So, how do you bill your clients?
Client billing can include hourly billing, but it can also include flat-fee, retainer-based and/or value-based billing. Most people use one of these four methods. Some use all of them or even a hybrid.
Let’s take a closer look at each of them:
The hourly billing method is just what it sounds like – billing the client a standard hourly rate based on the amount of time it takes to do the work or complete a project. With this method, the client has little control and assumes most of the risk. You could almost say it pits the accounting firm against the client.
Why? If the firm underestimates the time it will take them to complete a project, they just bill for the actual hours worked, even if they’re over by a little or a lot. Using this method, the firm is guaranteed to be paid for every hour they worked.
If the hours are way over the original estimate, the client is not going to be happy – and may even push back. This is not a good way to start a client relationship. The client will start scrutinizing every detail, and you’ll continually be under a microscope. On the other hand, if you’re really efficient and complete the project in less time than you originally estimated, you’ll get paid less than you expected. The problem with hourly billing is that the better and more efficient you get, the less you make, which doesn’t incentivize you to get better or more efficient. There’s no reward for being good at what you do.
Hourly billing is not an ideal way of doing business, as it can cause friction between you and the client. It is rarely a win for anyone involved.
Flat-fee billing involves the accounting firm estimating the number of hours a project will take to complete and multiplying that by the hourly rate. Both parties agree on the project cost up front, and the fee is fixed. In this scenario, the firm takes on the risk.
It’s imperative with flat-fee billing that you estimate and manage projects well. A low estimate will result in lower pay for your time investment. You have to be able to get the job done in the time you have allotted. In contrast to hourly billing, however, there is a reward for flat-fee billing if you can get the work done faster. The more efficient you become, the more you make per hour, and you can get more jobs done within the same amount of time.
One of the other positives with flat-fee billing is that it’s predictable. You know how much revenue you can expect, and your client knows how much the project will cost. The more efficient you become, the more profitable you will become as well.
Retainer-based billing is likely different from what you are used to. Traditional retainer-based billing involves getting a deposit up front that you bill against. Then, when you have billed through the deposit, you request another retainer from the client. Here I’m referring to the method of retainer-based billing that is used among digital agencies.
Retainer-based billing is based on hours, but it is different than hourly billing. With this type of billing, you and the client agree on both the number of hours per week you will allot for their project and the hourly rate. The client has access to you or your team for the number of hours you agreed upon. If they don’t use the time, they lose it. If they use more than the agreed-upon number of hours, they’re billed for the additional time. In this scenario, the client takes on the risk.
As with flat-fee billing, retainer-based billing is predictable for both you and the client. You can make yourself or a team member available to do the work and know that your costs will be covered whether or not the client uses up the time they paid for. And, if the client uses more than what they paid for, you know you will be compensated for that additional time. For the client, however, retainer-based billing may not be worth the risk if they’re not sure that the amount of work they need done will be consistent.
You’ve probably heard of Ron Baker. He’s a speaker, best-selling author and thought leader who has become very well-known in the accounting industry. He wrote “Professional’s Guide to Value Pricing,” “Implementing Value Pricing” and a number of other great books.
There are some great quotes by Ron in a podcast interview with Jonathon Stark, including:
- “The billable hour takes your focus away from measuring what matters to the customer.”
- “Don’t ask your client ‘What do you need?’ ask ‘What are you trying to achieve?’”
- “Value is not a number, it’s a feeling.”
There are a number of different approaches to value-based billing. My approach (detailed below) may be slightly different from Ron’s, but he was definitely the inspiration behind it!
The value-based billing method is different from all of the other billing methods in that it doesn’t involve hours at all. It’s based on … value. Specifically, the overall value you provide to the client regardless of the number of hours the project takes.
For value-based billing, it’s important to know what your break-even point is on a value-based bill so you know where your starting point should be. In addition, you need to know what the market will bear for the product or service you’re providing. The more niche provided by your service, the more likely it will command a higher value.
Value-based billing also requires the company to determine the services that the client values the most so the pricing can be adjusted accordingly. The higher the value of the product/service, the higher the margin can be on that particular item.
We determined that clients do not put a great value on the accounting and tax services. So, we do not have a high markup on those services. On the other hand, clients highly value the virtual CFO service, so the markup is greater for that service level.
Next, we put a factor markup on the revenue size and employee size of the business. The value-based billing of a business that has revenue of $1 million and 10 employees is going to be drastically different than a business with $10 million and 70 employees. The bigger the business, the higher the factor.
Then we look at the supply and demand for the service. We base that on a closing ratio of 30 percent. If we are closing greater than 30 percent, we increase the price. If we are closing less than 30 percent, we decrease the price. Again, we are billing on the perceived value the service has for the client. That is Summit CPA Group’s definition of value-based billing.
Value-based billing is a great option for the right type of service. You need to be very confident in your quoting abilities in order to value bill properly. It will likely require some trial and error, but once you figure out the appropriate balance between the service you’re offering and the price your clients are willing to pay, it can help eliminate the guesswork in the billing process.