As soon as you start running your firm or practice, there’s one thing that undoubtedly comes up as you start to grow… the number of accounts receivable and invoices that you now have to track. For many, this is commonplace. But in this article, I want to explore the option to remove AR once and for all!
With that in mind, let’s explore Value vs Fixed Fee Billing.
Fix Fee Billing
Principles of Fix Fee:
- One price fits all (for a specific service)
- Commonly presented as a package
- Commonly has three options (Standard, Premium, VIP)
- Advantage: Automated payments, can (typically) scale easily.
The advantages of fixed fee billing when comparing Value vs Fixed Fee Billing, is that you can charge clients upfront for the work, or at the very least, charge a monthly service automatically through a merchant or payment processor. Now the idea of using a merchant or payment processor might alarm some practice owners, but to politely counter, we believe that the benefit of having predictable, automated recurring cash flow outweighs the benefit of saving small percentage points. The automation will save time, and potentially reduce additional costs around staffing. By having client credit cards on file, you have both the freedom and predictability to know how much revenue you will receive each month.
Downsides: Of course we have to cover the downsides of fixed fee billing. The first is that there's very little wiggle room to customize plans for clients. The goal of fixed fee is to have a very systematic approach to client engagements. This approach makes it easier to hire and build a robust process around client engagement and delivery. However, it leaves little room for individualized packages.
Value Based Billing
Principles of Value Based:
- Price based on client value, not time
- Customizable to client needs
When comparing Value vs Fixed Fee Billing , the advantage of Value based billing is that you can charge more, add more services, and quickly become a trusted advisor to your clients (due to the customized nature of the billing and service arrangement), which can then increase client loyalty and even referrals. We'd also like to state that with value billing, since the price is agreed upon upfront, you can collect half or all the payment upfront (after all, you're likely to put a refund or guarantee in place). You can also have client payment information on file to automatically bill them on a specific date. Either way, even with value based billing, we'd highly recommend collecting some or all upfront, or having client payment information on file in order to eliminate accounts receivable.
Downsides: Since the work can be customizable on a per client basis, it becomes more challenging to scale your team and operations in terms of bringing on more clients or team members. However, many firm owners prefer to work with fewer clients, and provide a more high touch, higher price service. However, if your plan is to scale quickly or be the lowcost provider, value-based billing can inhibit growth.