As fixed fee or “value pricing” becomes a popular way to charge for services, it’s critical to make sure your pricing is right.
With value pricing you’re charging the customer a fixed price for a set of services, so one of most important thing to remember when coming from time-based billing is that your inputs (time) are no longer guaranteed to have a constant profit margin. Where before you may have made a margin of $60 per hour, now your margin on an hour of work could be $1000, or it could even be negative. You don’t want to be losing money, so we need to make sure that it’s closer to the former!
Your cost of doing business is the amount of time your team spends.
How do you do this? With data. Now hold on, don’t get scared away by the dreaded D-word. You’re not going to have to pull out your high-school statistics notes or sit over a spreadsheet for 3 days a month working everything out. Instead, you want to capture and have access to the information you need as a natural part of your day-to-day business. Funnily enough, the way to capture this data is actually something you were (probably) already doing before: tracking your time.
The sooner you’re tracking time, the sooner you’ll have actionable data to make your business more profitable.
Make smart decisions
You may have thought that by moving to value pricing, you’d be done with timesheets for good. As it turns out, they’re actually more important than ever! For the most part, your cost of doing business is going to be the amount of time your team spends to provide a service to your clients. You already track this at a high level with salary & wages, but unfortunately that doesn’t give you a lot to go on in terms of determining what specific aspects of the work you’re doing are profitable (or not).
To be able to make smart decisions, you’re going to need to know the raw input costs of the services you’re providing for each client. To do this, you’ll want to use time-tracking software like MinuteDock. You want software that not only allows you to track an appropriate level of detail (so you can get the insights you need), but also something that is easy and quick for your team to use. Since tracked time doesn’t translate directly into invoices anymore, it’s important to reduce the barriers for your team to get their time tracked, otherwise excuses will be made for why it wasn’t done!
What level of detail should you track? This really depends on the types of services you’re offering. A good place to start is to itemise the handful of things you spend time on at high level, and then break it down further if you think more granularity will be useful to compare. For example, an accounting business might break their time down as: bookkeeping, business advice, tax advice, annual accounts, admin. Most time tracking software will allow you to tag or assign tasks to your time entries, and allow you to drill down into each task when running reports.
The sooner you’re tracking time, the sooner you’ll have actionable data to make your business more profitable. Here are five things that time-tracking will let you do to improve your business:
The easiest way to earn more is to charge more.
Figure out where you need to charge more
The very first thing you should do is check to make sure you’re actually making money with all your clients. Are you making as much profit as you thought you were? If not, consider increasing your prices for any new customers you bring on board, and when possible increase the price you’re charging existing customers.
The easiest way to earn more is to charge more. Remember: you’re no longer working on an hourly rate, you’re working on a value outcome. Different customers will have a different perceived value of what you’re offering them. Start thinking about “how much value does what we do add to this particular client”, rather than “what is the cost of what we do plus margin”.
Optimise the costs of the services you’re providing
Time is your input and cost of doing business. Look at what services are incurring the most overhead, and brainstorm ways to reduce that cost without compromising the value to your customers. For example, consider automating common tasks with software, or eliminate unneeded communication with your clients by having them do some things themselves.
Often the most costly aspects of the service you provide are actually things that have the least perceived value by your customer! If these jobs can be done by more junior employees, consider hiring lower cost staff or interns to handle those tasks, and free up more senior staff to bring on more clients.
Improve the efficiency of slower employees
Poor performing employees can be a major drain on your business’s profitability. Having insight into which members of your team are pulling the most weight and which ones are falling behind will allow you to invest in improving the skills of staff where it will have the most impact.
Often though it’s not black & white; different employees may be better at different roles. If Joe is slow at data entry and bookkeeping (maybe he’s just not a fast typer), then you’ll be better off getting someone else to do it. Of course, sometimes you just have to bite the bullet and let poor performing staff go, and in these situations at least you’ll have the data to back-up your decision!
Fire unprofitable customers
Never be afraid to fire a customer that is more hassle than they’re worth. Every business inevitably has their problem clients, the ones where you say to yourself how you’d ‘hate to think’ how much time you’re spending on them (now you know!). It can often be better to let them go, but if possible, try to do it in a positive way, so they think you’re doing them a favour. For example, you could recommend them to another firm. Either way, dropping unprofitable clients will free up resources to take on customers that make you more money.
By knowing what type of customers are generating the most value for you, you’ll know where to invest more time in converting leads.
Focus on your most profitable services
Now that you have the data on hand, you’ll be able to figure out which of the services you offer are the most lucrative. Focus on these wherever possible. Replacing less profitable clients and services is one of the simplest ways to really make a difference in your business.
This doesn’t have to be an overnight change: your team will obviously have limited resources, and by knowing what type of customers are generating the most value for you, you’ll know where to invest more time in converting leads. Slowly over time, you’ll end up with a more lucrative client base.
Hopefully these tips will have you on your way to better profitability in no time. Even if you’re no longer billing by the hour, keeping track of where you’re spending your time is critical if you want to be making informed business decisions. If you’re not tracking your time already, the easiest way to get started is right here at MinuteDock!