In the fall of 2009, I participated in a panel discussion on estimating and billing practices for software developers. I took the position that hourly billing is the only way to charge the customer for custom development. At the same time, another panelist said that billing by the hour places an arbitrary limit on your income. That planted the seed to change my business model forever.
- If you want to set a fair price, you first need to understand the value to the customer. Then based on that value, you can set a price that creates outstanding ROI for the customer and a high profit for you.
- If you bill by the hour, there's an artificial limit on your income.
- With hourly billing, it's in the customer's best interest to take as few hours as possible to get a lower price. It's in your best interest to take as many hours as possible to get higher revenue. That creates a conflict of interest.
- The video of my first presentation on value pricing is available, Value-Based Pricing from Pause OnError.
- During the first 12 months, our gross revenue increase by 56% over the previous year. The next year, it increased by 79%.
- If I learn to do something faster and better, I should be paid more, not less because I'm creating more value.
- It's the Art of Value. Like any type of art, there are principles and concepts that you can learn and then apply in particular situations.
About Kirk Bowman
Kirk Bowman is the founder and Visionary of Value at MightyData, a custom software company in Dallas, Texas. After successfully switching from hourly billing to value pricing at MightyData, Kirk started Art of Value to help other professionals learn to price by value. He is a Practicing Fellow at VeraSage Institute.
- @MightyData (Twitter)
Denny Krahe says
I have my own personal training and run coaching business, and I am very intrigued by the idea of value pricing and am currently trying to work out the details of how to set up this model in my businesses.
On one hand, I feel like value pricing is a slam dunk. But on the other hand, it seems logically to me that service based businesses are a little more difficult to set up this way. I’m looking forward to hearing more episodes of the show, and if you can address some of the common questions/concerns about implementing value pricing into my type of business, I would really appreciate it!
Kirk Bowman says
Denny – Thank you for comment. I think a show about the concerns you mentioned is a good idea. Would you be willing share what your questions are? It would help me prepare the outline for the show.
Denny Krahe says
I’ve got tons of questions, but I’ll try to explain them as clearly as possible. If you’d like to jump on Skype at some point if you need more elaboration, please let me know and I’d be glad to. But here are some of my trip ups before I completely can embrace the value pricing model:
-End goal. If someone’s goal is to lose x number of pounds, there are many variables concerning how long that might take. For example, if I’m working with a client twice a week, what he or she is doing for the other 166 hours of the week has much more to do with how much weight is lost that our 2 hours together. Also, even if the client is doing everything right, you can only lose so much weight in a healthy manner so quickly. So if we set the goal to be achieved in 8 weeks, it would be hard to responsibly deliver similar results in only 6.
-Getting people to grasp the concept. I can understand the idea of value pricing for a deliverable good/service. But in my case, how to best explain it to my clients that it is a win-win scenario.
-What happens when the client isn’t doing their part? i.e.-not eating well, not doing their “homework” exercises, etc that is hampering their progress and thus preventing them from meeting their goal in the time frame we are shooting for.
These are the questions I have now, though I know I’ve had more in the past. As more pop into my head, I’ll be sure to pass them along.
Kirk Bowman says
Denny – Thanks for sharing your questions. It sounds like I need to do a show on the basics of value pricing including:
– How to determine value
– How to discuss value with the customer
– How to hold customer accountable to value