CEO to me: “I’m looking forward to January of next year. We raise our rates every 3 years, and we can do that next year.”
Law firm Founder to me: “I think I’ll raise our rates on January first. Everyone does it.”
CPA associate to me: “We sent letters to our clients that all rates are going up by 20% next year.”
I’m willing to bet that you have said things like this yourself. And you’ve heard them from other firm owners, and perhaps from your own providers.
Two questions come to my mind:
- Why raise rates on a specific date?
- Why raise your rates at all?
The date chosen is often a function of the firm’s fiscal year. If it begins January 1 then it makes sense to raise rates at the same time.
I can see some logic in aligning the increase with the fiscal year.
BUT…it also limits the firm’s ability or willingness to raise rates at other times. Who is in charge, the calendar or you?
Why raise fees at all?
This is the much bigger question and gets to the heart of why your firm exists.
When I ask, “Why raise rates at all” I’m usually told about increased costs, inflation, the competition, and “we need to increase profit.”
Whatever the answer, the point is always the same: “We need more money.”
I’ve spent the past 25 years helping firms make more money. So that’s fine.
What is missing: the clientele your firm serves.
When you choose to raise rates to cover your increased costs, or the addition of resources, or to make more profit, the clientele is nowhere in that answer.
I’ve been urging professional and B2B services firms to recognize that they change people’s lives! It’s not about the inputs, it’s about the IMPACTs.
It’s about where the clients want to go.
If a professional or B2B services firm is to stay in business, it has to continuously accumulate knowledge and expertise that increases its ability to change client’s lives.
Have you or one of your associates gained new skills or insights that will increase the significance of the IMPACTs you deliver?
That’s when and why you increase your fees.
It has nothing to do with the calendar or with increased costs.
Why am I writing about hourly rates?
You know that I am dead set against hourly billing for professional and B2B services firms. So why am I even writing about hourly rates?
Because the transition to a non-time-based pricing model requires a huge shift in thinking.
The shift is away from thinking you’re selling time towards believing you’re selling IMPACTs.
A few clients have told me changing their beliefs was first step to IMPACT based pricing.
When we started working together, they were charging by the hour. They calculated their hourly rates by using the ‘cost-plus’ method. They added up all their costs and multiplied them by a percentage that would generate a profit. This number is divided by some number of hours which becomes the “hourly rate” charged to clients.
The cost-plus method allows for a few variables:
- The number of hours chosen (larger number, lower rate; smaller number, higher rate).
- Different rates for associates with different skill levels
- The targeted profit percentage
Cost-plus hourly rates are easy to talk about and apply to all clients and all work.
There are big pitfalls:
- Difficulty precisely defining direct client work.
- Difficulty accurately tracking this direct client work.
- Objections by clients to the charges and having to write them off in response to these objections.
- Not billing for all the hours you planned for; having to work 25% or more hours just to bill the target number.
- Clients objecting to your rates by citing the competition’s lower rates.
And the biggest pitfall of hourly billing is this one:
Being challenged by clients when you raise your rates.
Why do clients object?
Because you have relentlessly emphasized that you are charging for your time. Time for this task, time for that call, time for an email, etc.
Time is at the forefront in every of single thing you do.
So it’s perfectly reasonable for a client to say “Hey, an hour is an hour! I don’t want to pay more for tomorrow’s hour that is the same as yesterday’s hour.”
End hourly billing!
Yes, stop putting the hour first and put your clients first.
If you resonate with these pitfalls and want to explore getting away from hourly billing, text PITFALLS to 703-801-0345.
I know what works for professional and B2B services firms. Start now, make more money, and have more time to enjoy life.
