Are You Charging Per Hour? Why You Should Consider the Value Pricing Model
Selling hours for Rands is the inverse of a good business model, yet it’s a pricing model so many SME owners and entrepreneurs default to – from accountants and doctors to designers, dog groomers and gym instructors.
When billing by the hour, one can only bill for eight hours a day, so their income is capped. Good news is that technological innovations, such as online accounting tools, are cutting down on time spent on admin related tasks, leaving business owners with more time – up to 42 hours a month – to add more value to their clients.
This in turn can pave the way for small business owners to motivate a value pricing model, where fees are based on value to the client instead of the number of hours worked.
Value not time
“Value pricing means billing clients based on what you have to offer, not how long you work. We are not just selling our time, but our knowledge, experience, innovation and customer service – these are the factors our pricing models should reflect.”
This is according to Lauren du Plooy, partner at accounting software specialist firm, Rae & Associates, who – as a certified QuickBooks partner – took part in inspiring and educating others in the industry at a recent series of events held in Johannesburg and Cape Town.
“In addition to freeing up the limits that billing by the hour impose on earnings potential, value pricing can further benefit small business owners’ budgeting and forward planning. They will know what income they can expect to receive each month and, instead of waiting for busier months to realise profit, their profits can now be easily stretched out over the year.”
Business owners need to remember that what they offer is more valuable than just their hourly rate
She adds: “They will also begin to recognise the value they can offer each client based on their expertise, years of experience and extensive industry knowledge.”
Here’s her step by step guide on how small business owners can implement value pricing:
1. Conduct research
Business owners need to empower themselves to make this decision for their businesses by ensuring they have extensive knowledge of how value pricing works, as well as how to price the service bundles they intend to offer their clients.
2. Design service bundles
Bundling makes life easier for clients. It means grouping services together into packages that are then billed at a fixed monthly price. Doing this requires an audit of each client’s needs.
It is worthwhile to conduct the scope of work in meetings with them, discuss what issues they face in their businesses and establish how to help solve these. Business owners can then figure out the scope of work required to assist their clients and base bundles on the information they have been given. Ultimately, this enables the clients to choose the bundles that best fit their needs.
3. Price each bundle
Determining how to bundle is crucial as under- or over-charging will affect profits significantly. Business owners need to make sure that they cover their costs as well as make a profit. They need to decide what services they are going to be offering in each bundle and then providing three levels of pricing for these – the bottom tier price should be the lowest they can go whilst still making a slight profit, the middle tier price allowing for fair profit and good value for the client, while the top tier price should be the most that can possibly ask for the services offered.
Generally, clients will gravitate towards the middle option, but this gives the business owner the opportunity to upsell the services and the increased benefits of the higher priced bundle to their clients once they have been with them for a few months.
4. Communicate to the existing client database
While this can be quite daunting, business owners need to relay why they are making the change and help their clients understand the benefits that they will be receiving. Setting out clear expectations of what clients can expect to receive makes building a solid relationship with them a lot easier.
5. Keep employees in the loop
The change from hourly to value billing must be explained to employees. Value pricing might seem foreign to them, but if properly explained they will start to understand how they are providing value to the business and its clients, not just their time. Ultimately, the value pricing model will mean a change in the company culture and it’s important that everyone sees the benefit.
“Business owners need to remember that what they offer is more valuable than just their hourly rate. Their expertise, many years of experience and/or extensive industry knowledge inform their ability to get the job done effectively and so they should be paid accordingly,” concludes du Plooy.