How to make the switch from billable hours to subscription billing

Posted by: Gráinne Forde /

While everyone complains about the billable hour, agencies have been slow to switch to the obvious alternative. Subscription billing is the new frontier for agencies—and better for your bottom line.

Here are a few key reasons why subscription billing increases your agency’s margins:

  • Your monthly revenue stream is predictable, not influenced by time off and other variations in non-billable hours.
  • You can leverage high-value time and charge for the value of tasks instead of the time to complete them.
  • Your employees are incentivized to work smarter instead of more hours, leading to better employee retention.

If you need to see the financials for these claims, check out this post where we break down why subscription billing is better for scaling.

While it’s easy to talk about subscriptions as a better billing system, in theory, it’s hard to overhaul your entire agency pricing in practice. Changing the fundamental unit economics of your business will always come with an adjustment period for management, staff, and clients—which is why we put together this guide on how to mitigate those growing pains.

These are the major shifts you’ll want to look out for as you change your billing system and set your team up to scale. 

Overhauling a 55-Year-Old System: The Challenges of Eliminating the Billable Hour

Agencies have been billing per hour since 1962—and yours has likely been operating that way since day one. As you switch billing systems, you need to keep your hands on a very complex set of moving parts to make sure your agency grows. 

Here are the major challenges to watch out for in terms of your clients, managers, and staff as you switch from billing per hour to subscription.

  • Clients are hesitant to make the change to a pricing system they’re unfamiliar with. Subscription billing is an unknown variable that might cost them more over time, depending on how many hours per month you put in.
  • Managers have less insight into their staff’s workflow when those staff members aren’t submitting hourly invoices for each task and client. While the unit economics of your agency used to be focused on hours, now it’s focused on output—which means that it’s harder to get transparency into your employees’ days.
  • Staff get bogged down in ad-hoc work, which can make them less productive overall. Since clients can ask for revisions on the fly, staff members can’t accurately plan their own workflow, leaving them with too much to do—or too little. 

Here’s how you can help each of these groups overcome their challenges.

Help Clients Understand the Change

The unknown is unpredictable. When you transition to subscription billing, your clients might wonder if they’re losing money on the same services they were getting before, and if so, how much money that will be. 

But the pricing switch shouldn’t impact their budgets very much. Unless you have a serious problem in your pricing structure, switching to subscription billing isn’t about making more money from each individual client. It’s about keeping your prices tied to services instead of hours. This change in the foundation of your pricing structure allows you to take on more clients as you work more efficiently and add other low-cost, high-value services over time.

Since subscription billing has revisions built in, there may be a slight increase in overall price, but not much. Here’s a side-by-side comparison:

Billable Hours vs Subscription Billing

Some clients might ask you if this change will make billing less precise—or give your agency all of the financial advantages. The good news is that subscription billing actually benefits both your agency and your clients. Here’s why:

  • No surprise costs. Each month’s invoice will be consistent because revisions won’t result in expensive additional charges.
  • Appropriate value. As your clients scale, they’re going to need an expansion of your services. Packaged subscription billing means that you can charge them the appropriate amount for each service instead of an hourly rate, regardless of what the task is.

While you may clearly see these benefits, the change is still an unknown variable from your clients’ perspective. The challenge isn’t talking your clients into a taking a risk, it’s helping them understand how the switch ultimately benefits them in the long run.

Solution: Communicate the change in person

Hopping on a call with your clients to explain how the new pricing system works and the many ways they will benefit, gives you the opportunity to get them on board with the changes. When you compare pricing systems as we did above (you can even use their actual past invoices), the pricing system switch won’t seem extreme or nerve-wracking.

But for clients who are still unsure, proposal software BidSketch recommends this approach:

  • Flatter. We don’t recommend flattery for the sake of flattery, but expressing how much you value their partnership and appreciate working with them  communicates how much you do want the best for them. 
  • Compromise. Be willing to offer a discount for the first couple of months after switching to the new system. This gives them the financial incentive to switch and demonstrates how much you value their business.
  • Overperform. In the months up to any pricing switch, you have to make sure that your agency is doing top-notch work to keep clients on board. If a client is hesitant about the change, make sure to go the extra mile for them in the months after the switch to prove that you care about their success.

When you explain the benefits of subscription billing for your client and convey your appreciation for their business, they’ll understand that you aren’t just doing the best thing for your agency—you’re making a change that will help your agency better serve their needs. 

Keep Managers in Touch With Employee Workflows

When your creatives aren’t submitting weekly or monthly invoices for every client they’re working on, it’s easier to lose touch with their workflow.

When you’re billing per hour, your creatives’ workdays are focused around managing billable hours, and the business runs on a billable ratio. But when you’re billing monthly, your creatives’ workdays are focused around output, and the business runs on how much work they actually get done.

Since managers aren’t getting weekly reports of how employees spend their time, they need to be vigilant in tracking employee productivity. This isn’t about being Big Brother—it’s about making sure that you’re giving employees the support they need. When you don’t understand your employees’ workflows, the ones who need help could fall through the cracks and high achievers could go unappreciated.

Solution: Continue time tracking

Just because you’re getting rid of hourly invoicing doesn’t mean you should get rid of time tracking. Logging hours spent on projects is still crucial for tracking productivity, building accurate proposals and pinpointing friction points in your workflows.

