Hourly billing isn’t a good pricing option and it’s something that Jonathan Stark, former software developer and author of ‘Billing is Nuts’, is on a mission to rid the world off. The problem with hourly billing is you’re always putting an artificial ceiling on your income. You’re limiting yourself, based on the hours and days you can work, along with the traditional standard hourly rates associated with your industry. It’s why value-based pricing is so much more effective for you and your clients.
It often allows you to get started, long before you really know what your client wants. But it’s also not designed to build trust either. If a task takes longer than your client thinks it should, they question your efficiency and wonder if you’re padding out the hours.
The hourly billing model also penalises you for being good at what you do. The slower you work, the more you’ll get paid. And the better and faster you are at your job, the less you get paid. Plus it also encourages scope creep too.
The thing about hourly billing is it almost becomes borderline unethical. It creates a dynamic where the client can end up paying more than it's worth to them, because they didn’t know the cost upfront and can’t make a value-based decision around it.
Put simply, the cost becomes the focus - not the desired end result or outcome.
Retainers are often seen as prepayment for a bucket of hours, so the same problems still exist.
If you want retainers to work, then you need to price them as advisory consultancy retainers. You’re then positioning yourself as an expert and you’re paid on a monthly basis for access to your expertise. Like a brain for hire. Your client then has access to you 24/7, usually via a platform such as Slack. They’re not paying for a number of hours or a specific number of things that you do - they’re paying because they may need your expertise.
It’s far better to be pricing for your work, not the hours worked. You should be getting paid for your services - hence fixed, value-based pricing. Instead of billing in arrears for time, you’re pricing upfront for the value you’re creating.
Value-based pricing ensures your clients know exactly what the price is upfront, along with the scope of work involved and the end results. You’re giving them three prices to choose from, each with profit built into the price. And since you're giving the price upfront, the client can decide if this price is acceptable to them.
If you want to use value-based pricing, you need to find out where they're trying to go first. You can then set a price for your contribution to getting them to that place. Once you have that, you know where you're going. So it's really easy to control scope creep.
No matter how big or small the project, you need to have a ‘Why’ conversation. You can then use the questions to help tease that out and uncover their root motivation. It also helps you price things more effectively, takes the pressure off you having to prove yourself or persuade them, and you don’t need to try and close.
The different ‘Why’ questions fall into three categories. The first is ‘Why this?’ The second is ‘Why now?, and the last one is ‘Why me?’
So if you've gone through the ‘Why’ conversation, and there is a good fit between you and the client, the proposal is going to write itself. They’ve basically told you the transformation they're looking for, why it needs to be done right now and why they have to spend extra money to get a specialist like you. So it makes writing the proposal very easy.
You then need to give them value-based pricing solutions and ask for the sale. That way, you’re not overwhelming them with too much choice and aren’t giving them a ‘take it or leave it’ price.
Rather than guesstimating the pricing, you decide what you’re going to do, and how much you’re happy to do it for. You define the scope after you've set acceptable prices, and then you present that to the client and then they can choose.
The proposal you write will indicate the success metric (or ultimate result) they want to achieve, along with a progress metric. This is usually something that helps show you’re on the right track and headed towards that end goal.
For high priced projects, the Goldilocks pricing curve works well. This is where the first option is 10% of the value. The second option Is 22% of the value. And the third option is 50% of the value. Psychology dictates they’ll usually pick option two. If they pick option three and that keeps happening, it illustrates that your prices are way too low.
Listen more to my podcast with Jonathan Stark on value-based pricing.
Like what you hear? Don’t forget to rate and leave a review to help spread the word!
The Pricing Queen podcast is produced by Decibelle Creative
50% Complete
Lorem ipsum dolor sit amet, consectetur adipiscing elit, sed do eiusmod tempor incididunt ut labore et dolore magna aliqua.