Set appropriate pricing for HR services
Pricing is arguably the hardest part of starting something new in a business, and HR departments are no exception. The creation of a pricing scheme for new services should align with current billing practices. Maintaining this consistency will help you integrate your existing clients into HR.
Let’s take a look at the different types of pricing traditionally used by accounting firms and how each may work for your HR practice.
1. Value price
The concept of billing for the value you provide tends to hurt the accountant’s brain. We think in terms of numbers, not how to measure something ambiguous like value. Start by considering the added value of the knowledge you will provide to the customer.
From an HR perspective, many of the first services you will consider providing will be compliance focused. How much money can you save a client to fill properly from day one? How many lawsuits will they avoid with the right policies and procedures?
It may be easier to measure the value when you’ve been there for a while. Think about payroll services. When businesses try to manage their payroll, we all know they often miss records and returns and end up with significant fines and penalties. The average of these fines and penalties is a great baseline for telling a customer that you will save them on average these mistakes and, therefore, those dollars.
The risks of HR are similar. When you start with value pricing, you can define what you think is the value proposition. Additionally, it might be helpful to see what a full-time in-house trained HR professional would be and break down the costs (including all the benefits and taxes the client would save by hiring you), then extrapolate which part. of full time work you would have to do. It is a good reference to start your pricing on HR services.
2. Fixed costs
Fixed-cost pricing sets a menu price for specific services, or sets specific packages and sets a price for it. These packages can be easily defined by identifying customers with similar needs and creating a standard solution to those needs. We do this by leveling up our packages – we start with an Questions Help Desk, move into a Compliance Support package, and at the very top we have a Strategic HR Package.
When using a robust backend for payroll and HR support, you can also create a cost-plus pricing scheme. This would fall well in the price of the fixed costs. You have standard costs and outsourced amounts that you will pay for a service like ADP, and you can decide what your profit margin will be. You can then increase the price to create an appropriate menu price option for your customers.
3. Hourly billing
The old standard is billing by the hour. However, this invoicing scheme did not become the majority practice in accounting firms until the 1970s! Yet, it remains the most common method used by accounting firms to invoice their clients. I struggle with hourly billing as a sustainable business decision due to the rate of innovation in fintech.
The truth is, if you use technology in the right way, you should take 50% of the time it took you 15 years ago to do the same job. Is the value of this work decreasing? No. So, should your bill go down? No.
There are, however, some advantages to hourly billing. First of all, you can control your profit margin at a micro level. Second, you know for a fact how many hours you have to work to be profitable.
Finally, it makes the management from a financial point of view much easier. As such, it remains the most common billing practice.
If this is the pricing scheme you use today for accounting services, translating it into HR services is relatively straightforward. You can tell your customers when you introduce the service line that you will bill them as they use the service. Specific to HR, the rates are a little lower than the accounting in the market.
It’s best to decide which pricing scheme aligns with your entire business. If your customers are used to hourly billing, start there. If your customers are used to receiving tax invoices once a year (even if they are based on hourly billings) which are generally roughly the same, this might be a good time to start the transition to low cost pricing. fixed charges on the value billing route.
Pricing for value will give the best profit margins for your team and ultimately align your business functions with the broader service lines you offer. As you deploy your HR services and think through all the aspects to bring this suite of services to life, don’t doubt yourself. In my experience, setting and maintaining the right price is directly related to a practitioner’s confidence in performing the service.
Remember the strong resources that back you up and proceed with authority.
Grow your practice with HR consulting services. Access the on-demand recording of this free two-part webinar series presented by Liz Mason and ADP. Register today.