When it comes to value-based pricing, it’s critical to make sure your pricing is right.
You’re charging the customer a fixed price for a set of services, so one of the most important things to remember when switching from time-based billing is that your inputs (time) are no longer guaranteed to have a constant profit margin.
Before you may have made a margin of $60 per hour, but 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!
How do you do this? With data.
1. 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. The easiest way to do this is to get staff to track their time. 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”.
2. 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.
3. 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 that simple - 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.
4. 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.
5. 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.com