/ business

Breaking the Time Barrier with Value-based Pricing

When you're charging an hourly rate, you're actually selling hours, regardless of what you think you're selling - software development, training, etc. The trap here is that if you're not putting in the hours, you're not earning.

Is there a better way? What alternatives are there?

That's the question I've been asking recently as I do consultant work through my company. It's then that I come across the concept of value-based pricing.

Value-based pricing

The basic concept is to forget the hourly rate ... don't even think about it or mentally convert to it.

Instead, frame what you are going to charge based on the value you are going to provide to the client.

To the client, it's an investment. To increase product sales by $100k, they would be willing to invest $10k (10%) on new systems to make that happen. $10k becomes the figure you could charge to produce the $100k value to client.

The client is not interested in your costs, only the value you can add

The hidden benefit to all this is that both parties are working towards the same goal - creating that value.

With the "selling hours" approach, there's always that conflict of interest when something extra needs doing - the client wants you to do it as fast as possible, because, hey, they're paying by the hour. On the other side of it, there's no other incentive (other than ethical ones) to do it any faster.

Value-based pricing allows you to focus on providing value to your client

Breaking the Time Barrier

My first introduction to the value-based concept was by the founder of Fresh Books, Mike McDerment, who wrote the book Breaking the Time Barrier. It's a quick read at about an hour, but the message really hits home thanks to its narrative style.

The fable of the dog walker for example, resonated with me. She could no longer spend enough time walking dogs to be able to afford to continue doing it.

This was the the time and materials, hourly rate approach which meant she was competing on price with other local dog workers.

There was no other differentiator between her and the competition. Just raising her hourly rate alone would mean she was no longer competitive.

However, by changing her mindset and approaching her business from a more value-based approach, she focused on creating value for her clients. She found that her clients wanted their dogs to have the longest, happiest lives - they were part of their families after all.

That was where the dog walker could add value.

So, instead of just a dog walking service, it was repackaged as looking after the dogs well-being, training them, arranging vet appointments, selecting the right food and so on.

Everything was now focused on adding value to the client. To the client, it was far easier to justify paying more.

With prices raised, the dog walker was able to continue in business and due to the new focus, was able to grow to employ more people.

They are not paying for your time, they are paying for the value you are providing them.

Ok sure, it's just a story

But it rings true.

Given what we do in the tech industry, we're often too quick to base things on the cost per hour - how longs will it take to do this? Ok, that'll be X dollars then.

Our clients don’t care about our costs. They care about the value we create for them, so that’s what we should be asking them to pay for.