If you are billing by the hour—stop!
Your customers hate it and it doesn’t reward you appropriately. It also often stops you from upselling additional services. And let’s face it—you and your employees both hate tracking your time.
Your customers really hate it because:
- They don’t like the fact that they don’t really know how big their bill will be. Value billing transfers the risk from the customer to the provider.
- They don’t like being charged for every phone call or email. So they just don’t call you. This stops you from finding out about their problems while it is possible to sell your solution to their problem at the time it will most affect the client.
- The client also doesn’t value you over your competition since they are buying time—not value.
Value billing means selling your services based on the value to your customers. This is a hard concept for service providers who are used to billing by the hour to understand.
I will use my business as an example. My customers view tax preparation and bookkeeping as commodity items. Thus, they don’t value them and shop mainly on price. I may want to bill $300 per hour. But on a commodity item, the customer can easily shop around for the best price. After all, they just need their books done and their tax return filed.
Now tax planning and business coaching are perfect for value billing. I am good at tax planning. A typical plan takes about 5 hours of work. With an hourly charge of $250/hour, my bill would be $1,250.
Is that a fair price?
It appears so but why? My smallest tax plan usually saves my clients $20,000 and last year I saved two of my clients about $400,000 each. What is this tax planning really worth to them?
I now charge $2,500 to $5,000 based on a value billing process. And there is no price resistance because 1) they are still saving substantially more than my fee, and 2) the client values paying less in taxes and using these savings on things they want.
For another client I saved them over $500,000 in construction costs and loan interest costs. My hourly billing rate would have been about $12,000. But I value billed at $50,000 for that and met with no resistance because the client saw that they were saving ten times my cost.
More importantly, both clients value me much more than they would if I billed them by the hour.