The Pitfalls of an Hourly Rate

Loren Fogelman
Posted by Loren Fogelman on Apr 15, 2021 8:20:56 AM

Up-Level Your Price Strategy

The billable hour is unfair. 

Most price strategies, whether fixed or hourly, consider time and costs. As employees, your income was connected to time. Therefore, you continued to track minutes and hours when you started your accounting firm.

An hourly rate emphasizes the technical aspects of your services. By highlighting the functional tasks, your firm blends in rather than stands out. This sends the message to clients that your services are an expendable commodity. As a result, you end up competing with offshore technicians who charge pennies on the dollar.

An Hourly Rate Causes Tension

Ever play tug of war as a child? Two opposing teams pull on opposite ends of a rope. That’s what happens when you charge for time. Basically, your hourly rate puts you at odds with your client.

Consider these:

  • Efficiency. Your client wants the work completed as quickly as possible to lower the final invoice. Since your earnings lower as you become faster, efficiency is punished.
  • Tracking. Most accounting professionals don’t enjoy tracking time and costs. Well, your client doesn’t really care about those things either. Clients hire you for a specific outcome, not a line-itemed invoice.
  • Scope. Did your scope of work change over time? Too many accounting professionals tell me they absorb those costs instead of discussing the change request with their clients.
  • Income Cap. Expertise and technology increase efficiency. As a result, you earn less as your processes improve. Connecting your fees to time caps your income since time is finite.
  • Escalation. When you connect your services to time, clients avoid reaching out to you when they run into a problem. They don’t want the additional cost on their monthly invoice. When they finally contact you, the problem has escalated. Fixing it now costs more than if they had contacted you sooner.

Who Determines Value?

Ever notice how the clients who pay the least expect the most?

Clients sometimes magically pull a total cost out of thin air. Most clients don’t realize what the work entails. Since they guess it’s easy, they expect a low fee. The final invoice catches them off-guard. The client now questions your fees, causing you to defend your work. Some clients will expect you to negotiate the final fee. How much have you written off over the years?

Your highest value occurs before you start the work. Once the job is done, its value lowers. It’s like driving a new car off the lot. The car’s value depreciates before the ink’s dry on the contract. This applies to your services, too. If you’re tired of the tug-of-war, then get paid first.

Challenges and Solutions

High value clients care more about what you know than what you do. You devoted countless hours to developing your expertise. Don’t dismiss this critical factor.

Maybe you’re unsure why clients choose your firm. If so, then talk with two or three of your best clients to understand what they value most about your firm. During that conversation ask about the challenges you solved for them. Include a couple questions where they share what’s possible now that their financials are in order.

Pay attention to the part where they share about the solutions and outcomes. Those things have higher value than the ongoing accounting and bookkeeping tasks.

Solving client problems is high value. Consider how to shift your focus away from the compliance work to the outcomes. That’s when you’ll stand out and be memorable. By the way, ideal clients happily invest in solutions.

Value Based Pricing

Value pricing aligns you with your client. Rather than compete on price, you lead with value. High value clients prioritize solutions and relationship over price. They believe the benefits they receive from hiring your firm is greater than their monthly fee.

Once your client agrees to the price, the contract’s signed and your fee is paid. You no longer need to chase money since you’re now paid before you start to do any work. Imagine the hours saved because you no longer need to track time, invoice clients or justify your fees.

As a result, you solely focus on delivering the outcome with no distractions or guilt. Here’s the best part –no more tug-of-war. You both want the job to be completed as quickly as possible. Your high value clients invest in solutions; they don't buy time.

No Income Ceiling

Einstein said, "The only reason for time is so everything doesn't happen at once."

Charging for your time creates an upper limit challenge. The only way to earn more is to devote more hours to your business. You sacrifice your personal time, feeling like a slave to your business. It’s not sustainable.

Ditch your hourly rate to reclaim your personal time. Clients value the results you deliver, not the time required to perform specific tasks.

Value pricing rewards speed and efficiency; profits rise as efficiency improves.

It’s similar to next-day delivery. Amazon Prime and FedEx prove that people will happily pay more for speed and guaranteed fast delivery. This concept applies to your accounting firm, too.

Ditch Your Hourly Rate

Since an hourly rate rewards effort, it creates a tug-of-war with your client. You earn more when you work more. Whereas your client wants you to be as fast as possible to pay as little as possible.

As a result, your highest value gets overlooked. You end up being punished for expertise and efficiency.

Value pricing solves the 'trading time for money' dilemma. You connect your prices to specific benefits and outcomes. This eliminates the tension around time. And it eliminates price competition. Instead, your rates reflect your expertise, not what you do.

Topics: Practice Management


 

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