Name your price: Hourly rate vs fixed-price vs value-add billing
We’ve just had a meet and greet with a new client—a masseur who wanted to talk about her business structure. She’s a great lady, and super smart.
So when she told us why she wanted to change accountants, her reasoning really stuck with me.
Apparently her previous accountant wasn’t a fan of email, and liked to call her for a chat. Now that’s fine if talking is your thing (here’s looking at you, Amelia). But for this particular client, these conversations (which formed part of her bill) added absolutely no value. In fact, in her view, all they did was waste her time.
So does hourly or itemised billing still have a place in today’s business world? Or is value-add or fixed-price billing the way to go?
An hourly rate means you pay for however long it takes to get the job done.
When I worked with my creative agency, we had some smaller jobs where the client said, “Just bill me for how long it takes”. It was great—we could capture our time, and not make a loss on the job. But I found it only worked for small jobs. If I gave that client a $5K bill when they only expected it to be $500, I’d lose that client pretty quickly.
And if I’m being billed by the hour, I worry there’s no motivation for efficiency. After all, it’s in their interest to take their sweet time.
During my creative agency, the account director and I would sit and put together fixed-price proposals. We would:
- figure out how long the job might take
- add some more time to it for overtime and sundries
- reduce it a little bit (the figure always looked too much and we really wanted the job).
The trouble was we’d always go over the price we estimated because it was still based on the time it took to complete a job. But while the Purchase Orders had been raised, having that awkward “sorry, we underestimated” conversation with the client was just painful. And so we’d either end up with a loss on the job or a disgruntled client. (The only other option was to cram the work into the time estimated, which would have put quantity over quality.)
But when you forget about the time it takes to complete the job, and focus more on the value you can add in fixed pricing, the model looks a lot more attractive.
Solving problems. It’s why most people come to creative agencies—and accountants. And with value-add billing you bill them according to how much value you add towards solving their problem.
Let’s say your business wants a cash flow forecast created to help you manage things closely through a tight period. In your mind, there’s a value for that. At the very least there’s an opportunity cost of saving yourself days of slaving over it—in other words, you can either spend dozens of your own hours pulling that together, or you can pay to outsource it to your accountant. On top of that there’s the peace of mind of knowing your bank balance is going to stay at a level it needs to cover outgoings in the coming months. That now-you-can-sleep-at-night effect is extremely valuable.
Having said that… you’ll have that price in mind for what that is worth to you and you don’t mind whether creating the value for you takes us 2 hours or 20 hours. Why should we be paid more, for taking longer to do something? It doesn’t make sense.
As much as it makes logical sense, value-add billing a client can be hard to implement, because you need to educate your client on the value you’re offering. But once you do that, value-add billing is a winner because they pay for your best work—not for the time it takes to get there.
The solution, not the journey.