Your team can use Teamwork Projects’ time tracker to estimate the amount of time a project will take, and then record the actual amount of time it took. Managers can then generate time reports at the click of a button using Teamwork Projects’ time reporting feature, saving hours of time on analysis.

time-tracking-teamwork-projects

 

Tracking time this way isn’t about watching each second or squeezing every last dollar out of your employees—it’s about making sure your managers have an accurate picture about how team members spend their time.

That way they can identify systemic workflow problems that impact the entire office and create better cost and completion estimates for each project.

Minimize Expensive Revisions

When you switch from billing to subscription, you switch the unit economics of the business from time to output—which means that’s your staff’s primary concern as well.

But since you can’t charge for revisions under the subscription system, last-minute changes could be tanking your employees’ output. They could be drowning in unanticipated work from a demanding client and unable to finish as many projects as they need to.

Since you’re tracking projects for clients instead of hours, these process inefficiencies could fall under the radar. A staff member managing a client who pays for 1 project per month could spend 20 hours on that client one month, 5 hours the next, and 10 hours the one after—all for technically the same amount of work. 

Hours spent per customer per month

These wild variations keep your employees from being able to plan what they can accomplish, leaving them either extra time or scrambling to get everything done.

Solution: Check in regularly with customers

A lot of ad hoc work and revisions points to an underlying problem in your client relationship. If a client is constantly requesting changes, it usually means that you aren’t aligned on the direction of the work. 

Scheduling weekly or monthly calls with the customer lets you front-load the work and make expectations clear at the beginning of each project. You can go over past work and discuss room for improvements too, which means you can get their projects right the first time around and eliminate unnecessary revisions.

To help uncover their preferences and reduce costly changes, ask them questions like:

  • What did you like the most about recent projects? What did you like the least?
  • What do you envision the work looking like in 6 months?
  • What steps can we take to get it there?

While you can’t charge for revisions in the subscription model, getting aligned with your clients up front will actually help your team members get more done in the long run. When you’re not spending time making extra tweaks at the end of every project, you can spend that time onboarding new clients or expanding your agency’s menu.

Rip Off the Band-Aid

It’s intimidating to overhaul a 55-year-old pricing system in favor of something new, and every change comes with growing pains. Whether it’s your clients, your managers or your staff members, you have to make sure you have your finger on the pulse of these changes and how they affect agency operations so you can fix any problems that crop up. 

We’ve given you the tools to help mitigate these growing pains—so it’s time to rip off the Band-Aid! Switching to subscription billing is the big change you need to scale your agency and reach the new heights you’ve been seeking.

Have any lingering concerns about making the leap? Let us know in the comments!

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Grainne Forde
Marketing specialist

8 Comments

Ali

Is there a billing or invoicing system that can be integrated with teamwork? To track invoices billing and payments?

Reply
Gráinne Forde

Ali,

Teamwork Projects integrates with Xero, FreshBooks and Harvest to name a few. You can find a full list of integrations here. There’s also a section in this blog post about eliminating manual invoicing which you might find useful.

I hope this helps. If you have any other questions just ask 🙂

Gráinne

Reply
M-A

Very well thought out article. We are in the process of trying this out and the recommendations are going to be of use.

Reply
Gráinne Forde

Great to hear that you’re making the leap M-A! Hopefully the tips in this article will help make the transition a smooth one for you guys.

Gráinne

Reply
william martin

Super interesting – we run a podcast production company, which typically is per-project or for a series, but ideally we are wanting clients to have a long-term relationship with us in order to be able to truly immerse ourselves in their culture and offerings, and serve their needs at the highest level. Subscription sounds like a perfect solution – we hadn’t thought of this. I am wondering if you have any models or examples of more production-based companies who have done this? Thanks for some great insight.

Reply
Gráinne Forde

William,

Glad to hear that you found the post interesting! If you’re running a podcast production company a subscription model would definitely work well for you. Off the top of my head I don’t have any examples of more production-based companies who have done it. We’ll research a couple of examples and try to work these into a future post on the topic to help make the advice more relevant to readers like yourself. For now, you might find some more useful info in this post.

If you have any other questions or ideas on posts you’d like to see from us make sure to let us know.

Gráinne

Reply
Per

Hi!

I like your thoughts, but I can´t really see how to use this in my web agency?

Clients hire us when they need a new website. Virtually all clients have different needs and requirements. The work we put in may vary between, for example, 20-200h and for a limited period. The clients wants their site as soon as possible. Do you mean we should offer our clients the same monthly tax? Or that we will have different rates for virtually all clients? And how can we set that rate?

Should we think of it like a loan with a payout plan based on the work we spend divided in NN number of month that it is assumed that the client intends to keep the site. Or is the subscription model only suitable for work after a website has been launched, for ongoing maintenance and updates?

Reply
Gráinne Forde

Hi Per,

I think this is a great observation and goes to show the inherent difficulties in pricing at the agency level. Two things spring to mind:
1. How different are the “different needs and requirements”? Do you think you could categorize them in any way, such as small (> 50h current work), medium (50-100h), large (100-150h), and enterprise/custom (150+h). These could then form the basis of your tiers and you start pricing within that range.
2. For subscription billing you do need some ongoing component to your work. I’m thinking for web design that could be maintenance, hosting, analytics, or optimization and updates over time–“tools to grow the site”. With the “loan” idea, you would have to tie the client to a particular timeframe, probably an annual subscription and then recoup the costs over that payback period. But then you would still have to offer some ancillary features.

Recurring revenue does comes down to recurring value. At the moment all of your value is tied up in the one-off, large projects, but if there is potential value that you can provide your clients elsewhere, then recurring revenue could work for you.

Gráinne

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