A recent article came to our attention which got us thinking. This article was written by Ryan Lazanis of Xen Accounting, a virtual accounting firm based in Quebec, Canada.

As a business owner, Lazanis understands the importance of providing exceptional service. He has also seen the frustration of his clients when faced with paying for his services at an hourly rate. If providing the best customer experience is important, then why not apply customer-first thinking to pricing?

2014_AUG_ALL_MONEY - Should you stop charging by the hour?

A Customer-First Approach

All you need to do is google how to much does it cost for a “Plumber to replace a kitchen sink” or “how much does a Cleaner cost per month” and you can see the variety of responses and general confusion amongst consumers about how much they expect to pay and what their experiences are with charges. The answers are usually “it depends” on how long/size/parts/travel etc.

“Adoption of value pricing has begun,” comments Lazanis, “and it won’t stop – it’s simply a better way of working. That said, change is hard. There are deeply ingrained cultural norms that revolve around the billable hour.

“I’ll go out and say it. The billable hour is a terrible measure for pricing your services. No one says to themselves, “You know what? I feel like buying 4.75 hours of my cleaner’s time today.”

Instead, customers are more likely to say something like “I want to know how much it would cost to clean my house once a week”. Charging by the hour for the job is unhelpful and does not give the answer your customer needs. What is valuable to your clients is understanding that they can purchase a full house clean from your business for $100 – regardless of whether that will take your team two hours or four.

Unfortunately, the behaviour of valuing your services based on time is so deeply entrenched, that many businesses don’t see the point in changing. What those businesses need to understand are the major flaws to this thinking. Ryan Lazanis delves into the four flaws below which we think can really apply to your business, be it a Cleaning service, Plumbing, Electrical or IT installation:

Flaw #1: Bias

The major flaw with the billable hour is the bias on the part of the service provider to spend an unnecessary amount of time on the task. Rather than providing laser focus on the client’s needs, those charging by the hour have a bias to do whatever pads their timesheets.

I’m not saying that people do this on purpose. Most are honest. But the issue is that the bias exists and it goes contrary to the goals of the client.

Flaw #2: Rewarding Inefficiency

The billable hour rewards inefficiency and lack of innovation, and it punishes efficiency. It’s no wonder that so many services and trade firms have stagnated. Why would anyone want to continuously innovate their business model into something more efficient if that innovation would actually lead to reduced revenues?

By putting a value pricing approach in place, the business is literally forced to find innovative ways to increase efficiency and effectiveness.

Flaw #3: Looks Inward, Not Outward

Newsflash: the customer doesn’t care about the amount of time that you spend on them nor do they care about how much your time costs. They don’t care if it takes you two hours to complete a given task, nor do they care if it takes you 200 hours. They simply don’t care.

Valuing your services based on time is a major disconnect from what the client actually cares about: the end result. That end result is worth something to the client which should translate to the value, or price, of your services.

Businesses in the services and trades sectors need to put a customer-first approach to pricing their services and in order to do so, the first step is to ditch the billable hour.

Flaw #4: Leads to Confusion

When quoting costs using the billable hour, it is exceptionally difficult for the client to estimate costs and can lead to frustration. I went through this very frustration as of late when looking to engage someone to replace my drains.

I was speaking to someone exceptionally skilled and liked what he had to say but we kept getting tangled up with costs. The plumber kept quoting hours but I had no idea how many hours this would take. The subject matter was far from my area of expertise and since I had no frame of reference I literally had no clue what the costs would be.

Although I think this person could have helped out, I ultimately lost interest trying to figure out whether these costs were in our budget, which probably resulted in a lost sale.

We here at GeoOp think this is a really insightful piece of work. For some of our customers this could be a way to focus less on quoting and site visits that do not generate cash. They could instead quote fixed rates over the phone or onsite and conduct the work in one visit rather than cost and quoting based on what they can review onsite and back at the office.

Naturally this might not suit some kinds of work, like Construction or Commercial Electrical work but we could definitely see this working for Residential Cleaners, Plumbers and Electricians after some work was put into to get value based prices right.

What do you guys think? Would you change your rates to fixed rates based on value rather than quoting hourly and cost + margin models and would this make business easier for you?

Scott La Franchie GeoOp

GeoOp saves you time by simplifying the day-to-day management of your business for a fractional monthly cost. All job, customer, and staff information is collated, stored, and easily available to who needs it, when they need it, on any device. GeoOp also seamlessly integrates with Xero, amongst others.