The world of pricing models for professional services firms is an ever-evolving landscape with the potential to significantly impact your firm's growth and success. So it's crucial for firm leaders to regularly review their approaches and consider whether they should explore new strategies or revise existing ones in light of current market conditions.
Over the last few years, many firms have shifted from hourly billing to subscription or value-based billing. Still, other firm leaders hold out because they believe that tracking time and adopting an alternative pricing model are mutually exclusive. But this isn't necessarily true — you can indeed do both. So let's explore the options available to help you identify what makes sense for your firm.
The case for tracking time
Tracking hours is an essential part of management in many firms. It helps firm leaders monitor staff productivity, balance the workload, and understand the profitability of individual projects or clients.
Shifting to an alternative pricing model doesn't have to mean getting rid of tracking hours in your firm. In fact, many firms do both: Bill clients a monthly subscription fee or charge based on the value of services provided, while also having employees track hours worked for management purposes.
The case for alternative pricing models
Many firms today are facing the same realities:
- Partners know they need to do higher-value work, but they are too busy with transactional and compliance work to make the change.
- Clients that should be buying multiple services from your firm aren't because your firm's services are too fragmented.
- There are major price inconsistencies from partner to partner or office to office for the same service.
The solution to these problems is to determine who your target client is and offer packaged services that holistically help those clients solve problems and achieve their goals.
Moving away from hourly billing is often driven by a desire to differentiate your firm and attract new, high-value clients who are more familiar with subscription or value-based services. Alternative pricing models can be tailored to the client's needs and adjusted as their requirements change.
Other benefits include greater cost certainty for clients, improved accuracy in billing (no more unplanned "scope creep"), and steady cash flow for your firm.
Knowing what to bill
When we talk to firm leaders about value-based billing at conferences and other events, we inevitably get asked, "But if we don't track time, how do we know what to charge?"
I would like to ask a question in return: "How long have you been tracking time?" If your firm has used hourly billing for the past two decades, then you have 20 years of data around billing for this type of work.
In fact, many firms might use billable hours as a starting point for their invoicing processes but write invoices up or down based on their knowledge of the client or engagement. For example, if a new staff member worked on a tax return and took twice as long to complete it as the experienced senior tax preparer who worked on it the year before, you likely aren't going to charge the client twice as much. Instead, you'll do a write-down because you know what the service is worth.
Likewise, if you invest in processes and technology that help you reduce the time spent on engagements, you won't bill your clients less. Instead, you'll write up those hours to keep your revenues steady (possibly with a reasonable increase over the prior year) and help cover the cost of that investment.
Making the shift
If you're concerned that shifting from hourly billing to an alternative pricing model will result in billing clients too little, continue tracking time while you transition. Compare your new billing model to what you would have invoiced using hourly billing to see if you need to adjust or increase the scope of client engagements.
If the billable hour data continues to be a helpful management tool for measuring staff productivity, assigning work, and identifying profitable engagements or clients, you can continue gathering it. However, we've also seen firms do away with time tracking after a transitional period once they're confident in their new pricing and discover that they have other, more reliable metrics to measure productivity and balance the workload.
Transitioning to a new way of pricing your services isn't something you'll decide on a whim. You need to get inspiration and insight into how to make it work and make it a lived experience for your firm. Otherwise, you (or your partners) will come up with a long list of reasons it won't work.
To get started, create an internal standardized pricing template for your services and train your people to have pricing conversations. You don't need to determine your pricing model for the next five years right now. Instead, try it on your next five clients or prospects and fine-tune it over time.
Tracking time and value-based pricing aren't mutually exclusive. With the right guidance, transitioning to an alternative pricing model can help you generate more revenue, attract higher-value clients, and improve the employee experience for your team.
