I almost got talked out of an 80% profit margin

When I was new to owning my bookkeeping firm, it took a lot of personal growth to figure out that I needed to use my own critical thinking skills (plus a hefty dose of intuition), instead of playing “follow the leader.”

In my last blog post, I introduced the idea of total BS bookkeeping myths that need busted ASAP. (I’m sharing even more myths in my weekly newsletter, FYI!) So what’s the next myth? I’m glad you asked!

Myth# 2 There isn’t “one pricing model to rule them all.”

I was ALMOST fooled by the “experts”

When I first began my business, there was no one in my social circle I could go to for advice on business. I didn’t have any mentors (ahem, quick shout out to the Bookkeeper’s Business Incubator), so I just kinda listened to whoever spoke the loudest. Oof.

At the time, value-based pricing (or billing by retainer) was EVERYWHERE. The jist was, and still is, “If you’re not using value-based pricing, you’re an idiot.” Ummm. That’s just rude. It’s also patronizing (and I hateeeeeee that!).

I was billing hourly at the time, but all this talk of retainer-based pricing had me convinced I must be doing it wrong.

I was so insecure, looking at those experts with doe eyes and innocence. But that nag Intuition started pulling at my sleeve “Justine – you might be right. Go find someone who can actually HELP you, not TELL you, what the most profitable model for you is.”

So that is what I did. I found a mutha-freaking data analyst, y’all.

He even lived in Silicon Valley 😂

He took all of my time tracking data for me and my employees, all of my billing information, and copies of all of the general ledgers for every client (anonymized of course), mixed it all up in some sort of magic-data–analyst-cauldron, and viola! 🪄

The end result was… any guesses?

I WAS RIGHT. At the time my Gross Margin was 80%. Now it hovers at about 76%. Yeah that’s right, I almost got talked out of an 80% profit margin by “experts”.

A tale of two models

When I first started out, I charged $50 an hour and I will be damned but it sure felt like $500 an hour back then.

But then something shifted: I got really good, and I got fast at bookkeeping.

One time, I did an entire quarter’s worth of work for a client and I got it done in two hours. $100 for an entire quarter’s work? Yeah… that shit was complicated and worth WAY more money than that.

So, I decided to try my hand at value-based pricing and charged $300 a quarter instead. It seemed straightforward to me – charge what the worth was work.

What I learned is: Value-based pricing makes sense under certain circumstances.

But then, a few years later, I grew my biz and hired some employees. Suddenly, I was running into another issue. The people I hired, while skilled, worked slower than I did. I could guess how long it would take me to complete a project, but I was in the dark when estimating how long it would take a team member to do it.

This meant I couldn’t price projects, or ongoing bookkeeping work, using a value-based model with any accuracy.

By following the value-based pricing model I established, my profit margins were suddenly being slaughtered. My team took much longer than I had estimated to complete projects, and I was SOL because I was already locked into a retainer rate.

Sooooo… yeah. I switched back to hourly and I haven’t looked back.

My Biggest Takeaway?

Charging hourly creates a shared-risk model between your and your client. You have the ability to expand and retract into the model as needed.

But with retainer pricing, your client risks getting locked into a retainer that’s too big for them. Or vice versa, you can be locked into a retainer that’s too small for the work you’re doing. But changing the retainer takes time, negotiation, and new scopes of work (ugh). How often are you realistically going to do that? For me, the answer is not too often.

So all of this back-and-forth with pricing taught me a valuable lesson: Charge an hourly minimum.

By doing so, I live in the best of both worlds:

1️⃣ I have a guaranteed fixed rate

2️⃣ But I also get paid for all time worked.

I also have a mechanism in place that secures my profit margin. I know what my team gets paid and I know what I charge per hour.

The result? My profit margins have stayed around 76%, which is pretty stellar by any industry’s standard.

What’s working for you? Stick to it!

All of this isn’t to bash on retainer-based pricing. If you’ve found success in doing it, that’s awesome – keep going! As long as you’re keeping an eagle eye on your own margins, your P&L, and feeling fulfilled in how you’re paid for your work, then you’re killin’ it!