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Hourly versus Value Pricing
The way in which your bill has an effect on your revenue.
Today, most businesses use the same method of billings that they have always used as no one knew there were alternatives out there. So what is better? Let’s debate Hourly versus Value Pricing.
Different ways to bill
- Hourly Rate – the traditional method used whereby the invoice is calculated on time is taken to complete the job at an hourly rate.
- Cost Plus Pricing – bill based on the cost of completing the job and then a mark-up is applied, usually a percentage, which gives you your profit.
- Fixed Pricing – the cost of the job remains the same regardless of the time taken to complete the job
- Value Billing – the job is billed after it has been completed and based on what the firm perceive the value of the job is.
- Value pricing – the job is billed before the job started based on the perception of the client’s value of the job
Reasons to change from hourly rates to value-based pricing
If you are working at an hourly rate, there are a few things that may be detrimental to you and your business if you choose to continue with that pricing model.
- The faster you work, the lower your income. Clients love increased efficiency, but this means lesser hours that can be billed which in turn leads to you being less inclined to improve your work processes.
- Clients shop on rate alone, which means you only compete on price
- Price increases difficult- you will need to justify the increased price to clients
- Skills not associated with billing- normally the more knowledge you have, the more you can charge a client. However, billing by the hour does not take into consideration what knowledge you have, it is charged at a standard rate
- Revenue limited by time- if you are charging by the hour, then there are only a limited number of billable hours in a week, thus no room to increase your revenue.
Benefits of Value Pricing
- Increased profit margins – if combined with technology efficiencies, results in greater profit margin on each job.
- Improved cash flow – With costs agreed to upfront, you can allow your client to spread the payments over a length of time, which guarantees cash flow
- Stronger client relationships – as the price has already been dealt with, the client will get no nasty shocks plus allows you to concentrate on the job at hand.
Check out another recent blog in this category.
Let’s discuss how we can move your business to a value-based pricing model.