Many marketing agencies charge by the amount of time for work completed. The Time and Cost model was originally developed in the early 1900s and having a business built on a foundation that’s well over a hundred years old is outdated.
Modernizing this is a fundamental concept that will have a huge impact on your business model and financial success. A service-based business should switch to a value-based billing model with fixed fees for services rendered, and there are many reasons why that is recommended.
With a time-based service business, the only way to generate more revenue is by adding more employees and more billable hours, and increasing your employees’ utilization towards those billable hours.
Hourly vs. Value
You want them to get 80% of their time being billable, billing a minimum of 1800 hours a year, then multiply this by your ideal markup, and you have your billable rate. The only way to increase revenue is to increase their bill rate, increase the number of hours they bill.
With an hourly billing model, this being the only way you can increase your revenue numbers; your options are limited unless you adapt. The hourly billing model is inefficient, and leads to burnout and employee turnover.
However, when you change to a fixed-fee business, you increase your revenue number by creating additional capacity and efficiencies, not by finding ways to bill more hours. There are several benefits to making this significant transition for a value-based business.
Some important distinctions and components to changing your pricing model include:
- Realizing that your services are worth more
- Finding the courage to charge more
- Increasing all prices immediately
- Offering additional services at the time of buying
- Creating a standard menu of services and fixed-price list
- Establishing prices in advance, not in arrears
- Articulating the value of each project eloquently
- Getting rid of low-margin services and low-margin clients
- Improving your language and sales skills
- Targeting more profitable clients and services.
- Using value-based fees for each service—not hours x rates
Adopting the Right Mindset
Changing from a time-based business to a fixed fee structure requires a mindset change that will help to realign your agency for a more successful financial foundation.
You need to be clear on what your average project billings will be, and set how many projects you need per year to achieve those goals with a fixed price model. There will also be more opportunities for you to provide additional services to existing clients.
Once you set your project goals and new pricing, you need to drive towards your new goals.
The first challenge is to make sure that your agency has project-specific financial clarity. Many agencies do not have a clear picture of each project’s specific financial targets and actualization.
You need to know:
- if a client relationship is profitable
- how much time you are spending with each client
- the costs associated with each client
- what and how your target profit margins are achieved
- the average Hourly Earnings Per Client
Find What Works for You
Many agency owners are incorrectly under the impression that because it’s “industry standard” to use the Time & Cost & Billing Model, you bill by the hour, you bill by your cost associated with the project with an agency fee tacked on top, that’s how it is done and there is no changing that.
If you want to accomplish your financial and growth goals, you need to make the switch. Usually, one of the biggest fears of changing to a value-based pricing model is that they will lose clients.
In most cases, very few clients choose to take their business elsewhere. Of course, it all depends on the way that my client positions it to their clients. The best way to explain is to say –
“We are changing our billing model to remove the unknown for our clients. We are aware that, from time to time, the hourly billable rate causes you to go over budget.
We are moving to a fixed fee model so that we can remove the unknown from a budgetary perspective for you.
At the start of each project we will provide you with a fixed cost for the scope, allowing you to have assurance that you will get the same work product without any variable costs.”
Planning the Transition
In order to make this billing transition happen, you will need to implement a process to determine the services and fixed costs depending on the type of agency and depending on the type of services that you’ll be offering.
You should review prior projects to ensure that we have an all-encompassing understanding of the expenses that have come up for each project. Then review your minimum required income, top down and bottom up budgeting and how to use it.
Utilize your historical data to build the cost structure of your fixed fee billing model. Finally determine what value will be provided; consider the cost to the agency, the target margins for the company, and blend that into the fee that you will present to the client.
With this your client will understand exactly what the cost is going to be, when they add to or launch a new project.
Understanding the Value Model
How you price your services will have a significant impact on the financial success of your agency.
Charging for the value you deliver, rather than the amount of time you initially hoped it would require, is a more logical and beneficial business model.
This, of course, requires that you have an accurate awareness of what benefit this will bring your client, what it will cost you to provide your services and stay on-budget while achieving the desired result.
Then, if you’re able to save a percentage of the time it requires for you to provide your various services, you’ll significantly increase your average hourly earnings for each project. You can continue to refine and save 5, 10, 15, or 20% year-over-year with each client and project.
Continuing to refine your process is the way you will take your business to the next level. When you change your business model to value-based, there’s more motivation to improve efficiencies and margins. Your entire team is encouraged to find more efficient ways to deliver services in a consistent and routine way.
Final Steps and Moving Forward
Upon embracing the strategy behind replacing the Time & Cost & Billing model with value-based pricing there are additional areas in which an agency must take action to help fortify the financial foundation.
As the owner, you will also need to be clear on how to budget, design your chart of accounts, prepare financial projections, assess, and close out projects, achieve consistent improvement, improve your profit margins, and manage scope creep.
Implementing Value Based Pricing at your agency may be the right move, but if you’re not 100% sure, you can always check our great free resources like The Agency Blueprint, or check out how other professionals are educating on and implementing this process. Taking advantage of webinars or free resources and conversations online are a great way to expand your own knowledge and business tactics in general, so don’t be afraid to look around and see what others are saying.
The views included in this article are entirely the work and thoughts of the author, and may not always reflect the views and opinions of Regex SEO.