Hourly Rates: You Could Be Making So Much More

Do you charge an hourly rate? Simply changing from an hourly to a value-driven fee structure will raise your revenues and your clients’ loyalty. I guarantee it.

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  Posted by Alison Covarrubias, San Francisco , California | May 10, 2010

  Thanks Amy. I always find myself back at the hourly vs. value conundrum. It takes a professional, like you, to help kick that bad habit to the curb!
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  Posted by Brad Srebnik, Seattle, Washington | May 11, 2010

  I'd say this is much too simplistic. First, I keep both options open: hourly and fixed bid. Why, if a client insists on one or the other would I lose that client right away, or start a big conversion about trying to convince them on something when it's more important (to me) to get the client for a reasonable and acceptable amount of compensation? Second, if I quote an hourly rate, I'm still always discussing project estimates and total cost with the client. They can then see, I hope, that I am giving them both a fair rate and an attractive overall price. Lastly, this is probably all very service-type dependent. For some services, you can attempt to measure value (say, in cost savings). In others, it's subjective, or the different in value between one service provider and another is very difficult to assess.
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  Posted by Michael Cohn, Butler, New Jersey | May 11, 2010

  Amy, The cost of a value-driven pricing offer for a customer is still based on the formula:

  Project Cost = (time * hourly rate) - discount

  So you still need to know how much you value your time in order to calculate the value-driven pricing.

  Heighten your reputation and exposure online.
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  Posted by Bonnie Copeland, Vancouver, British Columbia Canada | May 11, 2010

  Hi Amy As someone who is still learning an awful lot about running her own business I have to thank you for your explanations and reason for the value driven pricing. You wrote it in a very clear and easy to understand way and gave great tips here.
  I'm still trying to figure out how I would translate this into my own business in terms of sessions with a client but at least I have a much better understanding of the reasons one might use this ideal over simple hoursXhourly cost.
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  Posted by Amy Harcourt, San Francisco, California | May 11, 2010

  Thank you for your comments. I really appreciate your thoughts on this topic.

  Value-driven pricing is a paradigm shift -- for clients and practitioners alike. It requires a dialogue with your prospects and clients to help them see that this pricing model is in their best interest.

  If your clients do not see it this way and you want to retain the business at your hourly rate, please do. I would not choose to because I don't believe it's the best way to grow a business. But I completely respect your decision to choose the best pricing strategy for you.

  As for the formula for determining value-driven pricing, there are a number of factors involved, including how you value your time. But the value may be fluid, not a fixed hourly rate. I'll be writing another article on this since it's more than I can cover here.

  Thanks again for taking the time to share your thoughts.
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  Posted by Karrie Kohlhaas, Seattle, Washington | May 11, 2010

  Amy, great job pushing people out of their comfort zones and stretching some minds with your article!

  There are many ways to price: hourly, packages (my personal favorite), project-based, retainer and results-based...(you describe 2 methods above: one I call "project-based" because it involves a finite project with a price quote and the other fits the "retainer" model, though retainers can be set up in numerous ways too.) Chris Haddad wrote a controversial article way back about hourly vs. results-based pricing you may want to check out.

  I have seen each one of these pricing methods work well, depending on several factors. I do agree that many people are stuck in the hourly paradigm and just opening their minds to other options is a gift. Thanks for writing such a thoughtful article! I look forward to your next! I hope you'll continue to be provocative!

