One of my favourite readers, and former guest poster Irvin emailed me recently. He suggested I write a post about how I charge for my services. It was a great idea, so here we are.
Maybe I'm alone here, but I find this to be a very painful topic. Just charging money in general is painful for us introverts. Asking for raises back in my employee days was excruciating, and that was (at most) once a year. After that, I'd just submit my hours and get paid. So, apparently my brilliant idea was to go out on my own...where I'd have to ask for money each and every month. And, if I want to increase my rates, I get to "ask" dozens of people instead of just one boss. Great idea Eric!!
I won't go down the rabbit hole of "how much should I charge". That's its own painful topic, so let's just tear off one bandaid at a time.
Today we'll talk about hourly vs. flat rate pricing. We'll go through some pros and cons of each, and I'll tell you a bit about my experiences with both over my career.
I think I've mentioned this before, but I got paid $4/hour at my first bookkeeping job. To add insult to injury, I got paid $5/hour to clean the office over the weekend. For the majority of my bookkeeping career, I haven't had to set my rate or decide between hourly or flat rate. I would get hired for a job, they'd spell out the terms, and I'd either take the job or not. Over the years it's been a pretty even split. Sometimes I'd get paid by the hour and other times they'd have $x/month allocated to that department. This was true when I was an employee and when I was a subcontractor.
2010 was quite the year. In December 2009 I had a full time job in an office and a few smaller clients I took care of on the side. After the Christmas holidays were done the business I had managed was closed down. I was now working from home with only those few smaller clients, and no idea where to go next.
One of the big struggles was (and still is) how (and how much) I would charge for my services. I think the biggest hurdle in this generation is the amount of competition. Back before my business was online, I only had to figure out what the handful of bookkeepers in my city were doing. Maybe one was charging as little as $20/hr and another was as high as $50/hr. I would figure out where I fit within that group and charge accordingly.
Suddenly in 2010 I had people on oDesk charging $5/hr and accounting firms charging $100/hr for (at least on paper) the same services. Other sites were offering tiered flat monthly rates with comparison graphics like the ones you'd see when trying to decide which version of Office you were going to buy.
How the heck am I supposed to decide now? I had a hard enough time charging $25/hr when I knew someone in the same city was charging $20/hr...even if I knew I was more experienced. Now I had to compete with $5/hr and the $250/m "Bronze Package". Ugh.
In this scenario, you are literally getting paid for your time. You keep track of how many billable hours you work for a client each month and charge for those hours x your hourly rate. Once you know how much money you need to make each month, you either divide it by how many hours you can work to determine your hourly rate, or divide it by your hourly rate to determine how many billable hours you have to work each month.
Pros: For me, I know I'm getting paid for the work I did. For the client, they know exactly how much time you're spending on each aspect of the work.
Cons: For me, over time, I'm going to get paid less if I find ways to be more efficient. For both of us, the total invoice each month is going to fluctuate so it's hard to budget for these amounts. I could get stuck without any revenue one month, or they could get a big surprise one month if I had extra work to complete.
Opinion: I like this method when getting started with a new client because it's impossible to know how much time a job will take you until you're in it. Once I've spent some time in their books I usually like to transition to the next method.
In this scenario, you establish a flat rate. This can be a flat rate per job or a flat monthly fee or minimum retainer that gets charged every month, regardless of how much work actually gets done.
Pros: The big pro for both sides is consistency. I know the minimum amount I'm making each month, and the client knows how much my services will cost. It also provides an incentive for me to improve efficiencies. If I can deliver the same quality of service in less time, this is a great way for me to increase my hourly rate without charging the client more money.
Cons: The big con here is getting the numbers wrong. If I set my prices too low, I'm constantly working for a reduced rate. Set them too high, and the client feels bad about the value they're receiving. If the work fluctuates greatly month to month, this can create a constant renegotiating which is what I wanted to avoid in the first place.
Opinion: I like this method for my established clients who have very similar needs month to month. Hopefully I have set the prices correctly based on my discoveries while initially billing by the hour. Finding the right flat rate is one of those skills that you improve over time.
Why is this so hard to figure out?
It’s hard because it’s not consistent like when you’re an employee. As an employee it’s easy to agree on an hourly rate because you usually know the # of hours you’ll work each month. Plus, employees don’t have billable and unbillable hours. If they’re at work for 8 hours, that’s what they get paid for. As a business owner, the amount of hours I get paid for each day varies. Some days I’ll spend 8 hours working on client projects that are completely billable. Other days I’ll be running errands, writing blog posts, and doing my own bookkeeping. Those days I might not generate any billable hours.
I love the "look" of tiered pricing. I have seen quite a few bookkeeping sites that offer something similar to "Bronze", "Silver", and "Gold" packages. That's such a clean, simple way to price your services...on the surface. Here's an example of the Bronze package. This is completely made up, but loosely based on what I've seen.
Bronze Package - $250/month - includes:
* reconcile 1 bank account
* AR and AP tracking
* basic financial reports
* payroll for up to 2 employees
I like the simplicity. A potential client can choose your services like they’d choose a combo at a drive thru.
There are some issues though. With this example, do you limit the # of transactions? I have clients who have 10 transactions running through their account each month, and others who can have more than 300 transactions each month. That's a big change in workload. Do you set transaction limits in your tiers? How do you charge for overages? What if those 10 transactions require 5 phone calls to get clarifications from your client? Do you charge extra for the back and forth?
After all these years I still don’t have one good answer that will fit everyone’s situation. I don’t think there is one. Here are some suggestions I have, which will include tips specific to fellow bookkeepers.
- Get in the habit of tracking your time. You can use apps like RescueTime that track this in the background, but either way track how much time you’re spending on all of your daily tasks. The more you know the better you can estimate future projects.
- Figure out flat rates for small, short term projects. For bookkeepers, this could cover things like tax returns, training, setting up software, and basic reporting.
- Charge by the hour for at least the first month for new long term clients. You can’t know how complex a project will be until you get started. Most business owners don’t know how long they spend doing their own books, so the estimates they give you are rarely accurate. Plus, the work they’re doing might not be the same as the work you need to do. Get to know their system and then (optionally) quote them a flat monthly rate going forward.
- Base your monthly rate on the full year. Don’t forget about the extra work you’ll be doing during busier seasons. For bookkeepers, don’t forget about year end, quarterly reports, and tax filings throughout the year. Add up the hours you think you’ll work in a full year, and then split that up over 12 months.
- Be very clear about what work is included in your rate. If you are presented with work that will be outside the scope of your regular fee be upfront about potential overages and get the clients approval before proceeding.
- Give yourself a bit of breathing room with your rate. If you set your prices too low you won’t have time for small surprises that will (and they will) come up. Think about your cellphone bill. People would rather pay for a bit more data than they need than paying the bare minimum and then constantly getting charged overages.
As you might have figured out from the sheer volume of this post, it’s a topic I spend a lot of time thinking about. Based on my research with fellow bookkeepers, there isn’t one (or two, or three) answer either.
What about you? If you are a bookkeeper, or anyone who charges for their time, how do you do it? I’d love to hear your opinions. What’s worked, what hasn’t, and what does your ideal system look like?