Value Based Pricing - Explaining what it really is….
There are many reasons that the fixed fee argument is being thrown at the bookkeeping and accounting market.
The reason today is that the software companies are automating what they perceive to be the bulk of what accountants and bookkeepers do, so they are trying to give these professionals a way to keep their fees up at the same level they were before.
- You used to take this long to do something and therefore you used to bill a certain amount for doing that work.
- The previous bill amount is now to be the “fixed fee” or the “value” that you will bill from now on.
- Now use the latest greatest technology and pay the software company for that technology, (and probably on-sell the software to your clients).
- Because you are using the latest greatest technology, you will do the work in less time.
- You spend less time on it but the output to the client is the same so therefore they should pay the same “fixed fee” or “value”.
When a bookkeeper or accountant first starts doing their thing with a new client, they are not as quick, probably not as thorough nor as good as they will be the second or third time they do things. As you work with more clients or the same client more times you get quicker and better at providing your service. The client should not be the only one who wins out of that equation.
The concept of billing to the value provided is not new.
Currently and in the past: bills were calculated from timesheets that recorded how much time it took; hours were then billed at an agreed charge rate to work out the invoice amount. The scenario within the accounting or bookkeeping firm was that as someone got quicker, or better, or more qualified, their charge rate would go up! Also the person is likely to be being paid more so the costs are up, therefore the revenue needs to go up. As the speed of delivery improved, the charge rate also went up and the client in theory pays the same, whether a slow low-charge person did the job, or a quick high-charge person.
As a person’s knowledge increased, skill increased or expertise in a particular area increased, or became more specialised, the charge rate increased.
Fixed Fee by another name?
A normal concept in manufacturing, or in fact in some service delivery professions is a concept of “Standard Costing”.
This is where it is decided that a particular product will cost $X to manufacture. These costs may include parts and labour but someone has worked out all the components and costed them. The cost of production is calculated accordingly to a “standard cost”. They apply the required profit margin and the result is a “standard sale price”. I am tempted to call it a “fixed fee” or a “value based” billing method.
In a service firm, a person looks at the service (maybe a “standard service”) and estimates how much time it will take and how much the person costs to deliver that service. So wages, (or fee expected), plus on-costs, plus travel time, plus down time, plus margin required. This amounts to how much the “standard service” would be billed at. This sounds very much like a fixed fee type calculation.
What happens when too much time is spent?
In the standard costing arena or when say a construction contract has been signed for a fixed fee/quoted amount, the arrangement typically then allows for “variations”. When the material costs more, the job took longer than it should, it rained, the supplier puts in a variation claim and the fixed fee changes.
In our world this could happen when the amount of work changes, the scope of work changes or something unexpected happened or was found and it required you to spend more time or incur more costs; therefore you communicate this with the client and charge more as agreed.
Fixed Fees is a valid billing technique!
How do you know if Fixed Fee billing is working?
Standard costing techniques are used to streamline costing and allocation procedures. If you like, to simplify the allocation of costs to each output and help work out whether that output is contributing to the profit of the business.
A business using standard costing will look at how many units of something it produced, and based on the standard costs, calculate how much it should have cost to produce those outputs. That standard costing is compared to how much was actually spent and if the actual expenditure is more than “standard” then the “standard” is reviewed and a new standard price calculated for the next set of costings and price setting.
How does a professional bookkeeping service firm, using fixed fees, know if the fixed fee is working for them?
You would review how much revenue had come in from your Fixed Fees.
Compare that to the costs of operating the business; rent, people, software, insurance, registrations, etc.
If you made enough money then the fixed fee would be working for you.
If not, then you need to up the fees.
How do you set your fixed fee?
Think of a routine period of time. For a bookkeeper you may need to break this down into how many of each activity you will do over a year.
How many end of year payroll?
How many TPAR?
How many activity statements will you lodge?
How many weekly reporting jobs will you do?
How many other activities?
It may be useful to allocate a weighting or percentage to each activity to assist in working out how to charge. For example, 40% of time is spent on general bookkeeping, 5% on TPAR, 10% on EOY payroll, 40% on activity statements, 5% on other.
Then you can average out costs based on what percentage of your time an activity would usually take.
Then add an amount in excess of your direct costs, which will go towards covering the rest of the operating costs.
Accountants have always adjusted fees to a commercial value. Bookkeepers can do the same. Keep abreast of industry norms by talking to your peers and staying up-to-date with trends.
See this ICB resource for more thoughts about Moving to Fixed Fees