Setting fees is always a difficult proposition for service businesses and pricing an intangible is much harder than pricing a product. Your fee will, however, represent what you and your expertise are worth.
Setting fees that will represent what you are worth and make money for your business, is based on good judgment, knowing your client, having a good sense of self worth and also knowing what your options are.
Service Fee Options
Hourly fee: This option pays you for your time. This is not advisable as it is severely limiting to the growth of your business, and affects your perceived value with your clients. When you bill this way, each professional in the firm and every support person eventually reaches their limit of billable hours and then you need to add a new resource to the firm. As a client, I always wonder if I’m being billed as I chat on the phone to my accountant and he asks me about my holiday…tick, tick, tick…I always get the feeling that the focus is on billing more than service.
Contingency/success fee: This often comes to play when your service is helping a client to win a major piece of business, tender or project. If you charge a fee contingent upon success, you will only get paid when the client wins the business, although you are certainly backing yourself! However, there are many things that can affect the outcome over which you have no control. It is far better to charge for the service, and if the stakes are high, charge a success fee on top of that. It’s like a bonus for exceptional performance.
Project fee: The best way to charge a set fee for a project is in staggered tranches. For example, you will always be paid faster if you don’t start the project until you receive the commencement fee. If the project is to take five months, for example, and you leave the bulk of the amount to be invoiced at completion, you may not be paid for eight months. A better option is 50 percent up front, 30 percent at completion of a (pre-agreed) major milestone and the remainder on completion of the project. Alternatively, you may decide to invoice 50 percent up front and 50 percent on completion if it is a relatively short project. Never leave the bulk of the fees to be invoiced at the end of the project.
Retainer: A retainer is the ultimate goal of all people in the service profession. There are many forms for different types of services: monthly fee retainer for the provision of ongoing consulting/advisory services, monthly support fee (for software), monthly licence fee, monthly fee to be available on request for support/training, and so on. You may decide to charge a retainer on a monthly or quarterly basis in advance. Do not nter into a retainer arrangement where you are paid after the service has been delivered. You could end up delivering three months of service and wondering when you will be paid. If your clients really need your help, they will accept your terms – terms that are agreeable to you!
What are you worth?
When you deliver value to your clients and help them achieve their goals, and solve their problems, you can justify your fees based on that value they receive. Knowing what you are worth is as much about mindset as expertise and experience. You need to know what you are worth and the value you deliver your clients, and believe firmly in your worth. Your mindset drives your sense of self worth and what you can charge your clients.
Where do you make money?
Where and how do you make money? Go through your end-to-end delivery process and note all the points at which you make money, and what you are providing our clients at those different points. For example, if your primary product is business accounting software, you generate revenue from sales of the product, probably on a per user licence fee basis.
You could also be making money from:
- support – ad hoc, for specified periods
- training – user
- training – administrator
- training – train the trainer
- training – refresher
- software upgrades
- training – on new upgrades
- maintenance – ad hoc, annual fees
- customization – reports
- hardware sales
- hardware upgrades
- software sales – other applications
- consulting – integration of systems.
When you identify where you make money throughout your actual product delivery and follow-up process, you can assess how much you make by looking at packaging different processes and services together, and charging different price bundles and levels.
A great way to move toward a value-based pricing model is to bundle products/services together. If you are an accountant, you could charge a monthly fee, for example, for compliance and BAS services, annual company return, and four quarterly review meetings per annum with the client. You could also package special reporting packs, the individual’s personal tax return, their family’s annual tax returns, management of their superannuation and a range of other options that suit different types of clients. You could have three basic levels of package starting from $500, up to $1,500 per month, as an example. Other clients may opt to remain on an hourly fee (if you decide to give them that option).
That helps with forecasting your revenue, your resource requirements and your profit estimates. Clients know where they stand and exactly what they will receive, and you don’t need to have everyone in the firm record their activities at six-minute intervals.
Charge for what you’re worth
If prospective new clients try to force you into a ‘money for time’ situation, don’t go there. You have value to offer the right clients who will pay you for what you’re worth.
Part of your business growth strategy should also be to seek out clients who not only value what you can do for them, but can also afford it. If you find a potential new client who wants your help, but can’t agree to your terms or your fees, you should either reduce the service and so reduce the fee accordingly (i.e. reduce the ‘package’ you are offering), or walk away.
Forget charging for your time, and start charging for all the knowledge, experience, ideas, capabilities, contacts and resources you have that will ultimately deliver exactly what your clients want, and reward you in the process!
–Jenny Stilwell is the managing director of BOSS Management Group, which provides strategic advice and mentoring to help business owners get clear on their strategy and the right structures for growth.