Hourly Billing: Is It Why You Feel Your Firm is Undervalued?
February 9, 2022 •TaxPlanIQ Support team
Hourly or fixed-priced accounting services? It’s a question many firms have dealt with for years, but one that seems more prevalent in recent years.
And there’s good reason.
When chatting with firms, most of them have a few common issues they’re struggling to work through. Chances are, you either have dealt or are currently dealing with at least one of the same concerns as your colleagues.
- Expectation gap
Hourly billing is when you charge by the hour. Value pricing is setting clear, upfront, and often monthly fees based on how you serve clients — not how much (or little) time it takes.
Let’s talk about a pivot that better communicates your value to clients, has the potential to triple your hourly revenue, and creates a more sustainable business. But first, we have to deal with the elephant in the firm.
Hourly Pricing (at least in part) Adds to Issues
Hourly pricing. You consult with the clients about their needs, communicate what you’ll need from them, communicate how you’ll handle things during the engagement, and track time…hourly.
When the month, quarter, etc. is over — you send them the invoice.
Depending on how things went, either the client is shocked (or at least mildly surprised) by the amount, or you’re feeling the squeeze of tight margins. Believe it or not, all of those problems mentioned above come out in this scenario.
Beneath the undervalued category sit several subproblems. These generally split into two types — too much time, and not enough (in your chargeable hours).
Too much time includes things like having to do things that add value to the client, but you aren’t charging for the individual service. A great example of this is tax planning being lumped into your hours as part of tax preparation and filing.
Your years of experience are saving clients from overpaying, but not part of hourly billing.
But your firm is not paid for the experience and expert tax navigation strategies you’ve developed, is it?
On the other hand, some things are speeding you up (which is good) cutting into the number of hours it takes to serve clients (which isn’t as good).
A great example of this is the growing number of “Fintech” tools that automate bookkeeping, accounts receivable, forecasting, and so on. These are fantastic platforms to help improve the processes of your firm, but if you’re charging based on time — they take a toll on your billable hours.
How value pricing alleviates being undervalued: In a nutshell pricing for value is all about charging what you’re worth. No, it’s not something unethical, like charging fees contingent upon the amount of a tax return, or how much you “saved” the client.
When the experience and work do require longer hours, clients may feel like they’re paying too much and don’t understand why it took so long. After all, they’ve done taxes before, handed you the P&L, and communicated quickly.
Nevermind, they would have skipped over credits, improperly depreciated, and potentially racked up fees.
Key point: It’s hard to communicate the value of your services if the most prominent story on the invoice is told in hours and dollars.
How value pricing alleviates underappreciation: Charging a set price isn’t a magic wand solving all communications problems. There is some positioning needed that shows the value of what you’re doing — disconnecting time from the benefits (what’s in it for your clients) of your services.
Hourly billing makes staffing even more difficult (and it’s already so hard!). A few quick reasons (that may find themselves in your head when recruiting):
- New accountants could be slow (more clients upset with billed hours)
- Can I afford to hire at all?
- If I don’t hire, I can’t move the business forward
How value pricing alleviates (some) understaffing: Pricing based on value, not time, improves margins (more on that below). Plus, it gives you a steady understanding of incoming revenue and capacity. This data helps you develop a better recruiting strategy and hiring plan.
This one embodies the rest, with its own unique attributes. You feel underappreciated, clients feel confused about what they're getting for the price, and as a result — you aren’t staffed properly.
It comes down to expectations.
Clients' expectations are often too narrow. Need taxes filed. Hours it takes, the price you pay. Easy enough.
But you know everything that goes into paying everything owed, and not a penny more. Plus, you see ways to better prepare for next year, creating an even cleaner return.
The land in between these two reference points is the gap.
How value pricing alleviates expectation gap: A clear service structure, often shown in the form of a table on your website, tells the “what” of your offerings to clients. This includes things like how often you’ll communicate with the client,
Want to Know More About Value Pricing at Your Firm
Changing your firm’s business model to charge by value, not by the hour is a great way to improve your business, grow revenue, and reduce friction with your clients. Interested in finding out a bit more?