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Blog » April 2016 » Hourly Billing vs Fixed Fee vs Value Pricing. What do they all mean?

Hourly Billing vs Fixed Fee vs Value Pricing. What do they all mean?

I recently sat through the first leg of the ICB Conference in Tasmania. I was particularly interested in a discussion around pricing models in the bookkeeping industry. What I quickly learned is that the majority of bookkeepers in Australia are still using hourly billing as their pricing model and strategy, with little to no confidence in other models.

In this blog I want to tackle the three pricing models that were discussed at the conference to help clarify what they all mean and how you can best utilise these models in your business.

Now remember WHY we are looking at this. Having different pricing models can help you and your clients in the following three key areas:

  1. You get paid consistently on time which absolutely provides you with improved cashflow
  2. Your clients have a clear consistent payment plan. No hidden surprises. They love this.
  3. Depending on the circumstances there are different models that can actually allow you to get paid more than under other models.

On the last point, Matthew Addison (Director for ICB) made a point to challenge bookkeepers on their pricing. I agree entirely with him that $30 per hour is too low. The industry average is and should be at least $55 - $65 per hour, and in many cases you should be charging more.

Amanda Linton described her experience through-out the day, running a full time bookkeeping business in a regional city. She was never out of work and was charging $65 per hour at a minimum. Her point here is that people in regional cities will pay a price for a quality, valuable service.

I also listened to Deb Laut from Newcastle talk about her experience in fixed fee pricing. Deb mentioned 90% of her clients were on this pricing model. She oozed confidence telling her story. Very very awesome! Go Deb.

Let's review the three models that were discussed at the conference and you can then size up how they could suit your specific circumstances.

Let's start with the familiar one - Hourly Billing

I wrote a post last year called "Pricing your services for the future", which detailed the origins of hourly billing. As I began to research the history of tracking billable hours, I discovered a fascinating debate about “selling time”. Here are a few interesting facts I found:

Billable hours were popularised by the American Bar Association to boost lawyer salaries when they began to fall below doctors and dentists in the 1950’s.

A 1958 ABA article argued that lawyers were terrible businessmen because so much of their time went unpaid. Billing by the hour would help them to earn more while going the extra mile to get a job done properly. At first, minimum hourly rates were add-ons to bonuses received for a finished job.

However by the 1970s things began to move in the direction of basing everything on billable hours alone. Hourly billing focuses on charging your clients by the hour, which is calculated by measuring the amount of time spent working on a client. In some instances I've seen advisors have their clients buy X amount of hours in advance for cash flow purposes. Client's simply top up the amount of hours they wish to buy from the advisor as they run low.

This model doesn’t really encourage you to perform a task faster, in fact in the short term, until the client works out there is a problem, this model actively discourages efficiency and problem solving. The problem that starts to arise is that we are now implementing faster processes using the new technology that is available to us. This means you’re penalised by completing jobs faster. Doesn't make sense does it. You still apply the same knowledge and skill set, why should you charge less? In my mind you shouldn't charge less for the same outcome, after all the client is after the outcome, not whether it takes you 5 minutes or 5 hours to achieve that outcome.

The other obstacle I saw was when a junior staff member would take longer to complete a job than you could. Business owners couldn't understand why their bill was more or less, and there became an inconsistency with the bills they were receiving; and all because people with different skill sets complete jobs at a different pace.

If you are still big on hourly, I'd highly recommend checking out TSHEETS - Time Tracking Software. This is amazing resource for bookkeepers and accountants.

Let’s review Fixed Fee pricing

Fixed fee looks for you to create and establish 3 or 4 fixed pricing plans for your clients to pick from. The scope of work that you will and will not complete is clearly defined. Typically this is could be displayed on your website and or marketing material.

This can be powerful as it allows the client to choose a plan based on the size of their business and they'll look at what appeals to them i.e. what gives the best outcomes for their business. There is no question in my mind that offering a fixed fee for work is better for everyone involved, but a fixed fee based on time is not.