  ThoughtShot Business Consulting
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  Posted by Julie Weishaar, Nanuet, New York | May 11, 2010

  Hi Amy. You article is very timely for me. I am pretty must just starting out and I truly dislike charging by the hour. Once you give a client an hourly rate - their next question is "how many hours to do think it will take? For some projects, that don't require too much input from the client or approval phases, this is an easier project to estimate. But, for some projects, such a collateral development ,where there are many involved in the approval process, it is almost impossible to estimate because before you start the project, you have no idea what the approval process is going to be like. I learned this the hard way and will be moving forward trying to avoid hourly rates for similar projects in the future. Thanks for your suggestions and insights.
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  Posted by Abhinav Asija, New York, New York | May 12, 2010

  I agree with Michael Cohn..
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  Posted by Karrie Kohlhaas, Seattle, Washington | May 12, 2010

  Very interesting that this article, as well as Chris' article (linked above) on a similar topic both garnered low marks for the authors. It seems challenging for a lot of service-based solo-preneurs to imagine how to charge outside of the hourly paradigm. I noticed with Chris' article that people were almost offended at the notion of results-based pricing.

  While nothing works for EVERYONE, it's good to hear new ideas and to even be offended by an idea once in a while. There is value in that. The boldest and most innovative ideas are almost always rejected at first.

  I am not wholeheartedly in agreement with Amy, but she brings up good things for hourly workers to consider. I also don't agree with Michael Cohn. (I am not trying to be contrary, just honest!)

  I think you should have an idea of how you value your time, yes, but you can actually set up a fee structure that is not based on an hourly rate. There are times when you really have no idea how much time something will take, but you have a sense of what the value is to the customer and how much it will "take out of you" energy-wise, not just time-wise.

  Example: For some project, you may have a skill that is highly valued and you can knock out the project in short order. In that case, your fee may equate to several times your normal hourly rate in the end. (But your fee was not based on an hourly rate x hours. In fact precisely because it was NOT based on your hourly rate, that frees you to make such a large profit on it.)

  I am glad that Amy is bringing this subject up again. Way to challenge the status quo and get people on the edge of their seats!

  ThoughtShot Business Consulting
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  Posted by Gayle Ballinger, CPDT-KA, Seattle, Washington | May 12, 2010

  Interesting. In some ways I already do value pricing although I discuss an hourly rate and refer to them primarily as sessions. In my industry (dog training) it is easy for me to get most dogs to do what I want. The challenge comes in getting the dog to do what the client wants and in response to their asking it of the dog. I have no control over how much time or how closely the client follows through on homework and management programs when I am not there. Obviously, the more they do the faster and better the results. There are also times when I, as a trainer, decide the dog has been "pushed" far enough or achieved so much in less than an hour that it is in the best interest of the dog to end the session early. However, I can usually fill remaining time educating the client or with a Q & A session. I still base my rates on an expected hourly session and set up packages accordingly. I think I will revise my menu to say "per session" with a note that most sessions average one hour, and get rid of the "hourly" rate terminology. I don't mind running past the hour 5-15 minutes but I also need to make sure the client understands that I will charge more if the client wants to continue the session... so then I'm back to the hourly thing... oh, Bother!
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  Posted by Amy Harcourt, San Francisco, California | May 12, 2010

  Such wonderful and thoughtful comments. Thank you, everyone!

  Julie, you may just be starting out, but you clearly know your business and its value. I'm happy to hear you're going to try more value-driven pricing.

  When you produce marketing collateral, project-based pricing is ideal, as you've discovered. You can break down each project into smaller pieces or stages and quote on each or provide a price range, allowing for the unknowns in the review and approval process.

  Gayle, your business is perfect for package pricing. I love your idea to begin referring to the "hour" as a session. And it sounds like you sell packages of sessions now.

  You might want add to these packages things like phone consults, on-call assistance, dog socializing groups, etc. You know your business better than I do so you can come up with the specifics. But the idea would be to enhance your packages with a variety of services so that your fee isn't tied so directly to each "hour" or session.

  Clients rarely use all of the services offered in a package so if they go over the hour by a bit, you won't have to charge them for it. Something to consider.

  Karrie, you said it all so well. Your example is perfect.

  It's often the case that we have a highly valued skill we do with such ease that it takes us little time to produce results. It's not so much the time as all the experience we've garnered to get us to this level of skill.

