What Is Value Billing And Why Does It Matter?
Value billing refers to just one available method of billing your clients. The amount you charge is based on the value of the service or information you provide your client. Keep reading to learn more about this newly trending accounting practice.
How Does Value Billing Work?
In value billing, you’re charging clients based on the ‘value’ your services will create for them.
Although it’s deemed a veteran practice to charge clients on an hourly basis, many accountants have recently endorsed the effectiveness and profitability of value-based billing.
However, to arrive at the desired profitability of your niche, you must be familiar with the necessary bumps and turns of your destination.
Value billing can ultimately land your business greater revenue. However, for long-time practitioners of hourly-based accounting, this phenomenon is likely a tremendous leap of faith.
Shifting to the new paradigm can never be easy. In the end, you must compare the pros and cons of moving from one accounting method to the other.
Why Use Value Billing Instead of Hourly Billing?
If you’re wondering how to base the price mechanism for clients, review the following list of the pros and cons of value-based billing to reach a decision.
Pros of value billing:
- When you base the price mechanism on the value your service can generate, your client automatically yields the trust necessary for selling yourself at any desired rate
- Billing your clients based on value determines an estimated price range that your clients are comfortable with. Many clients are conformable with being charged by the hourly rate, but there may be others who feel the method is overpriced
- Some accountants are either not aware or not sympathetic to client needs. With value-based billing, you position yourself as one who is striking away a commission for their service. This is ultimately fair to both parties
Cons of value billing:
Hourly-based billing is easier to conduct. With value-based billing, there can be quite an estimation work pending upfront. This pending work includes:
- Understanding your clients’ needs and their customers
- Defining the complete engagement spectrum
- Appropriating costs based on this estimated revenue also endorsed by your client
What Is An Example Of Value Billing
- Suppose you’re a financial expert whose services have been hired by a successful company to maximize tax savings
- Through your consultation, the company saves up to $40,000 of taxable income. In the end, you deliver them an invoice charging $2,500
- The company will understand that your billing method is value-based
- Since it’s only a small percentage of the value that your advice has created for them, it’s quite likely that there’ll be no delays in payment clearance on the company’s part
What Types of Businesses Should Use Value Billing?
Value-based accounting is best for businesses that pride themselves on the value they provide their clients instead of the time they serve them for.
One great example of such a business is a law firm. If you’re a lawyer, the clients pay for your expertise and advice, not the hours you put in to understand their case. The same applies to subscriptions and SaaS businesses. In these cases, you must use a time tracking software to track the expenses and time spent, compare it with the estimated income and bill accordingly.
Before making the switch, take care to do the following.
- Take your client into the loop and explain how the switch will affect their relationship with you
- Don’t forget to warm up your staff to the new pricing mechanism
- Introduce cloud accounting software for better tracking and project management
What Are The Best Value-Based Billing And Invoicing Systems?
Here are some invoicing softwares to make the switch easier.
- Xero: Xero is leading cloud-based accounting software that not only keeps tabs on your project rates but also reduces the overhead costs. It does this by replacing manual tasks such as invoice creations, reconciliations, and setting reminders
- QuickBooks Online: Like Xero, QuickBooks can make the switch from hourly billing to value-billing a breeze. The same way you automate hourly-billed invoices, you can also automate invoices charging on value. QuickBooks can estimate this result for you. Moreover, it keeps track of the time spent on a project and services performed
- FreshBooks: The software offers both hourly and project-based billing with customizable invoices. It also offers multi-currency, tax calculation, online billing, and other facilities that can reduce the overhead cost of your business significantly
Value-billing is emerging as a financial breakthrough for businesses that pride themselves on the value they create for their clients. Compared to hourly billing, this phenomenon is somewhat new. Before making the switch, consult a financial expert to learn how your business can make the most of this new billing method.