There’s a quaint simplicity to hourly billing. You have your rate and you simply multiply it by the hours spent on the job. Easy.
But there’s a teeny problem: increased efficiency, thanks to technology, has significantly decreased the billable hours spent on key tasks like compliance. Basically, with hourly billing, you’ll be required to do the same amount of work faster but for less fees.
This trend isn’t going away. Indeed, in accounting’s future we’ll begin to see, more and more, what the Dutch accountant Marcel Spoelstra recently called “the dark side of the cloud”. As the time it takes to do work is eliminated, you’ll have to find new work to boost your income. Hourly billing becomes a rat race where you constantly try and outrun technological progress.
But before we angrily shake our fists at technology for taking another thing away from us, just hang on a sec. Sure, billable hours are on the wane - but what if you utilised a fee structure where supercharged efficiency was good news?
As Spoelstra explained in that same AccountingWEB article: “Eight years ago, it used to take me 40 hours to do the annual accounts for a client. Now, I do them in eight hours for the same price. They get a better quality service for the same price, but I can spend more time working profitably for other clients.”
The benefits of value pricing
What Spoelstra is talking about is value pricing. Under this fee structure, as the name suggests, your rate is tied to the value you offer clients - not the hours spent on them.
The shift away from cut-and-dry billable hours toward value created makes it easier to increase fees. But that’s the kicker (and a big reason why many accountants shy away from it): value pricing is a Darwinian system that only rewards accountants that provide tangible value for their clients. Hence the ‘value’ in the title.
As the great investor Warren Buffett succinctly put it:
“If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business.”
In his excellent book Bill What You’re Worth, the practice consultant David W. Cottle outlines what he calls the rule of price flexibility: “Clients will pay 50 to a 100% more than the fees they pay for compliance so long as current service is outstanding and they can see the value and benefit of the additional service.”
Or as Cottle’s British equivalent Mark Wickersham puts it, it’s a misconception that clients are price sensitive. Sure, if you hike prices in an absurd way, clients won’t swallow it. But if prices rise in line with the value offered, most clients will gladly accept a higher price.
How to implement value pricing
Efficiency: As we’ve established, the efficiencies gained from tech have eroded billable hours. But while it’s detrimental to hourly billing, tech led efficiency is a vital component of value pricing.
Technology compresses compliance tasks that would have taken days in the past. And with value pricing - that’s just fine. For many clients, this efficiency will fulfill their basic compliance need.
And with the hours you save, you can now concentrate on becoming a holistic business consultant to your advisory clients (all that data from your compliance work will be essential here).
Create your price proposition: A simple approach is to agree on a base fee for compliance work from the get-go.
Mark Lloydbottom, a leading accountant and practice consultant, takes this a step further than price, even stipulating simple conditions a client must fulfil for that fee to be achieved. Namely, the client should maintain complete records. If the records are a mess, there’s a case for increasing your fees.
Over and above this essential staple, you can start to augment your offering with lucrative value added services.
Many accountants create price packages. Glenn Martin, a partner at Avery Martin, groups his by bronze, silver and gold. Bronze being basic compliance, Silver to include bookkeeping and gold to include business advisory.
There’s no silver bullet for setting your prices, either. Ultimately, your best compass point is the market. Or, as Rob Nixon phrases it:
“Put the price up and let the marketplace tell you when you’ve gone far enough”.
Regular, honest meetings: Value pricing isn’t foolproof. For some clients, your price proposition might be too high, for instance. But rather than losing out on the engagement, you might decide to work with the prospective client to find a price point that suits them better.
That, ultimately, is the beauty of value pricing: you aren’t a slave to hours worked, you determine the value of your services. But at every stage, it should be done with candour. Keep an eye on margins, if a bigger fee is justified, it’s worth raising it with clients.