The Pros and Cons of Hourly Billing: Is it Time to Switch to Value-Based Pricing?
Episode 736: Show Notes
Does your input feel aligned with your output? If you are billing hourly, chances are things are beginning to feel unbalanced. In this episode, we fill you in on how we can help you make the transition from hourly billing to value-based pricing, creating a more predictable business and recurring income. Today, we want to introduce you to new pricing models and provide insight into how to prepare your clients for the changes.
If you don’t want to be trading each of your hours for a dollar, it’s time to consider value-based pricing. If you continue to only get paid for the time you’re physically working on clients’ projects, you’re never going to be able to scale beyond a personal income. You need to be paid for every aspect of your job! There is a way to transition without dismantling your current business and The Incubator will walk you through the steps.
Stay tuned as we share more about how The Incubator program is structured and how we can help you calculate the ideal pricing for your unique business.
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The First Steps to Transitioning to a New Pricing Model
The very first thing we’ll do in The Incubator is gather the facts! You’ll share everything with us, including what you’re currently charging and how long it’s taking you to fulfill an offer. We’ll put you through a time study to track your time when it comes to individual projects or clients, and according to the results, give you advice and share strategies for your specific business.
The next step is for you to walk every possible scenario through every feature of our calculator and submit the results for our critique. We have a completely non-judgmental approach. The way you want to work is up to you. We just ensure all factors you want to account for have been accounted for and provide feedback.
Our goal is to help you develop a service that isn’t dictated by what the client says they want but rather puts you back in the driver’s seat. Instead of reacting to what the client wants, you can show up as the expert to align them with a service.
Misconceptions About Value-Based Pricing
There is a misconception that, if you’re not charging hourly, your hourly rate is irrelevant. This is simply not true! You ultimately need to know what an hour costs you. Tracking time meticulously is super stressful, which is why we do a loose calculation. We calculate a base number of what your company needs to be charging on average per hour to remain profitable and operational. And once isn’t enough! You need to keep addressing your average hourly rate: Make a decision based on today’s data, do the project, and recalculate. Although time-consuming initially, it will save you time going forward and will help you to get clear about the wording of the problem and how your expertise can address it.
Clarifying Scope
The calculation stage is a good opportunity for you to clarify the scope of your service both for yourself and prospective clients. Clarity in scope presentation matters a lot in the sales process.
Our personal favorite scope line item to discard without hesitation is “unlimited support”. If you do choose to include this, be sure to put a time limit on it, include your business hours, and make it relevant to the specific service you’re providing. You don’t want clients coming back after 6 months to use that line item against you.
How to Communicate Changes to Existing Clients
Once we’ve walked you through your premium package design, you’ll have another critique opportunity. Then we’ll help you to figure out how to communicate with existing clients if a change is going to be made to their offer. These clients will typically be those in retainer services and there may be a contract or timeframe that you need to be mindful of. We speak to our clients about how to structure the conversation with their clients around price increases and scope changes. Although there are risks involved, these conversations can go well! And if not, it’s a worthwhile challenge — the long-term impact on you and your business will be massive. Nothing beats the feeling of showing up to do a job that you’re being paid appropriately for.
Why You Should Consider Switching to Value-Based Pricing
If you remain in the hourly world, your client is always looking for you to be more efficient, to your own detriment. As you get more skilled and efficient, you could ultimately end up being paid less for the same work, with the same clientele. It’s not right to be penalized as you continue to scale. If you’ve been doing something for years and it now takes you 20 minutes as opposed to two hours, why is that 20 minutes worth less? In short, it’s not.
This is as much about the return as it is about the price. “Value-based” refers to the impact of your service. The value to the client is a crucial variable to consider. If they can use your offer to 10x their investment, why are you so hesitant to charge more? Your expertise is invaluable and, at the end of the day, you’re saving your clients money.
Quote This
If you remain in the hourly world, your client is always looking for you to be more efficient, to your own detriment.
Highlights
The First Steps to Transitioning to a New Pricing Model. [0:12:42]
Misconceptions About Value-Based Pricing. [0:18:33]
Clarifying Scope. [0:22:40]
How to Communicate Changes to Existing Clients. [0:24:45]
Why You Should Consider Switching to Value-Based Pricing. [0:28:15]
Today’s Guest:
Abagail & Emylee
The Strategy Hour Podcast
The Strategy Hour Podcast is a twice weekly show hosted by Abagail Pumphrey and Emylee Williams, the founders of Boss Project. Join us for semi-ranty biz conversations for service providers looking to ethically grow their agency businesses. Episodes cover everything from lead generation to leadership mindset to team culture and beyond.
Key Topics:
Value-based pricing, Hourly billing, Pricing model, Project scope