This allows the client to determine the best fixed pricing plan for the outcomes they want. You determine the fixed fee by estimating the amount of time it takes to complete the average jobs listed in each package. Adding in optional extra services to charge is recommended, e.g. health check, BAS lodgement etc but only for an additional fee. The key point in this model is that encourages you to find new and smarter ways to do things. If you can get the same outcome for the client in a shorter number of hours than you originally estimated then great – you can spend the saved time on new client work or, heaven forbid, doing something in your newly created leisure time.

The issue I've seen with this model is that not two businesses are the same. In some instances you're trying to fit a square through a circle shaped hole. The other is that clients see your price points and start comparing that with other competitors in your area or online. Now they're most likely comparing an apple with a gumboot but unfortunately unless you've displayed your value to them, they may have bolted for a cheap option before they've made any effort to speak with you. If you see this problem arising you have a great segue to displaying your real value.

Lastly, Value Based Pricing

Value based pricing is a model in which you do not display your pricing. You do not have fixed packages. It is, ask first, tell later scenario. Under this approach you need you to clearly and confidently display your value to your prospect or client in the initial meetings. You'll then provide a tailored value based price after you have sufficient information.

Done successfully I've seen bookkeepers able to charge more, and more importantly be able to justify why they charge more which means there is no loss of clients.

The trap here is to not crash and burn on price. If your client appears to be pushing you on price, you really need to consider if they are your type of client - in most cases they probably are not.

So where to from here?

To start you on the path to setting the right sort of fee for the right sort of client here are a few things you might like to ask in your initial meeting.

  • How many employees do you have?
  • How many transactions a month do you process?
  • Are you GST registered?
  • How many bank accounts do you have?
  • How many shopfronts and/or online stores and.or Paypal accounts?
  • What optional extras do you need? These might include BAS lodgement, end of year payroll processing and lodgement, etc.

By asking these sort of questions up front and displaying your value in these initial conversations you are

  1. more likely to win that client,
  2. more likely be able to charge that client more than you would normally have in the past and
  3. clearly define your responsibilities and accountability within the business.

A Great tool for value pricing is a product called 'Pricing In The Cloud'. It was created and developed by pricing expert Mark Wickersham. You can purchase a subscription to the software online or you can get it for free when you partner with Intuit in Australia. The Pricing In The Cloud tool makes this whole value pricing process really, really easy. I strongly recommend you check it out.

Let’s revisit the key takeaways from this blog regarding the three main pricing models:

  • Hourly billing = easy to measure, penalised for completing tasks faster.
  • Fixed fee = clear and concise pricing arrangements, no two businesses are the same in which one size does not always fit all.
  • Value pricing = clear assessment of needs and wants, designed to give the client a choice of the most appropriate plan, with the opportunity for you to up sell etc.

Software to review

TSHEETS - Time Tracking Software (Amazing insights available in the data. Free for bookkeepers and accountants assuming you meet some base conditions)

Pricing In The Cloud - Value based pricing tool.

It's now up to you to decide what pricing model works best in your business. Remember that you also need to take into consideration the changing landscape that cloud accounting and technology are bringing us. Speak with your colleagues, what are they doing? How are they doing it?

I would love to hear your case studies and stories. Please email them to Uniting Bookkeepers and they will forward to me. What are you using? What's worked? What hasn't?


About Trent Mclaren
Twitter: Trent_Mclaren
Facebook Page: Trent Mclaren - Intuit Australia
0475 960 6040475 960 604

I assist small business owners, bookkeepers and accountants to adapt to new cloud accounting software in Australia. Through this we'll help you save time, grow your business, improve your marketing and more importantly attain a work-life balance you love.
In order to achieve your goals, you must be a leader and a believer. Your peers need to feel part of something real and exciting in order to succeed. Turning up to work is just not enough.
I believe in creating a positive environment that stimulates and motivates people. An environment that allows people to grow, develop and most importantly enjoy their work.
 

Posted: 7/04/2016 10:18:38 AM by Julie Ferguson | with 0 comments
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