They fill their retirement accounts and use index funds for non-qualified accounts to keep the tax burden low. Using the tax code can really put a dent in your income tax liability. But the government has insidious ways to pry your hard-earned cash from your wallet.

Selling an old car and buying a new or newer vehicle has an obvious hidden cost: sales tax. When you sell your current vehicle the government collects some coin from the buyer; when you buy a replacement vehicle the government collects sales tax from you. In Wisconsin, where your favorite accountant lives, the sales tax is 5% with most counties tacking on a ½% or more. (I am aware a few counties have a 5.6% rate, but we are trying to keep this discussion clean.) If you buy a $10,000 car you are required to pay at least $500 in sales tax, more in most counties. The value of the car hasn’t changed, but your net worth took a 5% ding on the purchase price. New vehicles are even worse with the higher selling price and non-tax fees crammed down your throat by the dealership.

Buying a piece of real estate is the worst. We will use your favorite accountant’s state in our illustration.

Sales tax isn’t due on the purchase of a home, rental property, land or commercial property. (Can you imagine paying sales tax on a $400,000 home?) There are far worse things than sales tax when it comes to purchasing/selling real estate.

Local governments love when real estate changes hands. In Wisconsin there is a $3 per $1,000 transfer tax. Don’t forget title insurance and both the buyer and seller get a bill.

As a seller you pay realtor fees or pawn your property pro se. If you go it alone you will invest time and money advertising the property and running to show the property. You still need an attorney (and last I checked they still invoice for their time) to handle the legal documents when you have a buyer.

Rather than bore you with the myriad fees associated with real estate I will stop here. All you need to know is real estate, as the buyer or seller, has lots of fees/taxes connected to the transaction.

The transaction fee is the most voluntary tax of all. The more you spend the more you pay.

Reducing spending and saving/investing a majority of your income has many financial benefits. We hear plenty about reduced taxes based on retirement accounts. What none of this savings rate considers is the amount of money wasted on merely the transaction.

Taxes are not the only culprit! Sure, the government has its hand out whenever an asset transfers. But so do sales reps, attorneys, and (gulp) accountants. Everybody gets a piece of the action. You have no guarantee on how the new asset will perform for you. The rental property could sit vacant; the new car could be a lemon. But all the, ahem, professionals are getting paid. If you ask me to consult on a transaction know up front I am the only guy in the room guaranteed a profit.

Reducing the Tax Grind

Taxes will consume over half of everything you earn in a lifetime if you are not careful. Income and sales taxes are only the beginning. Payroll taxes take a bite and realized capital gains put a grin on Uncle Sam’s face. Before you blink, when is the last time you filled the tank on the car and thought, “Oh yeah, I just paid an excise tax.” Excise taxes are everywhere and hard to spot for a reason. It makes it easier for the government to get more of your wealth.

Property taxes are relentless. If you rent the landlord adds the property taxes to your rent; it’s built in. If the landlord didn’t include this major expense she would be broke quickly and the new landlord will not be so lax.

And did you forget you pay corporate taxes, too? You do. Corporations include their tax liability in their cost structure and pass it along to customers. The end user get stuck holding the bag.

Even when you die the government takes a slice in the form of the estate tax. It never ends even if you do!

You can fight back and regain control of your financial future. We have discussed visible (income, et cetera) taxes at length in the past. Now we want to gut the terror of the hidden tax: the transaction fees.

Fee’d to Death

When a simple phone bill has more individually listed fees than you actually make phone calls it is time to consider fees, transactions fees and how they affect your wealth.

We will focus on the two big ones: real estate and vehicles. Of course you already know if you increase your savings rate you will automatically reduce the transaction fees chewing into your life. Buy less stuff; pay less sales tax. You understand the concept.

Cars are a different story. Transportation is a necessary part of life. Even people who bike and walk everywhere they can frequently also own one or more vehicles. And each vehicle owned is a wasting asset.

The more often you buy a vehicle the more often you pay the stupid, ah, hidden tax. If you buy from anyone other than a “for sale by owner” there will be a profit built into the price. This doesn’t make the seller a bad person, just a business person who will survive.

No matter who you buy from you will pay a sales tax. Every sales tax paid is an instant reduction of your net worth. I have a powerful allergic reaction to any event that molests my net worth. There are times I come out swinging it is so bad.

There are two things you can do to massively reduce the transaction costs with vehicle ownership: buy as few vehicles as possible over a lifetime and pay less for the vehicles. Finding the lowest priced reliable vehicle to get the job done for the longest period of time creates the greatest savings. When I buy a car it will be in the family for a very long time. Most of my vehicles are purchased 2-5 years old and I run them for another 15-20 years. I don’t care what they look like! They only leave the family when they no longer can do their job.

A typical sale of an auto in my household is purchased by a local kid looking for a vehicle to enter into the local demolition derby. “Gi’me five hundred bucks kid and this beauty is all yours.” They buy it every time.

You may also consider forgoing vehicle ownership. Ride sharing and public transportation coupled with a good bike can keep transportation costs low. For those few times you need a vehicle for a longer trip I suggest renting. There are still transactions costs, but they tend to be minor in these situations compared to auto ownership.

The other big purchase that chomps a serious chunk out of your net worth is real estate. It drives me crazy when I see clients think they can trade houses like day-traders trade stocks. Of course you can make money flipping houses, but the transactions costs will kill you. Remember who is always guaranteed to turn a profit: the professionals (sales rep, et cetera). One bad deal and it all goes south quick.

Before someone points out I flipped a few houses over the years I want to point out I never went into an investment property with the intention of doing a quick sale for some easy greenbacks. We bought many properties and improved them all. If a rundown property cleaned up nice and we were offered a price we couldn’t refuse, we didn’t refuse.

I own homes like I own cars: for a very long time. I’ve lived on my current farm for 22 years. Before that I owned a home in town and before that I owned a mobile home because I didn’t want to live with my parents anymore. As far as I’m concerned, the mobile home was a vehicle (it has a license and everything) and is a wasting asset. The home in town was nice, but I always wanted to move back to the country where I could raise animals and till some land.

Warren Buffett still lives in the home he bought in 1958. Smart man. Bet he has money.

I’m not telling you you can’t buy a car or a property. If you want to own income property you have to buy it first. There is also nothing wrong with owning your residence. All I am pointing out is that you want to own as few of these big assets for personal use over your lifetime. Doing this one simple lazy thing (not buying/selling/trading your car/house on a regular basis) could increase your net worth by a million dollars or more over a lifetime if invested in an index fund.

Or, you can keep doing what you always do. My brethren in the legal and sales fields are happy to take you money.

So am I.