How Pricing Changes Affect Firm Economics

By Two Pillars & Co Advisory Group · Sources checked October 2026

Why does a price change matter so much?

Professional services firms carry mostly fixed costs: salaries, premises and systems do not fall when a fee is cut or rise when it is raised. A change in the fee you collect for the same work therefore falls almost entirely into profit. The CPA Journal, citing research from Harvard Business Review, reports that a 1 percent improvement in price, with everything else held constant, could increase margin dollars by 12.5 percent.^[1] The figure comes from a general analysis of business pricing, not from accounting firms specifically, and your own arithmetic will differ, but it shows why pricing deserves at least as much attention as cost control.

The same arithmetic runs in reverse. A firm that offers discounts to win or retain work, or that lets fees fall behind rising salaries, loses profit disproportionately. Many firms update their rates rarely and by a flat percentage, without looking at which clients and services can bear more.

What are the main pricing models, and how do they differ?

The CPA Journal groups pricing methodologies into three: cost-plus pricing, which sets a price to provide a fair return over costs; competitive pricing, which sets prices relative to competitors; and value pricing, which sets a fixed price for a service or bundle based on perceived value to the client.^[1] Hourly billing is a form of cost-plus pricing, because the fee follows labor. Thomson Reuters adds a useful distinction between pricing and billing: pricing is defined before work starts, while billing is done after work has been completed, and the two are not interchangeable.^[2]

The sources agree that scope is critical whichever model you use. Thomson Reuters calls the lack of a defined scope of work the biggest pricing problem for many firms, and says to educate the client on what is included and what costs extra before work begins.^[2]

What does the evidence say about where pricing is heading?

In accounting, a 2018 national survey summarized by the Texas Society of CPAs described a strong movement to value and fixed pricing, away from hourly billing,^[3] and Thomson Reuters says value and fixed pricing are starting to become the norm for many firms and that hourly billing is beginning to phase out.^[2] A Journal of Accountancy report found that value pricing can reward efficiency rather than hours, noting a practitioner’s view that under hourly billing, “all the efficiencies go to the client.”^[6]

In law the picture is different. The Thomson Reuters Institute’s 2026 report found that a full 90 percent of legal dollars still flow through standard hourly rate arrangements, and that firms and clients remain locked in hourly billing that may no longer reflect the value delivered, particularly as AI changes how long work takes.^[4] Whatever the profession, the direction of pressure is the same: clients scrutinize bills more closely, and technology reduces the hours needed for routine work, which weakens the link between time and value.

How do you test a pricing change before making it?

Start with a sensitivity model. For each service line, list current volume, average fee, direct cost and capacity used. Then model a price increase of, say, 3, 5 and 8 percent under three assumptions about client response: no loss, loss of the weakest few percent of the volume, and a larger loss. Compute margin dollars in each case; the break-even loss is the volume you can lose before margin dollars fall below today’s. Because costs are mostly fixed, the break-even loss is usually larger than leaders expect, and a price increase that loses a few marginal clients can still raise profit.

Then pilot. Apply the new fees to new work and to renewals first, as the accounting firm in the Journal of Accountancy report did when it began value pricing with new clients and later extended it to existing clients alongside an added tax planning service.^[6] Measure win rate, objections and realization on pilot work before moving everyone. Segment by client: long-standing clients on legacy fees, clients who value your expertise most and clients who are price-sensitive each warrant a different approach.

What should you watch out for?

First, communicate fees clearly. In legal practice the ABA Model Rules require that the scope of the representation and the basis or rate of the fee be communicated to the client, preferably in writing, and that fees be reasonable, judged by factors such as time and labor required, customary local fees, results obtained and whether the fee is fixed or contingent.^[5] Other professions have their own rules; check your regulator’s guidance on fee agreements.

Second, do not mix up price and billing. A firm can price on value and still invoice monthly, and some firms combine value pricing with monthly fixed installments, which also eases clients’ budgeting.^[6] Third, protect the experience: a price increase accompanied by clearer scope, better communication and a visible improvement in service is easier to accept than one imposed without explanation. Fourth, review the result after six months, comparing realized revenue, margin and client retention with your model.

Frequently asked questions

What to do next

1. Build a margin sensitivity model for one service line.
2. Segment clients by price sensitivity and how long ago fees were last reviewed.
3. Pilot a fee change on new work and renewals.
4. Document the scope and the basis of every fee in writing.