When I’m asked to give my most important piece of advice for business owners, I say this: avoid hourly billing. The only way to increase your top line (revenue) is by charging fees or prices commensurate with the value to the buyer.
Then the push-back and shock begin. “Everyone does it that way.” “We can’t take the chance that a fixed fee will be too low.” “Buyers always want to pay by the hour.” “That might be okay for simple work, but our work is too complex.”
This article is an examination of the pros and cons of hourly billing followed by three recommendations that every services company can use to improve their top line with value-based fees.
Pros of Hourly Billing
1) It tracks the time spent on each job or project for each client.
2) It feels familiar.
Cons of Hourly Billing
1) It only tracks time spent; it tells neither your company nor your clients what value was delivered during that time.
2) It creates a fixed inventory of hours to sell. Once each billable person has hit 40 hours (or 50) your inventory is depleted until the following week.
3) It eliminates productivity as a metric. Each hour produces the same revenue and you can’t get paid except by using the hours. Value delivered in less time costs the firm money.
4) It removes the ability to differentiate your company’s services based on value to the buyer.
5) It devalues your expertise. Instead of being able to charge for tremendous value delivered quickly, you are forced to charge for time.
6) It leads to price competition which drives hourly rates down.
7) It creates false equivalence between providers by suggesting that the same hourly rates mean the same level of expertise and service.
Increase Your Top Line with Value-Based Fees
Trivers Consulting Group has traveled the road from hourly billing to value-based fees. We know the objections, the pitfalls and the overall benefits to both the company and its clients and customers. Here are our three recommendations for making the switch in your services company.
1) Analyze all of your services engagements or projects for the past 12-18 months. Document the clients’ goals (outcomes); the work you did to reach them; and the total billable hours and revenue.
2) Articulate in clear and specific writing the value the client or customer enjoys since they reached these goals or outcomes. This value is in terms the client would use. The more you can quantify the value, the better.
3) Create a framework for your company that relates value to fees. Start with something simple: We delivered Value X to Client Y for a total of Z fees. Do this for all of the services engagements you have analyzed. You will see a correlation between value and fees. Use three or four of these correlations as a model for future engagements.
Commit to these for 6 months. If you find that some are under-priced, adjust. If you find some are generously priced, you can also adjust as necessary.
We know that clients and customers care the most about the value they get for the fee or price they pay. Don’t assume that one price (hourly rate) fits all and that no one wants more of less value. Charging for value delivered allows you to provide value at the level the client or customer desires.
For more solutions to increase top line revenue read some of our articles here.
If you have more questions or think it’s time to start making the switch to value-based fees, give us a call. We will discuss your company’s current billing practices and how we might work together to increase revenue. That’s what we’re all about: more revenue. 703-801-0345.