  Just the other day a friend of mine, who's been an outstanding publicist for years, was asked to get a business associate coverage in the local press. For my publicist friend, this was quick and easy. He knew the right angle and had the ear of the right editors. To his business associate, this was worth its weight in gold. My publicist friend didn't want to charge him anything. Why? Because "It was just a couple of phone calls."

  Word of caution to all reading this: do not confuse how easy your skill comes to you with how much you should charge for it. Often, we think what we do is nothing and our clients think it's everything. And that's why we're in business!
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  Posted by Kathy Johnson, Seattle, Washington | May 12, 2010

  Amy,
  I really appreciated your article and will be integrating this into my business. What a paradigm shift!

  ---

  www.colorswithconfidence.com
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  Posted by Michael Marinelli, San Diego, California | May 12, 2010

  An absolutely awesome article! In my industry, this whole method holds so perfectly true. Value is EVERYTHING, and the finished product always speaks for itself. Thanks for your terrific piece!
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  Posted by Chrystal Bougon, San Jose, California | May 13, 2010

  OH boy, I have a few people I want to share this with! Thanks for a great article, Amy.
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  Posted by Brian Willoughby, Bellevue, Washington | May 13, 2010

  This is a thought-provoking article, Amy, but I must say that I take issue with your claim that you can "guarantee" an increase in revenues for every possible switch from hourly to value-driven pricing. As Brad says, this is very dependent upon the service provided. In my case, I can guarantee that my revenues would drop.

  In my estimation, it depends upon who is willing to take the risk. Hourly pricing places the risk on the customer, while result-based pricing places the risk on the service provider. The market will determine who can fairly expect to reduce their risk exposure.

  If my service were very similar for each client, with a high predictability of the effort required (hours or sweat or however you want to measure the work), such that I would know what I'm getting into - and particularly both parties would know exactly what is being delivered - then results-based pricing would indeed be ideal. In other words, there isn't much risk when the job is basically the same for each client, plus or minus a few details that won't add up to much.

  On the other hand, if your prospective client is basically asking you to design a new and unique product for them, then you stand to lose your shirt if the effort exceeds the reward. The invention process is very unpredictable, simply because it wouldn't be an invention if the work followed rote steps that had been done before. As Gayle exemplified, any creative process can involve more work if the client needs to be educated along the way, because each client is different. My risk is that clients need me because they do not understand the invention process, nor do they realize how much work it will take to bring an "idea" towards a salable "product." Thus, I cannot guarantee a fixed price for a process that is unbounded. What's worse is that clients may change their mind about what they want as the creative process unfolds. In these cases, hourly works best. Clients who are well-prepared and have a good idea of what they want will get it cheaper because the path is a straight line, while clients who are confused and indecisive will have to pay for the dead ends which don't pan out and subsequent back-tracking. Highly custom services should probably be priced hourly.

  I have had to learn the hard way to not let a client punish me because of their lack of focus. If a client has me design the wrong thing for them, I'd rather get paid for the time than have them decide not to pay at all because their desired result has evolved. In order to protect myself from this kind of risk, I've had to lean towards more hourly based compensation. It sure makes a client think twice about wasting my time. I also enjoy my work more when I have a smart client who puts their best effort into the project.

  One of the thought-provoking ideas in your article is to charge by the month rather than by the hour. I really like this idea, because my mind is always working on the client's problem, even when I am off the clock. But as much as I like the idea, monthly pricing is not value-driven any more than hourly. It's just another valid option. If you think about it, employees are effectively paid yearly, and that's not a whole lot different than monthly or hourly in some respects.

  I certainly have clients who make it clear that they want to know the final cost up front, even though they have no idea exactly what they want with any degree of detail. Monthly rates would help me, but it wouldn't help them know whether they can afford to bring a new product idea to market. I feel that it is fair for me to charge more when I'm basically spending time teaching a client about their product market.

