As a consumer you want to get the best value for your buck, whether you’re shopping for a T.V., car or mechanic. This is why Midas' lifetime guaranteed brake replacement service is so popular. Even though Midas charges more than their competitors, their customers are willing to pay extra for the added value of never having to buy brake pads again–at least until they get a new car. Perceived value like this loosens the consumer’s purse strings by helping them see that value, on the whole, trumps cost.
Remarkably, most professional services companies remain focused in touting their resume while failing to highlight the value of their services, and they pay for it in lost revenue.
Can professional services firms boost profits by replacing Hourly Billing with Value Billing and actually make their clients happier by doing so? Absolutely! Clients value the worth of your deliverable over the hours you spend on the task. Let me refresh you on conventional billing methods before really diving into value billing.
Conventional Billing Methods
The rates of many professional services firms are either cost or market-based. This is usually sufficient to keep a firm running, but you are definitely limiting your potential revenue. For example, if you’re an accountant doing tax returns for $300 ($100/hr. for an estimated 3 hour job), you can easily incur a loss if the task takes longer than the estimated hours.
Only Clients Benefit From Traditional Billing
Technology has enabled you to operate more efficiently than ever. Increased efficiency means higher profitability, typically. But if you continue to set rates based on the cost, you just pass that potential revenue off to the clients as savings for them. It’s a nice thing to do, noble even, but it’s not mutually beneficial, and it’s not improving your profitability.
An accountant using an advanced tax preparation software that trims the length of a three-hour job down to one might be tempted to charge only $100 instead of $300. But why? Really, she could charge extra for the speed with which returns were completed and delivered, not to mention her purchase and implementation of the new software. A rapid turnaround rate is a value for which many consumers would gladly pay extra, especially if they’re in a field with frequent or strict deadlines. If our accountant here starts setting her fees based on the received value (the completed tax returns) instead of the hours spent, it will result in higher revenues and happier clients. That’s value billing.
Value Billing, Explained
Setting rates based on what potential clients believe your services are worth to them, as opposed to the cost or average market fee is Value Billing. Clients aren't interested in the details of how you accomplish a task. They are interested in what additional value they can get from your services, such as savings or financial gain. Value Billing is putting a price tag on those extra benefits you can provide that the competition can’t.
Any architect can design a building. It’s the one who can design and build a great looking building smoothly, on time and at the lowest cost for which consumers will pay a premium.
Justifying Value-Based Fees
If you’re going to charge more than the competition, you’ll have to justify it. Take a careful look at what you do on a day-to-day basis. What savings or guarantees do you have to offer that your competitors can’t match? Start thinking in terms of value and set a price tag to it.
For example, two IT firms provide computer network management services; one charges $800 a month, the other $500. The pricier provider is Gold Partners with Microsoft, Google and Apple, and offers 24/7 network monitoring service. In its proposal, it estimates that if your phone system goes down for even 4 hours in a given year, you’ll lose $30,000 to $40,000 worth of business as your sales staff is unable to make sales calls. So, this provider charges a bit more because it promises an up-time rate of 99.99%.
Detailing their value in this way makes prospects realize that the risk of losing that much revenue during an outage far outweighs the extra cost of their service. Customers would gladly pay the extra $3600/year for the peace of mind the IT firm’s guarantee provides. This is true for most clients--the price is hardly an issue if your services prove to be invaluable.
A Win-Win Situation
Moral of the Story: Don’t undersell your services. Value Billing allows you to charge more for your services because the focus is shifted away from your time and cost, toward how much the client will gain. Use every proposal or estimate as an opportunity to highlight your niche and the direct value you offer to the client. Don’t get bogged down in unnecessary task details of the service. By using Value Billing, you profit and your clients believe they've gained something exceptional by selecting your services.