Today’s episode could be a game-changer for you if you find yourself in a service-based business and not making what you are worth. Owning a service-based business means you’re selling your time and expertise as a professional. When you charge by the hour, that can lead to burnout and feeling undervalued. We are talking about a model called value-based pricing and how that can help you make what you’re worth and have the ability to provide higher level services for your clients, ultimately leading to a win-win for everyone. If you'd like to hear the full episode, you can listen here on our website or find The Cultivating Business Growth Podcast anywhere you listen to podcasts.
What we cover in this episode:
- 01:37 – Why switch from hourly to value-based billing?
- 04:32 – Would value-based billing work for my business?
- 06:11 – Charging for expertise and ability rather than time
- 10:04 – Increased transparency with clients
- 12:26 – Profitability and scalability
- 14:27 – Getting tactical – How to incorporate value-based billing yourself
- 15:00 – Expertise needed
- 16:00 – Time commitment
- 20:50 – Value provided
- 23:33 – Assigning a dollar amount to “value”
- 36:33 – The bottom line
Why switch from hourly to value-based billing?
The traditional 40 hour work week and hourly structure have been around for years and could be considered antiquated in today’s world, but hourly billing is the way many service-based businesses continue to charge. In addition, it is how most clients are used to paying. That may make the thought of transitioning to a new pricing model overwhelming, but value-based billing has many advantages, including the opportunity to get paid what you’re worth rather than constantly struggling to justify an hourly rate.
At face value, value-based pricing may just appear to be flat rate billing. While the rate stays stable, there is a bit more behind the theory behind value billing and how you approach establishing your pricing. It is really a different perspective and a movement away from solely looking at the hours spent on a particular project. We will discuss some of the other components you consider in a value billing model, but it really takes a big picture approach, ultimately focused on the entire value your client receives by working with you and receiving your service.
Would value-based billing work for my business?
You need to evaluate your business and make sure that it really is right for you because this may not make sense. For many service-based businesses, value-based does end up working as the best pricing model. When you’re providing a service, you are trading your time for money in many cases and there’s only 24 hours in a day. At a certain point, you reach a limit in how many clients you can take unless you start hiring employees or structuring your business differently. Looking at your pricing structure can help change your mindset and get off that hamster wheel of constantly feeling like you’ll run yourself ragged trying to give your time and give the best service to your clients. We are going to focus on some of the factors that could contribute to how this pricing structure may work better.
Charging for expertise and ability, rather than time
There are many things you’ll want to consider, but first and foremost, is your expertise. Many owners of service-based businesses typically establish an hourly rate. The more expertise you have, the higher that hourly rate becomes. You start to realize if you have a lot of expertise that, as you start to become more experienced, you can do a larger quantity of work faster because you have that understanding and experience. But you end up getting less money because you are only charging by the hour, which is counterintuitive to what we should be doing. As we gain more knowledge, we should be compensated. Value billing allows us to look at the ability your client needs rather than simply looking at the amount of time it will take to accomplish the task. By simplifying your knowledge and expertise into strictly hours worked, you’re undervaluing your services.
In addition to gained efficiencies, you have expertise to see an opportunity where someone with less experience might not see that, or see a bump in the road before it becomes a huge issue. It’s not necessarily just about doing the same job faster. It’s providing a service through the lens of experience versus strictly considering the time. You will also have a larger network of professionals and a team to rely on as well. There are many advantages you bring to the table as an experienced professional that should be considered beyond the hour itself.
Increased transparency with clients
Establishing a value-based billing model means agreeing to a set amount, and potentially even collecting, prior to beginning work. Whether your clients are running businesses themselves or you provide service to individuals, budgets are important. It’s a big selling point to be able to provide a structured pricing arrangement rather than an hourly fee with an unknown final invoice. Value billing helps your client avoid unexpected large bills and spread the cost of the work out month to month.
Not only is the pricing laid out, but so are the scope of services, which is great for your client and yourself. It’s important to know that the scope of services may change over time. When we do talk about value billing, we’re looking at a flat rate, but it does incorporate specific tasks. If that scope changes, that flat rate or that value billing may need to change, if it does take more time, or if suddenly something changes and your client needs more expertise than they initially thought. The parameters around both pricing and scope of work performed can provide solid peace of mind for clients who want to know what to expect in working with you.
Profitability and scalability
The goal is to set yourself up so that you can scale and grow as painless as possible. Establishing a structure that allows for value billing gives you, as a business owner, more control and understanding of where things stand. You gain the same transparency you’re giving to your client, which can help give you a better sense of what your financials look like.
It also helps your profitability because you’re likely going to be charging more because your value is likely higher than your hourly rate. If you’re increasing your revenue over time, and you’re streamlining the billing processes, that will pay dividends over time. Increased revenues alongside decreasing administrative time will allow you to improve your profitability for your business.
Getting tactical – how to incorporate value-based billing yourself
So now that we have covered the theory and reasons why you may want to transition to value billing, we do want to shift to how you would start to incorporate value billing in your own business. You need to know the factors that go into establishing pricing and how you actually assign a value.
You need to think about the type of services you deliver. Start there and think about the level of education and experience required to provide that service.
Although we are moving away from hourly billing, it is still important to consider the amount of time this project or client will require from you. You will also need to think through the total number of clients you will be able and willing to serve. If you want to give more of your time to a select few clients and offer more exclusivity, you will need a premium price.
You need to be very clear about the value you are providing as well as your target market to ensure those are aligned. By considering the problems your target market faces and how much it’s worth to them to solve that problem, you can begin to form some ideas around pricing. There are a few things you can look at that can help you establish this value even further. Challenges and goals can be a good place to start.
Assigning a dollar amount to “value”
Like we covered above, the three factors listed (expertise needed, time commitment and value provided) can be great starting points. But these are still a bit vague. What is the problem you are solving for your clients? Are you saving them money, time, increasing the value of their business? Because assigning a dollar amount is a bit difficult and the term “value” seems a bit intangible, we are going to run through an example of our own firm with some hard numbers to give you an example.
When we get a client, we first start by asking questions to determine what their main challenges are, what the solutions would mean to them and the level of accounting and advisory knowledge needed from our team to help them. The complexity of any issues they are facing when it comes to taxes or systems can impact pricing because it will require varying levels of knowledge and education from our team. We will also consider the time commitment, but our main focus will be on the value piece.
We commit to understanding their business and goals, as well as how aggressive they want to be in reaching them. We are providing very high level services performed by licensed CPAs, tax returns, regular advisory services, coaching and meetings for our business clients. We also customize services based on our clients needs, so there are many moving parts but because we are generally working with companies in the $1M – $10M range who have large growth, profitability and ease of operations goals, we start at $2,500 per month.
The bottom line
You want to try to look at these factors that we’ve talked about, examine your expertise, analyze how much time, energy, and effort is required, and that value that your client is ultimately going to receive. You want to pull all of that together and think through what makes sense for you to be charging for your pricing. We also set up a 90 day period review meeting where we ensure our clients are getting the value they expected and make any adjustments as needed. The goal is to create that win-win scenario for you and your clients. Your end goal is just trying to create that price point where your clients are able to pay for your services and you’re able to help generate the results that they’re looking for.
If you have over 10 years of experience in your field, you have internal knowledge that helps you accomplish those things quicker, or with better results and you really are providing a great value for your clients. So, you need to really evaluate if hourly billing is the best for you. If it’s not, this could be a great alternative to help you feel more validated, and help you receive the value that you’re giving your clients. You have happy clients. You’re giving them your services, your gifts, and need to be compensated for that. If this helped you at all, we encourage you to share with your community!
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