  On the other hand, I sometimes have to educate myself in new techniques which are not specific to a particular client. At these times, I simply clock out of my hourly log, and spend some time on myself. Once I reach the point where I am getting back into specifics pertaining to the client's project, I go back on the clock again. In this sense, the client is only paying for the results, because they're not literally paying for every hour that I spend along the path towards finding their solution. But my clients do have to trust that I will be honest, and I prefer clients who keep an open dialog as part of the ongoing process.

  Other questions you raised were about commodity pricing due to the whole hourly concept, plus the problem of limiting your maximum income because of the finite nature of time. These issues can be solved by charging more per hour, and working in an industry which understands the value of your service. My industry pays enough per hour that I'm finding reasons not to clock in, just to save my client some money! I never feel like I could have earned more. I also happen to have a skill set that is so unique that I can practically name my rate. I realize that this is not always easy to make happen, but I think people would be well served not to think of hourly pricing as a limitation. The real limitations are the uniqueness of your skills. You won't suffer from commoditization if your clients all understand how rare your service really is. While this is not an option for every valid line of business, it's certainly one to consider among the potential options.

  After reviewing the above, I realized that there are even more pricing options available. If client and service provider are willing to share the risk, then profit-sharing - either alone or combined with hourly or results-based pricing - could be a valid form of compensation. My line of work places me very close to considering profit sharing with my clients, since I am basically inventing their product for them. But the truth is that I cannot afford to gamble on every client's product becoming a success. Even though I am a great designer, I know nothing about marketing and customer support (for the end product). I still prefer to shield myself from my clients' risk.
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  Posted by Gregor Schmidt, Seattle, Washington | May 13, 2010

  We have been using the same approach with our clients, and it does work extremely well. Our clients receive great value and are more appreciative of our services. As a result they recommend us to their associates. Therefore we definitely recommend this billing approach.
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  Posted by Russ Alman, Olympia, Washington | May 13, 2010

  I too have billed both ways, and I believe that the value-driven model makes more sense when you can apply it.

  Think about it: as you become more proficient in your area of expertise, you will become more efficient, whether it is through requiring less time to do the project, being able to reapply parts from previous projects, or both. Therefore, if the the value of two projects is the same, but it takes you less time and effort to do it as you become better at it, you will become more profitable.

  Just because a task has become second nature to you doesn't mean that your clients perceive any less value in it. Your reward for your increased proficiency and efficiency is more profit.

  Thank you for reminding me of this.
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  Posted by Marc Karell, Mamaroneck, New York | May 13, 2010

  Bravo, Amy. Great article. I got rid of an hourly rate a few years ago and saw all the benefits you listed. Some of my clients insist on an hourly rate in a proposal and I give them one, but I think they do this for comparison reasons. And on an invoice, I avoid hourly rates, but for those that insist, I put in the rate and rough hours to get to the value driven total cost.

  Another positive about not having hourly rates. It frees me to do additional work for the client when things go wrong or out of scope for the project. Instead of being bound and say to a client: "I can't do that for you unless you pay me $X/hour", I can either define the value-driven price for the extra work or, if it is small, do it for free because I have made a good profit already. By doing the latter, I really gain the client's loyalty for future work.

  Good luck.
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  Posted by David Beverage, Doylestown, Pennsylvania | May 13, 2010

  Wonderful advice for average clients, but what about difficult clients who demand excessive time with hand-holding, education, and numerous changes?
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  Posted by Gail-Lee McDermott, Delray Beach, Florida | May 13, 2010

  I enjoyed the comments as well as the articles. Good "conversation". I do use an hourly rate. However, depending on the portion of my business I'm using, I give a project quote. Both work. Though I must say many clients insist on an hourly rate.
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  Posted by Mary McKitrick, Florence, Massachusetts | May 13, 2010

  Amy, this is very thought-provoking indeed. I work in an industry – voice-over – where pricing is all over the map. For broadcast projects such as a commercial, fees tend to be market based, that is, the fee is higher when the number of people likely to hear the commercial is greater. A commercial that airs in a major market such as New York or Chicago will garner a bigger fee. This is both because the commercial is worth more to the client in that market and because the talent, i.e., the person doing the voice-over, is potentially losing other work by being on the air in this market. In other words, if my voice is on a commercial in New York City and that commercial is airing often, other clients may not want to hire me for work in that market because their commercial would not stand out as much due to the prominence of the other ad that’s running so often right now. So it’s almost like being paid not to work for other clients in that market for a certain length of time.

