In many ways, hourly billing is easy and effective for bookkeeping firms. It’s simple to explain to your clients and simple to implement. All it takes to set your price is calculating an hourly cost and adding your desired profit margin. Easy as pie, right? Unfortunately, there are some downsides to this simple pricing model that make it less than ideal for bookkeeping firms.
Drawbacks of Hourly Billing
The most glaring problem with this pricing model is the flimsiness of “time” as a primary metric for value. What ends up happening a lot of the time is work goes unaccounted for or your income fluctuates based on your own efficiency. The firm will also be vulnerable to write-downs and write-offs because you cannot bill clients until after your work is finished.
The Benefits of Fixed-Fee Pricing
Fixed-fee pricing, which involves setting a flat rate for each service regardless of how long the work takes, is a great model to use if stability is your goal. It removes all the guesswork, ensuring that you know exactly how much you are going to make for every engagement. This model also allows you to improve margins without changing income and can help increase transparency with your clients.
Another Option: Value Pricing
Unlike fixed-fee or hourly pricing, value pricing has less to do with you and more to do with your client. With value pricing, you can greatly increase your income because your services’ price depends on the perceived or estimated value of your services to specific clients. As with fixed-fee pricing, AR can be eliminated and your clients know exactly what to expect ahead of time.
Determined to Stick With Hourly Billing?
Fixed-fee pricing and value pricing have their drawbacks too. Additionally, you may feel that it’s simply not the right time for a big change at your firm. If you’d prefer to stick with an hourly billing model, a few changes may help you maximize profitability.
The first step is ensuring that all your time working is accounted for. A reliable time-tracking tool is essential, as well as the ability to easily organize and add new tasks. If you’re looking for a new accounting software that will allow you to track your hours easily, don’t forget to check out Aero Workflow’s free trial!
With hourly billing, communication is also a key component to success. A well-written engagement letter can help you protect your business if disagreements arise after the final bill comes.
Additionally, using multiple pricing models may be right for your firm. Even if most of your services are fixed-fee, one or multiple could be at an hourly rate instead. You may also charge different hourly rates for different types of work, like regular bookkeeping versus CFO services.
Interested in making a change? Check out our other blog to learn how you can make the transition from hourly to fixed-fee pricing.
