How Much Will This Cost?: On Why We Don’t Charge By the Hour
Price is a factor in anyone’s decision making process. Whether it’s buying a new car, planning a vacation, or choosing a professional service provider, cost is one of the top determining factors into which people look. Naturally, when potential customers first come to us, one of the first questions they ask is, “How much does it cost to work with you?” The majority of people who have experienced working with professional service firms (like accountants or lawyers) have encountered the cost being figured on a per hour basis. When they see an hourly rate, the next question is always, “How much time is that going to take?” If a firm charges an hourly rate, the price is dependent on how long it takes to complete the services upon which were agreed. Our approach to pricing is different. Let me explain.
Before talking about how we price, let’s cover two things. First, let’s define “market price.” The nerdy accounting definition of market price is “the amount a willing buyer and a willing seller agree to in an arms length transaction.” What this means is that in order for a price to be agreed upon, you need two parties that are willing to do business with one another in a marketplace. Additionally there must be no other external pressures or circumstances that are impacting the buyer and seller, or any other relationships dictating the price. For example, if my brother was a car salesman and is able to sell me a car for $1,000 less than he is able to for anyone else, simply because of our relationship, then the price I paid would not be a market price.
There is also an implied condition with a market price, that each party is receiving more value than what they give. Let’s say it’s lunchtime and I go to the local sandwich shop and buy a sandwich for $6. For me, having my hunger satiated is worth more than keeping the $6 I paid for the sandwich, therefore I received more value than what I gave. For the sandwich shop owner, the $6 price tag is worth more than the actual cost to create and sell the sandwich. Both sides received value in excess of what they gave up for it.
The second thing to note when considering price, is that value is not correlated to time. If a service takes 10 hours to complete and another service takes 2 hours to complete, it does not necessarily mean that the 10 hour service is five times more valuable than the 2 hour service. The value of the work performed cannot be priced on an hourly rate, because there is not a way to “track time” when it comes to the knowledge base needed to provide top performance in the given services. While hourly rates are great for traditional services, when it comes to knowledge based services they tend to miss the mark completely.
This is why, at Lance CPA Group, we price all of our engagements on a fixed fee basis. Typically we are providing a monthly price for accounting services and review work, or a one time price for project or tax work. In order for us to calculate pricing, we first need to understand the scope of necessary services in full. This is why we talk with our potential customers, getting to know them and their businesses. We have a passion for small businesses and startups and know that the money side of things can often be very confusing and time consuming. We want to make that process easier so our clients can focus on doing what they do best, whether it’s brewing beer, giving stellar beard trims, or roasting beans for delicious coffee!
Often we encounter potential clients who aren’t exactly sure what they need, either erring on the side of thinking they need more than necessary or vice versa. Or, they aren’t sure of the services we provide. Beyond monthly bookkeeping, there are a myriad of other ways that our firm can add value to your business, but you won’t know (and neither will we) what those things might be until we get to know one another. Because we want to make sure that our market price is fair, and that we are always adding value to your business, we will initially perform a diagnostic that allows us to assess the proper scope of necessary services. After this assessment, we will give three pricing options. These options allow our clients to pick what level of service best fits their budget and specific needs. Once we have agreed on the price and the scope of services, we can get to work.
The benefit to fixed fee pricing is that our clients get to work with us in setting the price. They get to determine the level of services they need and the price point that make sense for their budget. Additionally, since we are not charging by the hour, there are no surprise bills at the end of each month that vary based on how many hours were spent on a particular service. We don’t charge for phone calls or emails either. Fixed fee pricing gives our clients peace of mind, and allows them to budget for their accounting expense each month. We want relationships with our clients to be collaborative. Fixed fee pricing starts the collaborative relationship on the right foot, setting both parties up for success in all of our endeavors together.
by Josh Lance, Managing Director, Lance CPA Group