  Long-form narration, however, is a different story. This includes corporate projects such as in-house training courses. This is not broadcast and the audience is much more limited. The way such projects are priced is all over the map but the two primary approaches are to charge by the word, or to charge by time. It really amounts to the same thing, because time is estimated based on word count and reading rate – in other words, by how much time it should take rather than how much time it actually ends up taking.

  Further complications: there are unions for actors: the Screen Actors Guild and the American Federation of Television and Radio Artists. Union voice talent are pretty much bound to a time-based method of payment. Non-union talent aren’t bound to anything, and that coupled with the fact that there is this perception that “anybody can talk”, many clients don’t value our services that much to begin with. They don’t realise how much work and skill actually goes into it. They say, it will only take a few minutes so they are expecting to pay very little. I try to educate as I go, but I also try to stay away from that kind of client.

  It would take a lot to push the industry to the kind of fee structure you’re describing (except for animation where the actors receive a set fee per episode, or per film, which is negotiated for each project), but I know many of us wish there were standards for non-union voice actors. Right now, it just seems like a race to the bottom.
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  Posted by Susan Clark, Houston, Texas | May 13, 2010

  Value-Based pricing requires an excellent scope of deliverables document. The client and you need to know and agree on exactly what is being delivered for the price quoted. When something comes up outside of the scope, you should have Change Control documents that say for this extra element, it will cost you this much more... then the client can decide if it is worth it to add.

  When estimating the project price, I do start with a spreadsheet of estimated hours/project task. However, I ultimately tweak the final numbers based on how much I think the prospect needs the results, how much they like to meet to discuss (price goes up), what value the results will bring the organization, etc. I also always build in extra "time" for issues that inevitably arise.

  It's hard to make the switch but ultimately a more satisfying way to do business. Neither I nor the client has to watch the clock (which builds the relationship). Goal is to make the client happy with a price that works for my firm.
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  Posted by Michael Bryk, Latham, New York | May 13, 2010

  Thanks for writing the article! While I have been building my business around an hourly rate that I have felt is fair. It does allow the client to decide whether or not they feel at each given hour you are working as hard as the next. You almost feel as if they are calculating your efforts as you work. Putting a set value on what you are offering just seems to make much more sense. If you own your own business why would you settle for an hourly rate? Your employees make hourly rate so you have control over your spending. There's no need to limit to the amount of money by suffocating yourself to hourly wages.

  Thanks again Amy for the mind food!

  Michael C. Bryk, Owner Bryk City Landscaping
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  Posted by George Sandoval, San Rafael, California | May 13, 2010

  Provocative! Good nerve you've touched on. Good on you!

  I received the advice recently that my rate should be "xyz". But I find from clients the real price, the real cost in doing business with a vendor is wasted effort.

  Unless of course as you mentioned - you can outline, in numbers the overall value (against their growth projections), the time, the percentage in dividends an effort will return.

  Now as a in right now, and as a secured diminishing investment.

  Otherwise, it's a shot in the dark, a charity loan, a "nice guy" thing to do because, well, vendors are poor.

  I found in outlining my approach, my sales approach and the approach, mindset I'll need to have successful projects and relationships, clients are also very poorly treated.

  I mean how many people of those whom you know are constantly accosted by everyone from Albert to Zodiac looking for money.

