Setting Proper Pricing for HR Services
Pricing is arguably the most challenging part of starting something new in business, and HR services are no exception. Building a pricing schema for new services needs to align with current billing practices. Maintaining this consistency will help with onboarding your existing account clients onto HR.
Let’s dive into the different types of pricing traditionally used by accounting practices and how each can work for your HR practice.
1. Value Pricing
The concept of billing for the value that you are providing tends to hurt accountant’s brains. We think in terms of numbers, not how to measure an ambiguous thing like value. Start with looking at the incremental value from the knowledge that you will be providing to the client.
From an HR perspective, many of the first services that you will consider providing will center around compliance. How much money can you save a client for filing correctly from day one? How many lawsuits will they avoid with proper policies and procedures?
It can be easier to measure the value when you have been in it for a while. Think about payroll services. When companies try to run their payroll, we all know that they often miss registrations and filings and end up with significant fines and penalties. The average of those fines and penalties is an excellent baseline to tell a client that you will save them on average those mistakes and, therefore, those dollars.
The risks of HR are similar. When you start with value pricing, you can define what you believe the value proposition is. Additionally, it might help to see what a full-time internal trained HR professional would be and break down the costs (including all benefits and taxes which the client would save by hiring you) and then extrapolate what portion of full-time work you would be doing. This is a good benchmark for starting your pricing on HR services.
2. Fixed Fee
Fixed fee pricing sets a menu price for specific services, or it defines specific packages and sets a price on that. These packages can be easily defined by identifying clients with similar needs and creating a standard solution to those needs. We do this by leveling our packages – we start with a Questions Helpdesk, move up to a compliance support package, and the very top we have a strategic HR package.
When using a robust backend for payroll and HR support you can also do a cost-plus pricing schema. This would fall nicely into the fixed-fee pricing. You have standard costs and outsourced amounts that you will be paying a service like ADP, and you can decide what you want your profit margin to be. You can then gross up the pricing to create a suitable menu pricing option for your clients.
3. Hourly Billing
The old standard is hourly billing. However, this billing schema did not become the majority practice in accounting firms until the 1970s! Yet, it is still the most used way for accounting firms to bill their clients. I have a difficult time with hourly billing as a sustainable business decision moving forward because of the rate of innovation in fintech.
The truth is, if you are utilizing technology appropriately, you should be taking 50 percent of the time it took you 15 years ago to do the same work. Does the value of that work decrease? No. So should your invoice decrease? No.
There are some pros to hourly billing, however. First, you can control your profit margin on a micro-level. Second, you know for a fact how many hours you need to work to be profitable.
Finally, it makes management from a financial perspective much simpler. As such, it remains the most common billing practice.
If this is the pricing schema you are using for accounting services today, translating it over to HR services is relatively simple. You can tell your clients as you pitch the service line that you will bill them as they use the service. Specific to HR, rates are a little lower than accounting in the market.
Conclusion
It is best to decide what pricing schema aligns with your overall firm. If your clients are used to hourly billing – start there. If your clients are used to getting once-a-year tax bills (even if they are based on hourly billings) that are generally about the same amount, it could be the right time to start transitioning to fixed-fee pricing on the road to value billing.
Value pricing will yield the best profit margins for your team and ultimately align your firm’s functions with the more extensive service lines you are offering. As you roll out your HR services and consider all the aspects of bringing this service line to life, do not doubt yourself. In my experience, setting and maintaining the right price are directly correlated to a practitioner’s confidence in performing the services.
Remember the robust resources backing you up and proceed with authority.
Grow your practice with HR Advisory Services. Access the on-demand recording for this free, two- part webinar series presented by Liz Mason and ADP. Register today.