For service providers like accountants and bookkeepers, there’s a new debate about hourly vs. fixed pricing. Hourly-based pricing in this context equates to charging your clients per hour of work that you put in. Fixed pricing is exactly what you guessed – fixed. The price is set from the outset for one-time work or is a monthly set price. Fixed fees are one way to price one’s services based on the value clients place on your service, rather than the hours of work you performed.
Both hourly and fixed pricing have been around for quite some time. A key difference today is technology. With more automated accounting and bookkeeping solutions like Xero and QuickBooks Online, the fixed pricing model is not only viable but it’s also potentially more lucrative thanks to economies of scale.
Let’s take a look at some of the challenges of charging hourly rates.
Hourly pricing creates the wrong incentive
When charging an hourly rate, you are compensated first for the time you put in, and second for the quality of work. This is a challenging incentive structure because talented professionals can complete high quality work in a shorter amount of time than their less talented peers.
Whereas, with fixed pricing, the incentive weighs in favor of high quality work and it’s less about how quickly the job gets done.
Plus, cloud accounting solutions bring with them a wealth of efficiencies that a savvy accountant or bookkeeper can take advantage of to deliver the same value to their clients but in a more efficient manner. Fixed pricing makes sense because of this technology.
Clients focus on the cost of your time, not the value of the work
In any sales process, you want to avoid any red herrings that a potential client could latch onto. A red herring is something that distracts from the relevant or important issue. In this context, having a high hourly rate can easily be a red herring when courting potential clientele. Let’s walkthrough an example:
A potential client is looking for tax help throughout the year. You estimate that since this is a sizeable client with $4 million in annual revenue, it’s probably going to take you ~5 hours per month. Your hourly price is $200/hour, a higher than average amount. The cost on a monthly basis to your potential client is $1,000 per month.
Now compare this to your less talented peer who charges $100/hour. For the same work, it would take him three times as long, or ~15 hours per month, making the cost to the potential client $1,500 per month – $500 MORE per month than your rate. However, on the surface, your peer seems cheaper, in fact 50% cheaper. It’s easy to see why a prospect would lock onto the cost of your time, as a measurement of value, instead of the value of the work being completed. Ron Baker talks of overcoming “buyer’s emotions”, including such price resistance (sticker shock) as well as payment resistance (not paying full invoices). These emotions will be reduced with fixed pricing. By discussing value and a pricing upfront with clients, they’ll feel less of these negative emotions.
Clients want to know what it’ll cost them upfront
No one likes surprises. They want to know what something will cost up front. By offering hourly pricing, the client will always be wondering what their bill will look like at the end of the month. There’s always the risk that it goes above their budget. This is obviously different from fixed pricing where there’s a clear understanding of the cost and what will be delivered for that price. Cost certainty is a good thing for clients.
Convinced to make the change to fixed-rate fees?
Hourly rates have their place, but in today’s cloud accounting world, they should make up a smaller portion of your income. Fixed-rate fees allow you to book more work and make more for your work. Have you recently made the switch from hourly to fixed-rate fees? How was the transition? We’d love to hear about your experience.