  There's the plumber, there's the City, there's the landlord, there's the tax guy, the financial planner, the banks, the employees, the suppliers, and what! WHAT?! now some yahoo who says he can make the client money. Me!!???

  Ah, did he/she the business owner miss something? Weren't they the ones spending the better part of their "my baby" conceiving years, planning, sacrificing, struggling to make this creature, this organism, this things of theirs happen?

  ...or was it someone else.

  "Yes," I can hear them crease a respond for the vendor, "please tell me Mr/Ms. Vendor, where could I have committed a mistake. And please Mr. Ms Vendor, please share before you send me a bill."

  Vendors! Ha! We are a self-engrossed lots aren't we.

  I try to plan with three to five years of decision embedded within each presentation. Do the math, know the business, find their competition, and provide answer for keeping or rejecting this competition.

  This generates some of the value you'll need.

  Thanks again, Amy.

  hmm need to check my blood pressure...
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  Posted by karl christopher, Seattle, Washington | May 13, 2010

  it all depends on what your business, and what your service is. i do a lot of handyman home repair work. contractors generally bid a price and do the work. but what i see happening, and what my clients tell me from other contractors they've hired, is the amount of work and materials that the contractor puts in doesn't add up to what the client was charged - in other words, contractors OVER bid the jobs or charge more than the purchase price of materials. if they can get it done quickly and move on, more money in their pocket- but not necessarily more value to the client. i have a lot of experience, but my estimates of how much time it will take to do a job are still often way off the actual time involved. contractors that lost money, or ended up underbidding the actual investment in a previous job, try to "make it up" on the next client.

  so i charge hourly, but i give an estimate of how many hours it will take, and i'm flexible. if i feel like it took longer than it should, say because i was just not feeling speedy that day, or because i had to learn how to do the job on the job, i'll put "courtesy credits" on the invoice. i'll show the hours, but credit some of the time back to the client. they love that. and i feel more honest about getting paid.

  people have told me i'm selling myself short, that i could be making more money, or charge more per hour. but i've noticed that other guys that do what i do are putting their trucks up for sale, while i've had all the work i care to do. in this economy, people still need to get things done, but they don't have the cash to lavish on a contractors bid price. when clients see you put in some doors and windows in 8 hours, and you charge them for 8 hours work, they feel like they got value for their cash. and i got the job. and they call me back consistently. i've never advertised or marketed my skills.

  but again, this is due to the nature of the work i do. someone who has a different business, performs a different service can better price jobs on a bid basis.
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  Posted by Rosemary Levesque, Portland, Oregon | May 13, 2010

  Interesting topic, especially for healers. In the energy work I do, I deliberated over the pricing. How could I stop at an hour when more time was usually required for the complete session? What I decided upon was a time range of up to 90 minutes of energy work with a fixed price. However, the client also gets some extra time as we finish with a short consultation. Healing takes time. I'd be interested to know how a package can be put together on a per client basis, or project basis as you discussed when healing is involved.
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  Posted by Bill Horton, Lake Oswego, Oregon | May 13, 2010

  Amy, I have been approaching price from both a project based and hourly fee, but find the project based to be more easily digested from my Small Business customers. Thanks for the post.
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  Posted by Thomson Dawson, Ojai, California | May 13, 2010

  Great article and equally great comments. This is a sticky issue indeed. I have been a consultant for over 25 years. In that time I have worked with many consultants as well.

  I can say with confidence, consultants usually fall into two categories:

  1) order-takers 2) value creators

  Order-takers (those with little power in the buying cycle) offer commoditized services, are poorly positioned and in abundant supply.

  Value Creators are highly paid experts, very specialized, and create value for their clients by solving a business problem that order takers are not asked to solve.

  Value Creators have their "marketing" baked into their narrow and highly focused positioning. Clients seek them out.

  Value creators rarely, if ever, compete for business, write long proposals, or CHARGE BY THE HOUR!

