This is the second article in my three-part series, sharing the results of the 2019 Intuit® Rate Survey. The first article focused on many of the top-level highlights that came out of the survey. In this article, we’ll examine the results from the last three rate surveys to uncover trends and attitudes about the billing methods used by firms.

We asked respondents to tell us which billing methods they used for specific types of services they offer from the following options:

• Hourly billing: based on the hours worked multiplied by an hourly rate.
• Value pricing: based on the maximum amount a given client is willing to pay for a particular service before the work begins.
• Value billing: marking up, or more frequently marking down, the invoice of the client after the work has been performed.
• Fixed fees: often determined on the estimated hours to complete the work or number of transactions.

More ProAdvisors are moving away from the billable hour

ProAdvisors® continue to move away from the billable hour and are adopting more strategic approaches to pricing. Over the past five years, we have seen a consistent decline in the hourly billing by as much as 34 percent for some services.

In this article from the survey conducted in 2017, I theorized that accounting and bookkeeping professionals preferred to bill hourly for services where there is a higher degree of uncertainty, such as cleanup and troubleshooting. The data still supports this theory. In fact, hourly billing for all services has continued to decline over the past two years. This indicates that we are becoming more comfortable putting a fixed price on all services.

Value pricing and fixed fees on the rise

What billing methods are we switching to? It appears that most practitioners are switching to either value pricing or fixed-fee billing, with very few (less than 1 percent) selecting value billing as their preferred method over the five-year period.

The largest uptick from the survey in adoption of value pricing is in clean up and troubleshooting (94 percent), and monthly accounting/bookkeeping services (61 percent), while payroll services had the lowest adoption rate (18 percent) and actually saw a decline of 24 percent in the last two years.

The adoption of fixed-fee pricing had more modest adoption rates compared to value pricing, with only an 11 percent increase in over five years for monthly accounting/bookkeeping services and relatively lower rates for all other services except catch up bookkeeping – which saw an overall increase of 63 percent.

Remember that value pricing and fixed-fee pricing involve setting a fixed rate for the job, but value pricing takes the financial position of the client and the perceived value of the engagement into account. Fixed pricing is typically the same across the entire client base, determined by preset variables such as the number of transactions processed or the size of the client.

How are firms and clients responding to these changes?

We added questions to this year’s survey to find out how firms and their clients are reacting to changes in billing methods. Of the 44 percent of respondents who indicated they had changed the pricing model in their firms, more than 55 percent said they are still experimenting with value or fixed pricing, but still billing hourly for some work.

Firms who did make the switch from hourly billing were split between value and fixed pricing, with slightly more firms opting to choose fixed fees.

Less than 2 percent of firms indicated they had tried value or fixed-fee pricing, but switched back to hourly again. It was easy to see why from the responses to the next question: How has this change immediately affected your gross profit margin? The majority (58 percent) said they saw no change in profit margin, 39.5 percent said they experienced an immediate increase in profit margin, and less than 3 percent reported an immediate decrease in profit margin.

We also asked about your clients’ reaction to the change in the firm’s pricing model from hourly billing to value or fixed price. Almost 60 percent told us that clients were indifferent to the change, while 35 percent reported a positive response and less than 6 percent indicated negative feedback.

In response, one respondent told us, “Many clients left, the ones who stayed are all very positive.” Another shared that the process of changing their fee structure allowed them to really analyze their client base: “Our profit first went down because we ‘fired’ some customers, but it ultimately has gone up.”

Should you make the switch?

There are a lot of benefits with moving away from hourly billing, including increased profits, customer loyalty, and a more streamlined billing process. But, the implementation process is certainly not without risks, especially in the beginning, as firms get the hang of it and learn to determine the fair value of the services they provide to clients. Firms looking to learn more about shifting away from the billable hour can learn more from industry experts such as Ron Baker, Mark Wickersham, and Mike Michalowitz, who have all written various books and articles on the subject.

This great article by Dustin Wheeler of Eide Bailey LLP, explains the pros and cons of moving from hourly billing to value-priced accounting. He explains the benefits to the firm and their clients, and warns of not haphazardly trying to make the switch. A successful transition takes careful research, planning, and an organized introduction of the new pricing model to clients – ideally in phases.

Changing your pricing model is YOUR choice, and you need to do what is right for your firm and clients. While it’s important to stay apprised of what’s happening in our industry and continue to learn about new and different ideas, ultimately, your pricing model should reflect the values and structure of your firm.

Some advice from your peers

We asked respondents to share a piece of advice with their fellow ProAdvisors. We received so many great responses, below are just a small handful!

“Use what works for you and not what everyone else tells you to use.”

“Don’t be afraid to fire a client. It may be better for both of you.”

“Don’t settle for less. You need to set the bar higher by charging what you are worth. Knowledge and expertise should not be bargained with. We don’t go to the dentist and ask for a discount; why is it acceptable to ask accountants to lower their rates? By setting a firm boundary, I have quality clients, work less, and establish value.”

“Don’t undervalue your skills.”

“Don’t sell yourself short. I undercharged for too long. Quote a value pricing rate quickly because, over time, you will get faster and, if you are charging by the hour, you will make less. A smaller amount of good clients are better than a large amount of small, poor paying clients.”

“You are worth more than you think; your client needs to know that your mind is the real value, and you act as the health insurance policy for the business.”

“Raise your prices!“

“Don’t overpromise and underdeliver. Do the exact opposite.”