Setting up Billing rates – How to Avoid Massive Headaches?

  • December 7, 2020
  • by Jakub Szyszka
  • No comments

Companies across the services sector, such as digital agencies, software dev shops, consulting firms, and law practices, are well accustomed to the issue of adequately setting up billing rates. Some might call it an industry standard, but it shouldn’t mean that there’s no smart way of going about this.

So, is it possible to have a fool-proof way of setting up billing rates that won’t cause you a big headache?

Let’s dive in!

Use TimeCamp to track your projects like a pro!

Where do we start?

Every service company has its billing rate system. Whether that’s based on a flat rate billing or, they’re using hourly rate billings.

However you decide, it’s crucial to assess your company’s billing model properly. Today we’ll showcase how to avoid chaos and headaches when setting up and managing your billing rates. Are you in?

It can get complicated.

With more and more different tech stacks to operate, other marketing channels to specialize in, or, in the case of law firms – different areas of law, services companies need to think ahead and keep an eye on the changing business landscape.

One of which is focusing on having a correctly set up a billing system.

But before we go into that much detail, let’s focus on the basics.

What is a billing rate?

It’s an amount of money that a company (or a professional) charges for their work.

Let’s say that Acme LLP, a consulting firm, has a billing rate of 400 USD per hour.

That’s a basic example of consulting billing rates in practice.

How these entities determine the amount of work is a separate thing. Billing rates can be set up hourly, weekly, or quarterly.

So, now that we can define what is a bill rate, let’s move on.

How does billing rates affect profit margins?

Hugely, to say the least. For services companies, a billing rate is the most crucial factor when adjusting towards more profitability.

In a nutshell, an hourly rate for a company’s services should cover the operating cost rate and the added profit margin. There’s no rocket science here.

Billing rates should be set up to reflect a company’s operating costs and a sufficient enough profit margin.

Billing rates vs. pricing strategy

It’s no big revelation that a company’s pricing strategy will directly impact how high one’s billing rates will be set.

But it’s crucial to note that one thing is to settle how much a company should bill their clients, and the second thing is…

Following through on that objective.

Why it’s so difficult?

The main reason is that when acquiring new clients, companies, and professionals like to use price as a bargaining chip when during negotiations.

Of course, there’s nothing inherently wrong with that. However, you need to set limits to how much your rates can be negotiated.

Adjusting billing rates

However, companies need to manage and adjust their rates as the year goes on. With IT and digital marketing being two quickly growing industries, labor costs and overheads are rising.

Therefore, ensuring that one’s costs are properly covered with a correctly set up rate is essential.

Here are a few things you need to factor in:

1️⃣ Know your operating costs

It may sound simple, but I do not mean some approximate figure. You need to know what are your exact operating costs throughout the calendar year.

Picture that: Can you imagine the sheer chaos when drawing up financial reports for a given year or quarter?

Randomly set up rates and usually, not so much precision when it comes to project timespan data equals…

… well, not a very clear financial report.

2️⃣ Have a clear strategy when it comes to pricing

You can either decide to be a cheap company or an expensive one. I’m not going into too much detail, but your billing rates need to be consistent with your business strategy. If you want to position your business as a luxury brand geared only towards a narrow client segment, then, of course, go for it.

But you need to have a minimum threshold that you can’t lower in terms of your rates.

3️⃣ Know when to adjust your bill rates

One might ask: shouldn’t a company have just one, locked rate?

Wrong. Remember that as a services company, you’ll do business with various clients with different budgets.

In practice, you should always aim to have enough flexibility to adjust your rates to different clients.

For example:

Let’s say you want to acquire your first client in the hospitality industry. You might go for the big fish, but those types of clients will usually require some proven track record in their industry.

It’s common practice.

So, what you can do it to pursue may be a less renowned company within that industry, but with the advantage of gaining work experience off of them.

The trade-off is that probably you’ll have to offer enough at a competitive rate.

But stepping into a new industry is considered somewhat of an investment in your company’s expansion.

4️⃣ Set up rates and track them

Although it seems like some additional and mundane work, it pays off in the long run.

Make sure to put in notes in your sales CRM for ongoing clients that showcase what sort of bill rate you’ve offered them.

If you have teams with specialists of different seniority or skills, then the number of rates to track will increase significantly.

However, this will help you with 3 things:

1) keep track of how you’re executing your pricing strategy

2) have a better insight on what’s the actual profit margin on all of your accounts

3) be more precise when it comes to revenue forecasting

To sum up, once a prospective client asks:

“What are your rates?”

You should definitely do the math and be prepared rather than just posting some random number.

Use the right tools

As you noticed, being concise with your billing rates is no easy task whatsoever. It can require a lot of additional work and resources to track your bill rates properly.

However, it would be best if you were smart when introducing new processes.

For example, did you know that TimeCamp is excellent for keeping track of your bill rates?

Now, not only can you keep track of your team’s performance across all of your projects, but you can assign a different bill rate and project rate depending on your employees’ seniority, skills, or project.

Set up bill rates and track your projects with TimeCamp. For free!

👉Recommended article: billable hours best practices

Summary

Let’s wrap it up. What did we learn here?

Although the services business is an ever-changing landscape, you need to minimize uncertainty. Having a proper billing system in place is a way of keeping things manageable.

To its essential core, the lack of clarity regarding billing rates is a lack of information about how your company is generating revenue.

Jakub Szyszka

Content Marketing Specialist at TimeCamp. Passionate about being another frustrated musician ;) Most recently immersed in the adventurous world of content marketing and brand building.

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