  Value Creators provide guidance, while order takers provide services.

  But remember this:

  CLIENTS DETERMINE YOUR VALUE, NOT YOU!

  Creativity, Innovation, Clarity and Confidence
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  Posted by Dawn Wilkinson, Mercer Island, Washington | May 13, 2010

  As an interior designer, I look forward to reviewing this article a few times more. I am interested to see if changing my billing structure would be of benefit to our clients & our business. Thank you for writing it, it has obviously sparked some buzz among Bizniks!
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  Posted by Glenn Mattsson, Santa Rosa, California | May 13, 2010

  Amy,

  I agree with you 100% and this is the approach I'm using in building my own practice. This is also what Alan Weiss preaches, and he even has a book (on my bookshelf) on Value-Based Fees.

  The Hourly Rate paradigm is self-limiting in just so many ways, so kudos to you for the reminder to break away.

  Thanks!
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  Posted by Charlie Becker, Mc Keesport, Pennsylvania | May 13, 2010

  Amy,

  I couldn't agree with you more and I think it makes perfect sense. What a great article Love it!! Clients like to be happy with a price but also good work performance. Again loved your article!! Thanks!!

  Charlie
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  Posted by Donna Duncan, Haverford, Pennsylvania | May 13, 2010

  Amy, your article had another keen insight. "... be sure to ask questions that help you understand not only what the client needs, but also why they need it. What problem are you trying to help solve? What opportunity are you helping to exploit?"

  By approaching each client with these questions you gain insights that will enable you to offer more value to your client. Often clients can tell me what they want, but not what they need or what it would take to get there. I find the more time I spend I spend in discovery, the more the client trusts me and the less they care about my pricing model, assuming I deliver that is!

  Great discussion.
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  Posted by Rick Itzkowich, La Jolla, California | May 13, 2010

  Amy, Excellent article. Interesting comments too.

  There will always be some correlation between the time you put into a project and the final price, by adopting the model you are suggesting you arrive at the "per hour" fee after you have set your price. For example if you quote a $5,000 job and you end up working between 25-50 hours on the project, your hourly fee ended up being $100-$200/hr. But you won't know this until you are finished with the project. The $100/hr ends up being a WORST-CASE scenario.

  The way most people approach the job is they quote a price based on their hourly fee. In this example, someone who charges $100/hr would quote it as a $2500 - $5000 job. As you can see, in this latter scenario, the person would have to work the maximum number of hours (50) to receive the maximum number of dollars ($5000.) If more income is your goal, then this represents the BEST-POSSIBLE scenario. In the hourly model, you want to work as many hours as you can to receive as much money as you can.

  By the way, neither approach changes the value delivered to your client.

  Remember, clients don't pay you for your time. They pay you for what your time produces.
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  Posted by Brad Miller, Chicago, Illinois | May 13, 2010

  I totally disagree.

  Please...Please stop calling it "value pricing" and call it "flat fee." A flat fee is what we're talking about. My time has value. My clients agree to my pricing based on the total value (just like a flat fee).

  Maybe it makes sense as a marketing consultant, but I'm a graphic designer. Maybe client's don't understand what you do?

  I agree that when looking at an estimate, a client wants to know what a project will cost, but they see that with my estimate. They also see one number, but they also see where I came up with my figures.

  I have to evaluate my client and their budget and decide what the value is to them and how much time to spend on it.

  In practice, flat fees are not the way to go for a graphic designer (unless it's several times what your hourly rate would be...and congrats and getting that client).

  Projects get complicated. Clearly defining the start and end...and every little detail of projects and expecting nothing to change is not practical. Of course, I clearly define jobs, but I also quote my time...That's the scope! It's the clients who take jobs out of scope, not our firm. If a client decides mid-project that they need a new section of their website or more business cards, I don't have to write up a change of scope document and ask for more or money by figuring out an additional flat fee...I just tell the how much more time it takes.

