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Time-based billing is fast becoming an outdated, inconsistent method for pricing your service fees.
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Time-based billing? Time to move on
31 October 2016
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12 minute read
Time-based billing is a thing of the past, yet it’s still the dominant billing method for accounting firms across Australia, with up to 90 per cent of firms still using timesheets to monitor chargeable hours. We’re also seeing the average client fee nosedive for the second year in a row. Is it a coincidence that as accountants start to complete their job faster, at the same time they are starting to earn less revenue per client?
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These are some of the problems and themes starting to arise within accounting firms across the country. Today, clients want consistency in their fees, team members are working more efficiently with technology and reducing billables as a result – or they are taking too long to complete the work and clients are paying higher fees as a result.
In an industry in which change and disruption are appearing in every thought leader's blog and every software vendor's conference, why do we still see such a resistance to moving away from time-based billing? Some may cite lack of education or not knowing how to price differently, or better yet, not having any confidence in using other methods like value-based pricing.
Value pricing is a strategy that’s appeared in the last couple of years, referenced by leading experts all over the world, such as Ron Baker (director, VeraSage Institute, USA), Mark Wickersham (founder, Pricing In The Cloud, UK) and Andrew Robertson (founder and mentor, 26 Group, Australia).
What is value pricing?
Value-based pricing (also value-optimised pricing) is a pricing strategy that sets prices primarily, but not exclusively, on the value (perceived or estimated) to the customer, rather than on the cost of the product or historical prices.
Value pricing exists in everyday life. The key here is being able to tailor it to your clients’ needs and wants. Andrew Robertson, director of 26 Group in Wollongong, is one of the few Australians that have found a way to position value-based pricing as the best fit for both their clients and their organisation. “We started 26 Group as a specialist consulting firm. We were driven to help our clients and other accountants implement change in their pricing strategies. Pricing your fees by the minute is a backwards way of thinking and becoming a source of problems for all accountants and bookkeepers as their firm transforms into the future,” he said.
Ron Baker of VeraSage Institute wrote “Accountant professionals need to have a value conversation with the customer”, including the best opening statement to begin this conversation: “We will only undertake this engagement if we can agree, to our mutual satisfaction, that the value we are creating is greater than the price we are charging you. Is that acceptable?”.
The suggested theory is that the client agrees that the perceived value is greater than the price that has been put forward. There is a mutual agreement in place and thus a positive engagement to carry out over the next 12 months. Remember your customer is king in today’s wide world of business and customer-centric experiences.
Mark Wickersham of Pricing In The Cloud said some accounting firms he works with are earning two to three times more on their compliance and value-added service fees by implementing a value pricing strategy and moving away from time-based billing.
Implementing a value pricing model can help your firm:
A) Get paid on time and more consistently, allowing for improved cash flow within the firm.
B) Give your clients a clear, consistent bill, with no hidden surprises.
C) Increase charge-out fees, up to three times more than before.
Let’s look at a few things to consider when implementing value pricing.
1. Price the customer, not the service.
The most common pricing mistake among professional firms, alongside under-pricing, is pricing the service, not the customer. Studying elasticity, consumer surplus, demographics and psychographics is not the full story of a customer's perception of value. To establish an optimal price, you must understand the value drivers of your customers and what causes them to be more or less price-sensitive. This is not as precise as computing price elasticity, but is far more valuable when dealing with something as subjective as value.
Value pricing is different to the concept of elasticity, since it is not concerned with how changes in price will affect revenue. It is more concerned with setting a price commensurate with the value you are creating for a flesh-and-blood customer, not some notion such as a 'market', to drive profit.
2.Understand the five Cs of value
- Comprehend value to customers
- Create value for customers
- Communicate the value you create
- Convince customers they must pay for value
- Capture value with strategic pricing based on value, not costs and efforts
These five components determine the wealth-producing capacity of any firm and will drive profits in the long run. Every job for every customer has value drivers, and the firm’s job is to comprehend what those are.
- You are what you charge
A business is what it charges for. More precisely, a business is the value it creates. Ultimately, it must offer a value proposition that a customer is willing to pay for. Since value is the ultimate arbiter of price, it is worth exploring how customers determine value.
Hourly billing creates a bad culture, focused almost exclusively on the convenience of the seller, not the customer. It is not how you purchase anything else in your life. You would not tolerate it for one minute if any other business tried to price this way. The first step to value pricing is eliminating the billable hour and timesheets, replacing them with more strategic tools for professional knowledge.
Time is not money (or value) and customers do not buy hours. Pricing by the hour is causing professional firms to focus on the wrong things, with consequences.
When you make hours important, then the customer is bound to focus on hours, rather than on value. Professionals caught padding their timesheets, because they believe the value of what they create exceeds the price measured in hours, will lose the respect of their customers.
Value-based pricing is largely driven by creating valuable meaningful relationships between your firm and your client. As firms strive towards increasing value-added services, there needs to be a conscious effort to create and display value with your clients – not associated with the time it takes to complete a task, but in fact looking at the type of work that needs to be completed and pricing the work based on what is important to the client.
Trent McLaren, senior BDM, Intuit QuickBooks Australia
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