Many years ago, I shifted our agency from the traditional agency billing model of hourly fees to a value-based fee model. It’s a huge departure from how 99% of all agencies charge for their time.
But I believed (and still do) that hourly based fees undermined the work we did and actually encouraged our clients not to call us.
Think about it. Let’s say we’re doing a project for you and the price is $5,000. Or…on the flip side, we are doing the same project, but it’s $200/hour.
If you have a question — under which pricing model are you more likely to call and discuss your question for 45 minutes? Or…which pricing model allows you to build your budget and have confidence that the project will not go over?
It also allows us to do better work. Clients don’t care how much time we invest in a project. Until we’re billing by the hour. Then, all of a sudden, it’s an issue. With value-based pricing, everyone wins. We get to spend the time we need to on a project and the client gets exactly what they needed at the price that they agreed to. Who can argue with that?
I’ve noticed that more and more service professionals are also beginning to shift to a value based model. It makes sense. Over at IowaBiz, Rush Nigut says that many attorneys are recognizing that unlike manual laborers…they are not really selling their time. They are selling their expertise and beginning to bill accordingly.
How about you? How are you pricing your products/services? Want a little help in figuring out how to get the fees you deserve?
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I’ve got two examples for you – both from my point of view: one as client and one as ‘seller’
The mother-company of the business I worked for before ‘forced’ this accountancy on us: hourly rates, you got an invoice even for the simplest question. Never did we receive advice or notifications to help us grow our business or warn us for changing regulations etc. Did we have a wonderful relationship with them? No, they were ‘costs’
In our own business we have a wonderful accountant who – because of my own knowledge of bookkeeping – placed us immediately on a fixed year tariff (rather low), keeps feeding us tips/advice/ideas to improve our business and has turned into a very valuable friend. He’s a real asset to our business.
Who do you think we recommend more?
In our own business – installing wooden floors, so not only true for ‘services’ – we always give a fixed price per job. Every room, every floor is different. Sometimes it takes us a bit longer than planned to finish the job, sometimes quicker.
But our clients know upfront what the costs are going to be. In contradiction to most our our ‘colleagues’ who quote a day-price and never seem to be able to tell the client how long it is going to take.
How many jobs do you think we’ve ‘won’ this way?
It sounds like ‘shortening the decision cycle’ again.
Karin H. (Keep It Simple Sweetheart, specially in business)
I agree entirely. We have always priced on a project, not hourly or daily basis. Your phraseology (value-based) rather than ours (project-based) is, of course, a superior way to position this approach and I think I shall promptly start adopting it, where appropriate.
In return, let me share with you one of the tips and tricks I use in pursuing this selling approach. I assume that most of our clients are, at base, corporate bureaucrats and, therefore, necessarily risk-averse. So, after I’ve given them the overall pitch, and thne made your point that I don’t ever want them to hesitate to simply call me for some advice & counsel, I make he following point: “We take the risk that the project ends up taking more time than we budgeted. This usually does happen…your [meaning, the client’s] people travel a lot, reschedule meetings, have trouble coming to afinal decision, etc. This often results in a longer porject than anyone ever originally planned. Then, we have to have a bunch or catch-up, re-start meetings. So long as these delays are reasonable, you [the client] don’t incur greater costs. You can budget $XX,XXX and feel confident that’s it. To repeat, we take the risk.”
When I use that speech, I can usually see the relief on their faces every time I say, “we take the risk.”
Excellent examples both! I had a client say to me once, “one of the reasons I love working with you guys is because I never feel like you have your hand in my pocket.”
We can position ourselves as our clients’ partner or as a vendor.
To quote you…who do you think has longer, more profitable relationships and gets more referrals?
We sometimes use the phrase “project billing” as well. As you say — it’s sort of situation dependent.
We take the risk is a smart way to describe how the billing works. We talk about the same sort of advantage to the client. But I’m not sure we’ve used that phrase before.
We talk about how, as long as the scope of the project hasn’t dramatically changed…you know exactly how much you are going to pay for X. And you’re right, clients like the stability of that.
But, I like your language better!
It’s good to “steal” ideas from like-minded colleagues!
We, at After The Launch, do the same thing! It’s much easier on the client when we price per project.
Kudos to you for also kicking the hourly rate.
Interesting to see a perspective from a different profession. You are right on target!
I’m finding more and more of us are moving to this model. It makes sense — it’s to the client’s ultimate benefit and it elevates us from an hourly worker to someone who has expertise to offer.
Glad to find another kindred spirit!
It would be interesting to know whose idea it was to begin billing by the hour. Surely, there must be some historical reason or background for it.
But, I think many of us in many professions have come to realize that the model no longer works. I think those of us in smaller firms, regardless of profession, have an easier time making the transition.
Has your firm actually adopted this shift or are you still in the discovery stage?