(This is a guest post by Jonathan Stark, a speaker at the upcoming Double Your Freelancing Conference. Don’t have your ticket yet? Buy your ticket while they’re still available and join Jonathan and 13 other speakers in Norfolk, Virginia, this September 16th – 18th)
In 2005, I was making a little over $90,000 USD annually as the VP of a boutique software development firm. It was a good company and I loved my fellow employees, but I was miserable. I spent most of my time arguing about invoices with clients, hounding developers to log their hours, and responding to RFPs with estimates that almost always turned out to be low.
Then one day everything changed. In a flash, I saw with total clarity that billing clients by the hour was hurting me, my company, and our clients. It was the source of just about every problem that we faced as a company.
Best of all, I saw an alternative: value-based pricing. I left the hourly firm, set up my own consultancy, and in the first year I doubled my income using value-based pricing. This year, I’m on track to do triple what I made by the hour. All while working with better clients, on more interesting problems, with lower labor intensity, and almost zero administrative overhead.
Fixed Bids? You’ve Gotta Be Kidding…
I can hear you asking, “Wait a sec… are you talking about fixed bids?”
Yes, value-base pricing results in you providing a fixed price quote to your client.
And now I can hear you freaking out, “NOES! I’LL DIE OF SCOPE CREEP!”
No, not if you do it right you won’t.
I’ve talked to a lot of developers who have dabbled with fixed bids and gotten burned. In every case, they had based their fee on time and materials or cost-plus calculations. If you make this same mistake, then yes… you will probably get killed by scope creep because you’ll set your fee way too low every time.
If you base your fixed price on the client’s perceived value of the project outcome instead of your estimated labor, you can set your fees significantly higher, deliver more effective results, increase customer satisfaction, and more.
Three Reasons Why Hourly Billing Bad For Your Clients
But wait a second… why question the logic of hourly billing at all? It’s what your clients expect, right? And it’s how your competitors do business, right? Not to mention other professional service providers like lawyers, accountants, and psychiatrists. If it works for them, why won’t it work for you?
Simply put, hourly billing is corrosive to client relationships across all professional services. This includes “digital” disciplines like graphic design, user experience design, copy writing, software development, and so on. You can’t truly partner with your clients if you’re billing by the hour, which means that you can’t do your best work.
Here are three reasons why this is true:
- Billing by the hour implies that you will first provide an estimate of the hours required to complete the work. This means that the buyer has to make a purchase decision based on an estimate, not a known cost. If the estimate turns out to be low then things get ugly fast. Even if the client doesn’t blame you for the overage, they will experience buyers remorse because they spent more on the project than it was worth to them.
- Billing by the hour encourages you to invoice in arrears. Providing a fixed bid opens up the option to negotiate much more favorable pricing terms because the final price is disclosed to the client before the project starts.
- Billing by the hour allows you to “get to work” before the client’s actual desired outcome has been identified. It’s a classic example of “Something must be done! We’re doing something! Something has been done!” Consider this: If you don’t have a goal, you can’t succeed. If you can’t succeed, you must fail. If you fail, your client will regret their decision to hire you.
Okay, But What’s In It For Me?
But value pricing isn’t just about client satisfaction, there are also huge benefits to you. The biggest one is that disconnecting your income from the number of hours in the week allows you to break through the artificial ceiling hourly billing imposes on your business.
Shifting from billing clients by the hour in arrears to giving clients value-based fixed bids in advance is not as easy as flipping a light switch. For most people, hourly billing is baked into their business at every level and it takes time and effort to migrate away from it. If you’d like to learn more, I urge you to attend the Double Your Freelancing Conference this September. I hope to see you there!
: If you have ever tried fixed bids and gotten burned, think back to the engagement and imagine how it would have gone differently if you had charged 2, 3, or maybe 4 times more money for it. I’m guessing you wouldn’t have gotten killed. The secret sauce of value pricing is understanding why many clients are happy to pay more than double what you or your competitors are currently charging.
: You could also try to break through the ceiling by hiring a bunch of junior employees and billing them out for more than you’re paying them, but this will change you from a practitioner into a manager. If you don’t mind spending all your time doing one-on-ones, worrying about making payroll, dealing with health insurance benefits, providing professional development opportunities, resolving employee disputes, and so on, then by all means, hire juniors and continue billing by the hour.