In 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 customers for custom work. At the same time, another panelist suggested that billing by the hour places an arbitrary limit on your income. This planted the seed to change my business model forever.
The Story Behind My Switch
- Value pricing is a business model that determines the value to the customer and then sets a price to create a fair return on investment.
- I read Value-Based Fees by Alan Weids and several blog articles.
- I made a public commitment to switch within 12 months on the FileMaker Talk podcast.
If you bill by the hour, there's an artificial limit on your income. – Jonathan Stark
The Principles of Value Pricing
- Value pricing is a way to better serve the customer and make more money.
- With hourly billing, it is in the customer's best interest to take as few hours as possible for a lower price.
- It is the professional's best interest to take as many hours as possible for higher revenue.
- Hourly billing creates a conflict of interest between the professional and the customer.
- Value pricing aligns the interests of the professional with the customer by focusing on the value created.
- There should be high value and high ROI for the customer.
If You Want to Learn, Teach
- I decided to teach value pricing to learn it. I gave my first presentation at PauseOnError.
- VeraSage is a think tank dedicated to eliminating the billable hour in professional services.
- I sought out Ed Kless after reading his biography on the VeraSage website.
- The first time I used value pricing, I quoted a price twice what I normally would, based on value.
The Results of My Switch
- There are three outcomes for a customer when switching to value pricing:
- Embrace the change
- Refuse the change
- Make the switch and then stall
- You will lose some customers.
- It is better to start with new customers when switching to value pricing. Start with a small one.
- In the first year, gross revenue increased by 56%.
- In the second year, gross revenue increased by 79%.
The Disadvantages of Hourly Billing
- The professional is paid less for working faster with hourly billing.
- The faster you create value, the more it is worth.
- Hourly billing focuses on the wrong thing: inputs instead of outputs (results).
- Customers ask about hours because that is how we have trained them. (The History of the Billable Hour)
- The customer should focus on the results – only doing work that matters.
- If you can shift the conversation to value, there will be substantial work that matters to the business.
- Determining value and setting a price is more art than science.
- We learn better through conversation and story.
About Kirk Bowman
Kirk Bowman is the founder and Visionary of Value at MightyData, a custom software company in Dallas. After successfully switching to value pricing at MightyData, Kirk started Art of Value to help other professionals learn to price for success. He is also a Practicing Fellow at VeraSage Institute.