Exactly How to Calculate Your Fixed Price

As people move away from hourly billing and move towards value pricing, the first step in the process is being able to give a fixed price.

One of the problems with hourly billing is that the client doesn’t know the price until the work has been completed. If we can give them a fixed price they will feel more confident and more likely to buy.

You can watch the video here.

Just to be clear… 

Fixed Pricing is not Value Pricing.

However, it is an important first step to have a system for coming up with a fixed price. Once you have this system in place, it is much easier to move through the steps towards value pricing.

So, how exactly do you come up with a price…

#1 - Work out the scope

For every service, there are primary scope factors.

These are factors that will determine how long the work will take. For example, the primary scope factor for payroll is likely to be the number of employees. For bookkeeping, it may well be the number of transactions.

Let’s assume we are bookkeeping…

In order to be able to give a fixed price upfront to every new client we need to have a formula.

#2 - Analyse your current prices

The first step to creating this formula is to look at your previous pricing examples by taking a sample of 10-15 of your bookkeeping clients and writing down this information:

- How many transactions per month

- The monthly fee you charged them

Gather this information for each of the sample clients and plot the points on a graph.

By drawing a line of best fit through your graph you can get a good sense of what you are pricing. This line will also give you a starting formula.

(You can see how close your line fits the data by using the R-squared number - the closer to 1 the better).

#3 - Outliers

You will notice there will be some points that don’t fall on the line of best fit, so the next step is to identify why.

Perhaps sample client A is being charged $7,000 when the line of best fit suggests they should be charged $5,000.

You need to identify the secondary scope factors. These are other factors that will affect scope. For bookkeeping, it may be how many bank accounts they have, what industry they are in, whether they have overseas transactions and so on.

So client A may have overseas transactions, which is why they are being charged more than the line of best fit suggests.

You can then make a new rule to add to your formula such that if the client has overseas transactions they will be charged 40% more.

It may be that if they already have a desktop accounting system and you don’t have to spend time setting them up with one, you charge them 10% less.

You can make a rule for all of the secondary scope factors that may affect your pricing.

You can adapt your formula to include these rules and you should find that your line of best fit gets more accurate, the R-squared number gets closer to 1.

You Will Never Get It Perfect

Using this process will give you a pretty accurate formula for coming up with a fixed price.

It will never be perfect, but this process allows you to give the client a price upfront that will guarantee you a reasonable profit.

It’s far more accurate than hourly billing. You could end up working overtime and not recording the hours, or writing time off because you think the client won’t pay such a high price.

This process will ensure you get a good profit every single time, and the client will be happy to get the price upfront and avoid surprise bills.

If you found this valuable and would like to learn more about value pricing, I run a free live online training session every month with a topic chosen by you. Attend live and you can ask me any questions you have. Click here to register and I will send you an invitation to the next session.

Wishing you every success on your pricing journey

Mark Wickersham

Chartered Accountant, Public Speaker and Author of Amazon No.1 Best Seller “Effective Pricing for Accountants”