Hourly Billing vs Value Pricing: How to make your pricing strategy work for you
By Sayali Dighe
After months of grueling work, you finally finish a difficult engagement. It was a difficult job, but both you and your client are happy with the quality of the work.
You send an invoice to the client and then the dreaded phone call arrives: “Why did this take so many hours?” You try and explain the cost of your accounting services to the client, but they have a hard time understanding your reasoning. Although they eventually agree to pay the original invoice in full, both you and your client are left exhausted by the conversation.
Is there any way to avoid this frustrating but all-too-common situation?
The problem with hourly billing
If your firm is like many others, you probably use an hourly billing system to invoice your clients. When you begin working for a client, they know what your hourly rate is, but they have no way of telling how long it will take you to do the work, or what the quality of your work will be.
Most importantly, telling clients your hourly rate explains the cost of your services, but doesn’t in any way explain their value to your client. When it comes time to send invoices, some clients will struggle to understand why their invoice is much higher than they were expecting, while other clients will see a number lower than their expectations and wonder if you’re really providing them with your best work.
If this is a problem you find yourself struggling with, you may want to change up your pricing strategy and switch from an hourly rate model to value pricing.
What is value pricing?
The Journal of Accountancy explains that value pricing is a pricing strategy which “sets prices for services based on the value of the work product to the client, not on the labor required to do the work. Thus, the same work may be priced differently for different clients, based on the potential value to each client.”
Put simply, value pricing prioritizes the value of your services to clients, not the cost of your labor.
The benefits of value pricing
There are several key ways in which you can benefit from a switch to value pricing.
- Increased client satisfaction
When you explain your prices in terms of the value they generate for your clients, they’re able to understand exactly what they’re paying for. You can tailor your services to different clients with varying needs to ensure each client is getting the service they require at a fair price. AICPA recommends offering tiered service packages to make your clients feel more in control of the pricing conversation and give them choices as to the level of service they receive. Clients can choose from a range of options that covers everything from your most basic accounting services to premium-level service.
- Efficiency is rewarded
When the price of your services is tied to the hours spent on a project, there’s little incentive to work efficiently. Your employees may feel pressured to work long hours to increase profits, and even if work is completed in less time than expected, those benefits go to your client instead of you. With value pricing, your staff can focus on the quality of their work instead of their hours.
- Recover the costs of technological investment
The Journal of Accountancy asserts that “it’s essential for firms to find a way to profit from their technology investments.” Offering leading-edge services, such as cloud-based accounting, is increasingly important to accounting firms, but in an hourly billing system that relies on using the cost of human labor to determine prices, there is no way to recover the costs of technology investments, let alone profit from them. Investing in leading technology also often leads to increased efficiency, but using hourly billing means these efficiencies will actually reduce your profits. With value pricing, you can take the cost of technology into account when you set your prices, and any efficiencies benefit you.
With all these benefits, It’s easy to see how value pricing can help your business. Your clients no longer need to dread receiving an unexpectedly high invoice, and you won’t have to dread justifying the hours you spent on an engagement. Your staff will be free from the stress of filling out timesheets, and you’ll no longer be scrambling to justify the cost of investing in technological innovation.
When you’re free to focus on the quality of your work rather than the amount of time you spend completing it, a world of possibilities awaits.
Learn how you can optimize the value of your firm by taking a closer look at the Caseware Suite today.