Your Hourly Rate is Unfair to You and Your Clientsby
Unlike temp staff, you devoted time and energy to develop your skill set. An hourly rate disregards your expertise.
The Costly Mistake
Although value pricing is a hot topic for accounting professionals, the majority of firms continue with the traditional billable hour. Since an hourly rate emphasizes time, this pricing strategy positions your service as a commodity. You lease your time, similar to a temp agency filling an open position for the day.
Switching from an hourly rate to value based pricing doesn’t happen overnight. It is a process. Many valid questions arise as you transition over. If you’re ready to increase your profits without working additional hours, then this pricing strategy is your best option.
The History Behind the Billable Hour
You probably started your career as an employee. You either earned an hourly rate or received a salary. When you opened your firm, you simply followed the same model. Well, did you ever wonder how the billable hour got started?
In 1919, Reginald Heber Smith, an attorney, invented the billable hour. Basically, he needed a way to explain his high fees to his clients. This pricing strategy offered a “fair, logical, transparent and indisputable method” for valuing legal services.
According to Smith, “This method is especially pleasing to businessmen, all of whom have cost systems of their own. You can show him your cost and you can give him your supporting evidence. This at once dispels the notion that you are charging ‘all the traffic will bear.’”
Combining your hourly rate with a time sheet determines your fees. When the work’s completed, you submit your bill. If all goes well, then clients pay your set hourly rate on time.
This 100-year-old practice worked extremely well in the early 1900’s. As you know, much has changed since then. It’s like using a dial-up phone rather than a smartphone. Basically, the billable hour promotes underpayment.
Why? Technology speeds up the process. Computers have replaced hand-written ledgers and time-consuming, manual calculations. When you charge for your time, you earn less for the same work that used to be done by hand or when you first started out.
An Hourly Rate Creates Tension
Clients closely watch the clock when you charge for your time. Consider this:
- Speed: Clients who pay for time want you to get the job done as quickly as possible. Your firm earns more when you slow down the work flow. Although it’s not intentional, an hourly rate rewards inefficiency.
- Tracking: Consider how much time you spend calculating costs, tracking your time, sending your bill and waiting to get paid. Your clients hire you for a result, not your time. What if you based your fees on results rather than time? Then you no longer track your hours. Plus, you receive payment before the work begins.
- Scope: Your client expects the work to be done within a specific time frame and budget. Many projects take longer than expected. You either notify the client that the estimated time and expense has changed, or you absorb the extra cost.
- Skills: Your skills improve with time. You’re much more efficient than when you first started out. This means you now earn less for the same work. Charging for your time caps your earning potential.
- Write-offs: You may not know how to charge for some services, so you do them for free.
Clients, especially time-sensitive ones, avoid reaching out to you when a problem first arises. The additional cost causes them to hesitate. By the time they do contact you, a minor fix has escalated to a major issue.
Now, some clients arbitrarily pull a total cost for your services out of thin air. They lack knowledge about the details involved and under-estimate your time. As a result, they arbitrarily cap the job’s total amount and expect a low bill.
The total on the final invoice catches your price-sensitive client by surprise. When that occurs, you end up defending your work and negotiating your fee. The dollars written off for services delivered easily add up over time.
Consider this: your highest value occurs before you start the work. Your work literally loses value once the job’s completed. It’s like driving a shiny new car off the lot. As soon as you sign the paperwork and receive the keys to your new ride, its value depreciates. This thinking applies to your work, too.
Fortunately, a solution exists.
Value-based pricing removes these concerns. When you work with ideal clients, they appreciate your insights. These clients prefer quality over cost and seek a specific type of experience. They opt to work with you because the benefits outweigh your fees.
Here’s where your packages come into play. Rather than simply offering a single option, you now offer three options. Remember the new car story. Well, you can purchase the basic model, the upgrade or the luxury package. Packages offer your clients a choice about how to work with you.
With this model, your rates reflect outcomes rather than your time. The total price of each package is all-inclusive. To avoid doing work for free you clearly outline the scope in your packages and reinforce what’s included in your work agreement.
With pricing, unlike billing, you receive payment before you start to work. No more negotiating or writing off uncollected services.
First, your client chooses a package. Then, they sign the work agreement. Finally, you receive payment before you start the work. Rather than tracking time, you focus on delivering a specific result.
Here’s the best part – you’re now on the same page as your client. You both want the job to be completed as quickly as possible. Your ideal clients invest in solutions; they don’t buy time.
Stand Out from the Crowd
Ever notice how the clients who pay the least expect the most?
When you refuse to compete on price, you stop attracting price-sensitive clients. Decide to only work with clients who appreciate what you offer. They respect your work and quickly respond to your requests. That’s a lot more satisfying than chasing unresponsive clients.
Once you own your value, then others will value what you offer. Value based pricing solves a variety of concerns for accounting firms. Plus, it’s the fastest way to increase your income without additional hours spent working.
No Income Ceiling
Do you pride yourself on speed and quality? Value-based pricing rewards expertise and efficiency. Join the accounting firms who have already begun to separate their fees from time. Value-based pricing solves the dollars-per-hour challenge. You no longer chase money after the work’s completed, and no one’s questioning your bill.