Last year I posted an article on the “Top 10 Items to Include in a Service Agreement.” This article is a slight re-visit of that list – with a twist. As you may have noticed, Value-Based Pricing has been a buzz topic for some time now. Everyone is offering advice on how to grow your practice, and your billings, by charging a fixed flat monthly fee for services. Most fail to mention, however, the hidden pitfalls of Value-Based Pricing, and how to avoid them.
Avoiding the Hidden Gotchas
1. Hidden Gotcha: Scope Creep
In my personal experience, when you sign a fixed-fee Service Agreement, the client often views it as a license to pile on everything including the kitchen sink. Tasks you never performed before are now presented as regular To Do’s in the client’s mind, because, well, they are paying you for it.
Protect Yourself: Make sure your Service Agreement includes not only a detailed bullet-point list of what is included in your services, but also a second list of what is excluded.
2. Hidden Gotcha: No Cap on Hours
Don’t fall into the trap of saying you will do everything on the list for $x per month without including a cap on the hours. Otherwise, your hourly rate will dwindle down to the minimum wage.
Protect Yourself: Be sure to include language stating that you will perform all the tasks on the list, for up to X hours per month; any hours above the cap will be at an additional $x/hour.
3. Hidden Gotcha: Pricing for Special Projects
Say the client adheres to your Service Level Agreement, and asks for something which they recognize is out of the scope of service. How do you price that?
Protect Yourself: Include language in your Service Agreement which states out-of-scope work will be assessed as needed. You can decide to bill it at a flat hourly rate, or if the project is larger in scale, you can quote a fixed-fee for the special project. Don’t forget to include an hourly cap in the special project fixed fee! Email approval of the special project scope and pricing may be sufficient; just be sure to save in your records some kind of written approval which you can refer back to if needed.
4. Hidden Gotcha: Cost of Third Party Apps & Their Support
If your monthly fixed fee includes the costs of a QuickBooks Online or Xero subscription, don’t forget to build that cost into your pricing. The same applies for other Third Party Apps. Are you also supporting your client when they have technical issues with their apps?
Protect Yourself: Be sure to include the base price of any third party apps for which you are doing a hidden pass-through of the subscription fees. And don’t forget to add a contingency for the cost of the initial setup and configuration of the app, and/or its integration with your client’s accounting software. The initial integration of a third party app is best considered a special project in and of itself, and may merit special project pricing outside of the regular monthly fixed fee.
5. Hidden Gotchas: Consider Overhead Costs
I’m not thinking of rent and utilities here. I’m thinking of shooting off a quick reply to an email, or logging into the client’s accounting software on the fly to lookup something to respond to a question. This may only take 3-5 minutes, but when it happens a few times a week, that can add up over a month.
Protect Yourself: First, make sure you are tracking your time, even on a fixed-fee Service Agreement. You will want to perform a regular Job Costing analysis of your fixed-fee clients, to ensure you are appropriately pricing your services to cover your costs with a reasonable profit margin. Be sure your analysis includes time and expenses. When developing your initial pricing, consider adding a 10% overhead surcharge, to cover those quick emails and unexpected phone calls, which you will roll into the base fixed price.
6. Hidden Gotcha: Allow for Growth
Your client is at a certain size when you originally write your Service Agreement at a fixed fee. What happens when they add payroll, or add additional employees? Or they go through a growth spurt, or sign a new contract with one of their customers which results in more work than they’ve had in the past?
Protect Yourself: Be sure your Service Agreement allows you to modify your monthly fixed fee if the client’s business significantly grows or changes. My Service Agreement includes language that the fee will not be increased for the first 365 days, but be sure to include an exception for significant changes to the client’s current level of business.
Also, consider fair play – you may want to lower your fees if your client is experiencing a slowdown or their business is shrinking.
These tips are designed to help you avoid some of the hidden Gotchas I have personally experienced. Please feel free to share if you have additional thoughts.