Setting fee rates – using costs incurred or value provided?

Pricing the work that we do for clients is never easy.  When I worked for larger firms many years ago fees were determined by reference to ‘costs on the clock’ – ie: the aggregate of staff and partner time costs as measured by timesheets.  Charge out rates were commonly set at about three times the related salary costs. The rough rule of thumb being one-third salary, one-third overhead and one-third ‘profit’.  A more modern formula perhaps being one-half, one quarter, one quarter respectively.

I don’t want to get into the whole ‘trashing the timesheet‘ and value pricing debate here. I would like though to share a point I recently contributed to an online forum.  It will be especially relevant if you are a sole practitioner and thinking about your pricing policy.

Sole practitioner A works from home and uses a pay as you go telephone answering service so has few costs to cover. Sole practitioner B works from offices and with secretarial support so has more costs to cover. They provide the same service. The client perceives no difference. Indeed sole practitioner B may previously have been working from home just like sole practitioner A.

Why shouldn’t A and B charge the same fees? If A charges less because he/she is based at home, what happens when the decision is made to move to an office? Cost base goes up. But clients perceive no difference in service so wouldn’t want to pay more.

Answer? Fees should be set by reference to the value provided to client as perceived by the client. Practitioners will aim to keep the costs of servicing clients to a minimum but those costs are rarely relevant to the fees charged.

I used to work in large firms with varying charge out rates for different grades of staff. If a job could be done by a junior member of staff but they were unavailable and a manager did it instead the client should not be asked to pay more – unless they perceive they have benefited – ie: received more value than they would have done if the junior person had done the work. This rarely happens in practice.

Does this make sense to you?  How do you determine your fees?

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The value of detailed fee quotes and bills for professional work

It’s been a while since my last blog post on the subject of billing and fees. What has inspired me to return to the subject? Well, I’ve just had my car serviced and I was impressed with the sensible way that the garage both managed my expectations and the way they prepared their fee notes. I think there are lessons here for all ambitious professionals.

Having booked the car in for a service and MOT I received a phone call from the garage to advise me that the car needed a fair amount of additional work doing. This didn’t really surprise me as the car is 15 years old!

The garage owner ran me through the list of things that would be required and estimated the aggregate cost could be as high as £1,000 plus VAT. I asked for a firm quote which he then gave me the next day. The service would be £205, the MOT £50 and the extra work including labour and parts together would be £740. Together with VAT this would take the total cost to £1,164.43.

When I collected the car I received two invoices. One for the service and MOT. The other for all of the additional items and work. The total came to the same figure as I had already been quoted.

When I complimented the garage owner on the way the extra charges had been communicated to me and shown on a separate bill he told me why they do things that way:

1 – They always try to over-estimate what the extra costs will be so that customers get a pleasant surprise that the actual cost is less then the estimate;

2 – They always breakdown their estimates to distinguish the key elements BUT they always end a conversation by referring to the aggregate charge as they know that customers only focus on the last figure they heard. In my case that would have been £740 rather than £1,164.43.

3 – They always show the extra costs on a separate invoice so that customers do not get confused as to the charges for regular services etc. In this case I know that the basic charge is nearer £200 then £1,100 which is important if I was considering getting comparative fee quotes for similar work.

I think that many ambitious professionals could adapt these excellent practices to good effect. How would that work in your office for example?

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How to quickly lose your newest clients

Some years ago I read an article that highlights six things that happen all too often when anyone focuses their energy on trying to win new clients at the expense of managing the relationship with newly won clients.

The author explained how easy it is to fall into each of these six traps:

  1. Once you sign the deal, disappear.
  2. Show a consistent lack of respect for your client inside your own firm.
  3. Hide the other ways you can help – hey, it’s ‘my’ client.
  4. Keep to the tried and true approaches.
  5. Don’t ever, ever check to see how you are doing.
  6. Make your invoices as confusing and indecipherable as possible.

To this list I’d be inclined to add: Bill whatever is on the WIP ledger without checking back to see how this compares with the fee quotes you gave when you won the client.

I invite further contributions and suggestions in comments you can add to this blog.

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