If you're doing fee-for-service work, value pricing provides a simple way to justify your costs to clients and yourself, argues lawyer Jeremy Streten
Have you ever had a client who was shocked at how much time you spent on their file? Have you ever felt that dread when you had to send your client a bill, knowing that you would have to discuss each and every thing that you did? Have you ever thought that there must be a better way? For professional knowledge workers, like accountants, lawyers, financial planners and other consultants, charging clients based on the time spent doing that work is oldfashioned and is being revisited.
Building lifelong relationships
In any business it is cheaper to keep an existing client than to find a new one. Your goal needs to be to build lifelong relationships with your clients. Doing this is not easy; building any long-lasting relationship requires sacrifices to be made on both sides to build trust and confidence.
I have seen this trust damaged or destroyed time and time again when a timesheet is attached to a bill. It is human nature to underestimate how much time it takes to undertake a task. How many times have you had a client dispute whether you did spend so much time making a telephone call or drafting a document? After all, it was only a simple matter. Value pricing gets around these problems by providing a set fee for the work that was performed, so there is no need or ability to question how much time you spend on your work.
The inefficiencies of charging for time
The concept of charging for knowledge work based on the time that a person spends doing the work is inefficient for a number of reasons:
- We all have the same amount of time in the day to do our work. Time billing placesan upper limit on the amount you can charge in a day.
- As you become more experienced in your chosen profession you will find that you are able to do your work faster. For instance, a new lawyer may take a day to draft their first business sale contract, but by the time they are at their fourth attempt they can do the work in an hour. As you become more efficient the amount you can bill for time actually decreases.
You may be thinking, “Well, the solution to both of these problems is to just increase my hourly rate”. If you do that you will find that your clients do not see the increased efficiency and will question the increased rate.
Who will benefit from value pricing?
The benefits of value pricing for clients are there to be seen, but it is knowledge workers who will truly benefit. All professionals who currently charge for time – such as lawyers, accountants, financial planners and other
consultants – will benefit from a change to value pricing as they will be better able to do their work and keep their clients satisfied, while not having an argument over the time they spent doing that work.
You need to be smart
Clients want to know what they are getting for their money. When knowledge-based workers are charging for time they will often expect their clients to trust them, and will provide an estimate for their work. The matter becomes more complicated, and all of a sudden the client is left with a bill that is sometimes 40–50% more than they expected. Value pricing forces knowledge workers to become better advisers to their clients. It forces them to define what work they will actually be doing and put a price on the work.
Rather than estimating their price based on how long the work will take to do, knowledge-based workers need to look at the value the client will be receiving and set a price accordingly. I know from experience that shifting from time costing to value pricing for knowledge work is difficult for knowledgebased workers, but your clients will appreciate it and will leave you to do your work.
Jeremy Streten is a lawyer and author of the Amazon bestseller The Business Legal Lifecycle (www.businesslegallifecycle.com), which is designed to help business owners understand what they are doing in their business from a legal perspective and give them a plan for the future.