In the past, one of the questions you typically ask a professional you are looking to hire is:
“So, what’s your rate?”
Many people are very surprised when our answer to this is:
“We don’t have one.”
After all, it seems very intuitive to hire someone for X dollars/hour to complete a job in Y hours and expect to pay X x Y dollars once the job is completed.
In practice, however, this tends to not be such a simple calculation. What if the project takes twice as long as the two parties estimated it would? Should the contractor charge the client more? That won’t make for very happy customers. What if the contractor has 10 years of experience in his/her field of expertise and gets the job done in half the time, should they charge less than someone without that hard-earned experience?
The answer more and more businesses are (or should be) turning to is value-based pricing.
What is Value-Based Pricing?
Value-based pricing is a pricing strategy that sets the price of a product or service based on the perceived value that the customer is receiving. No longer are you selling hours of your time but actually digging into the customer's business and finding ways to provide them with the most value from your services. This sets both the client and the contractor up for success, there is a clear definition of the intangibles which the contractor brings to the table and the final result that will be delivered.
Problem #1 With Hourly Billing: Clients vs. Contractors
Hourly billing inherently sets up the client and contractor to be on opposite ends of a losing battle for both of them. The client wants the job done as fast as possible so they pay less for the service, and the contractor wants to milk up as many hours as they can from the work they are getting.
Let’s say you worked faster on this project than the last, for whatever human reason you can think of, your dog was sick, you were fighting with your spouse, etc. Should this client reap the benefits of you being on your game while the last suffers? If you’re slow or you incur too many costs getting the job done, it’s not the client's fault, it’s yours.
There is a reason employees get paid a salary and not an hourly wage. Their employer is paying for everything that comes along with that person, their years of experience, their proven case studies of work, their ironed out workflows, etc. All of these things add up to the perceived value they bring to the company, and service offered to clients should act the same way.
Problem #2 With Hourly Billing: It’s Unreliable
In all my years of experience developing web applications and software, I have not once seen a developer or product manager accurately estimate how long a project will take, ever. It’s simply not an accurate way to price a project, and someone will almost certainly feel slighted at the end of it.
Truth be told, most clients don’t care about how long it takes or what road you take to get to the end of the project, they are interested in the impact it has on their business, and that’s how it should be priced. It’s an amazingly practical approach when it’s done correctly.
Is Value-Based Pricing Just an Upsell?
This is the first thing most people uncomfortable with making the switch to value-based pricing jump to. However, it is in fact the opposite.
If you jack your prices up promising more value and you don’t deliver, you won’t be in business very long. The real leg work of value-based pricing comes in with understanding what your client is seeking from their project and how much it’s worth to them. Once this is figured out, the end result is going to be greater quality, and the expectations of both parties are met.
There is just far more incentive for the contractor to deliver value to their clients when operating with value-based pricing than if they were to be billed hourly.
Value-Based Pricing Promotes Transparency
The beauty of value-based pricing in my eyes is the transparency it brings to communication with the client and contractor. You both decide on the value which this project will bring to the client and the attributes that the contractor has to fulfill the task. After this step, there is no clock watching and hour counting/billing. It gives freedom to the contractor to work creatively and just focus on capturing the value in the project that the client is looking for.
If this takes the contractor half the time that it would have taken the competitor, that’s fantastic. The service is delivered fast and the contractor keeps their incentive to keep improving their workflows and skillset.
If you’re looking to hire a contractor for your project, we hope that you can see the value in hiring someone operating with value-based pricing. Ultimately, you’ll be getting a far more customer-focused experience and receiving a service that delivers what you’re expecting.
If you are a contractor operating on hourly billing, making the switch to value-based pricing is a fantastic way to actually look at what you bring to the table for your clients, and focus on how you can become more efficient at delivering that to them.
Thanks for reading!