Ryan Lazanis - www.starbusinessclub.ca
I’ll go out and say it. Charging by the hour for your services is a cop out.
The billable hour is a terrible measure for pricing your services.
No one says to themselves, “You know what? I feel like buying 4.75 hours of my accountant’s time today.”
Rather, they’re more inclined to say something like, “You know what? I really need some of my accountant’s help with my year-end tax planning.”
Charging an hourly rate for that help is a cop out, and it’s flawed in many respects.
One needs to determine the value of what that help is worth. Because this is what any client is buying, the value of what you bring to them in relation to their needs.
Billable Hour Flaw #1: Bias
The major flaw with the billable hour is that there is a bias on the part of the service provider to spend an unnecessary amount of time on something that the client truly doesn’t want or need.
I’m not saying that people do this on purpose. Most are honest.
But the issue is that the bias exists and it goes contrary to the goals of the client.
Rather than providing laser focus on the client’s needs, those charging by the hour have a bias to do whatever pads their timesheets.
Again, I’m not saying people intentionally do this, but the bias does exist, and from this, we can lose focus on what really matters: the client and their needs.
I caught up with Mike McDerment, CEO of Freshbooks, about this very subject, as he’s a staunch supporter of value pricing (if you haven’t read his e-book on the subject, you can check it out here: http://breakingthetimebarrier.freshbooks.com). Mike believes that the billable hour “misaligns clients and their trusted service providers,” because “clients are economically incented to have an engagement take fewer hours, while the service provider is economically incented to work more hours. In the space between, mistrust can emerge.” True alignment can only come from a pricing method other than the billable hour.
Billable Hour Flaw #2: Rewarding inefficiency and lack of innovation
The billable hour rewards inefficiency and lack of innovation. It’s no wonder that so many professional service firms have stagnated.
Why would anyone want to continuously innovate their business model into something more efficient if that innovation would actually lead to reduced revenues?
The billable hour actually punishes those who are efficient. Instead, by putting a value pricing approach in place, the business is forced to find innovative ways to increase efficiency and effectiveness.
Billable Hour Flaw #3: Looks inwards rather than outwards
Another major argument against the billable hour is that it is based on internal costs. As a result, the client doesn’t relate to it and has no frame of reference for anything you are doing.
Newsflash. The customer doesn’t care about the amount of time that you spend on them nor do they care about how much your time costs.
Valuing your services based on time is a major disconnect from what the client actually cares about: the end result.
Billable Hour Flaw #4: Billing based on time leads to confusion
When quoting costs using the billable hour, estimating these costs on the part of the client is exceptionally difficult and can actually lead to frustration.
In fact, I went through this very experience as of late when looking to engage some online marketing assistance.
I was speaking to someone exceptionally knowledgeable and liked what he had to say, but we kept getting tangled up with regards to costs.
I kept getting quoted in hours, but the subject matter was far from my area of expertise and since I had no frame of reference, I had no clue what the costs would be. Although I think this person could have helped us out, I ultimately lost interest trying to figure out whether these costs were in our budget, which probably resulted in a lost sale.
John Wires, founder of Toronto virtual legal practice Wires Law, understands this frustration all too well and implements a fixed fee approach to their firm’s services. “I moved to fixed pricing out of necessity for my clients. It gives them certainty in their legal spend, allowing them to make a business decision about whether it makes sense to retain me,” says John.
Value pricing isn’t perfect.
Probably the most difficult part of value pricing is actually determining the external worth of your services.
So how do you price your services if you don’t use time as a measure?
The answer is: it’s hard. It comes with experience as well as trial and error.
I do not profess to be an expert in value pricing, but I do know that it needs to be continuously monitored and re-evaluated. There is no right or wrong answer. The pricing needs to make sense for all parties involved.
There are a lot of resources online about how to employ value pricing. I urge you to check it out.
Escaping the clutch of the billable hour mindset is not an easy thing to do, but once you understand the principles of value pricing, the billable hour seems like something that’s better left for the dark ages.
Ryan Lazanis, CPA, CA is not your typical accountant. Destined to bring the traditional accounting firm into today’s modern era, Ryan founded Xen Accounting a completely cloud-based, 100% paperless Canadian Chartered Accountant firm which combines online accredited accountants with innovative software. His belief is that today’s technology can make accounting for small business more convenient, less time consuming and less irritating.