How to Transition from Hourly Billing to Value + Fixed Pricing
Steph Hinds, Growthwise
On an essential component to making the transition:
The number one thing you need when transitioning from hourly billing to fixed fees is the ability to still measure output. One of the reasons so many accountants continue to use hourly billing is because it's easy to measure what people are doing.
At Growthwise, we use Karbon because it allows us to measure completed jobs. We know what our output needs to be to meet client needs and compliance obligations – it's then easy to work backward to determine what we need to achieve in terms of output each week/each day.
Jelena Arkula, Books LA
On transitioning clients from hourly to value-based pricing:
The transition was a learning curve. Although we wanted to switch all of our clients to value-based pricing right away, the reality was that our first value-based client was actually a brand new client. At the beginning, we offered two choices – value-based and hourly – but very soon we revoked the hourly and offered only value-based pricing.
If converting an existing client, start writing the list of procedures for the client if you haven't done so already. Take a look at the previous 12 months of billing and average the cost. If you haven't raised the rates for quite some time, add at least 10%. You deserve it!
Then schedule a call with each client, take them out for a coffee or lunch if they are close. Otherwise, meet with them virtually and introduce them to value pricing. Emphasize no surprise billing and the benefit of fixed costs.
Outline what this fee will cover. This is really important. Use the procedures and services you provided in the past as a guideline. Have your new agreement ready (or even better: Practice Ignition or 17Hats) and document the new agreement signed by both.
Have a client sign the ACH form as well, and agree on when the transition will take place.
Cindy Henderson Magner, Beyond Bookkeeping
On the benefit of automating payment and scaling your firm:
We have been able to convert all of our clients to flat rates – automated payments. We’ve gotten ACH authorization so we can just pull money from all of our clients on the first of every month. That has eliminated billing, collections and any cash flow problems that we’ve had in the past as we grow. On the flip side, we are also working and hoping to finalize automating payroll.
If revenue is fixed, then the cost of the bookkeeper is also fixed – which also fixes your margins. It makes scaling a lot easier because you’ve got everything basically fixed.
When you convert to cloud, you become so much more efficient that you have to switch to flat rates. Once we converted to the cloud, it was very clear that we had to convert to flat rate billing because, otherwise, we were just working ourselves out of a job. This is the concept of value-based billing.
We averaged our client’s prior six months – their hourly bills – and came up with a flat rate. This simplified the management of our bookkeeping service because it’s flat. It’s easy to forecast. It becomes easier to quote new clients. The sales process is actually faster.
Steven Muller, Bookkeeper360
On set service bundles and scope creep:
I'm sure that traditional firms are really hesitant to make the switch from hourly to a value-based firm because of scope creep. It's really important to be very clear on what you're providing within your suite of services. So, as soon as scope creep occurs, get clients back into scope or readjust your engagement – or maybe even change up billing for a specific project by re-establishing an hourly rate. You'll maintain a good relationship with the client by being honest and transparent.
In terms of articulating scope, we build and price out value-based packages for each client because it's not cookie-cutter. We may have a flat rate per month but it really is customized for each opportunity. The suite of services that we provide differs based on industry or revenue size. In one way or another, you are always backing into time.
Understand how much it takes for your team to fulfill X, Y, and Z tasks on a monthly basis, roll that into time (whatever your hourly rates are) and then essentially look to transition your clients into a value-based model where they pay a flat rate per month. It's sustainable revenue which is great from a business perspective. It's easier to manage client expectations because they know that within a specific time frame that you're going to be doing X, Y and Z. This will help prevent scope creep.