  The alternative to asking for more money due to a change of scope it to just do it for free. You clients will eat that up and you will lose money. I guarantee it.

  If I'm under budget, I charge actual time. I'm paid what I'm worth and I'm happy with that. I'm pretty good at estimating time, an my clients usually ask for extras, so it doesn't come up every time.

  OK, sure if you get a huge sum as a flat fee that is far beyond what you could ever generate, more power to you. That would be nice, but the client's don't see overpaying for services as value. My client know what they are paying for.

  My clients appreciate the honesty of hourly rates and are loyal to me. I charge what I want to make and I earn it. I don't feel limited at all.

  That's me. I charge an hourly rate. If you like flat fees, do it. Please, don't act like it's the only way to go or that hourly fees don't take value into consideration.
• 

  Posted by Daniel Alexander II, Corona, California | May 13, 2010

  Amy:

  Great post. This is the trend in the legal field now. However, it is a challenge for both lawyer and client to get off the hourly standard. Flat Fee and monthly membership programs are the future. Big corporate clients are forcing big law firms in this direction as well.

  Daniel
• 

  Posted by Shea Bajaj, Seattle, Washington | May 13, 2010

  As an Architect, I really agree with Brian Willoughby's write up. Every project is unique and I have been doing more residential remodels than ever and you never really know what can of worms will be opened (not to mention the amount of client education/hand holding). I enjoyed reading this article and would love to come up with a better pricing alternative for both my clients and me but at this time, hourly seems to be the best for both of us. I may consider going to a fixed price after schematic design, for example, when most of the unknowns become known but for now, hourly and trust are the best. Thanks for your article. -Shea Bajaj
• 

  Posted by Candace Kortovich, Atlanta, Georgia | May 13, 2010

  Amy, Thanks for giving me so much to think about. I've found I'm uncomfortable with an hourly fee same for all, but as a Life Coach, package rates feel to me like I'm giving more content value, rather than minutes on a clock, to the client.
• 

  Posted by Nancy Milton, Elk Grove, California | May 13, 2010

  Thanks Amy for a great article. Your timing is incredible as I was just debating my fee structure. I am an attorney who specializes in mediation and conflict management consulting (aka conflict coaching). As an attorney, we are very locked into the traditional billable hour (I was a paralegal for 15 years before becoming an attorney so I know this very well). I want to break free of that structure and offer packages to my clients. I really appreciate your insights about value-pricing. I'm looking forward to your next article. Thanks again.
• 

  Posted by Lanny Udell, San Rafael, California | May 13, 2010

  Great discussion! I agree with Susan Clark...it's important to show the client what they're getting for their dollars. In my case, it's not just a paragraph on a page, but all the research, concepting and hand-holding that goes along with it. If prospects ask for my hourly rate, I explain the benefits of working on a project basis, and usually they agree.
• 

  Posted by Thomson Dawson, Ojai, California | May 13, 2010

  One more thing–and this is a biggy! (regardless of how you charge for your services)

  Always provide your client with more USE VALUE than you take from them in CASH VALUE.

  This one strategy alone will "competition-proof" your consulting business once and for all!

  It's also a fundamental ingredient to wealth creation.

  Now back to work:-)

  Creativity, Innovation, Clarity and Confidence
• 

  Posted by Kent Pelz, San Jose, California | May 13, 2010

  Amy, I liked your article so much I re-posted it on my Facebook fan page for Self Marketing New Thought Business Networking group, here in San Jose.

  http://www.facebook.com/kent.pelz?ref=profile#!/SelfMarketing?ref=ts
• 

  Posted by Betty Lochner, Olympia, Washington | May 13, 2010

  Amy - this is a great and timely article for me. I currently use both, but you give me some great insight into having the courage to give up the hourly quotes! Thank you.

  http://www.facebook.com/cornerstone.ct
• 

  Posted by Tom Scearce, Seattle, Washington | May 13, 2010

  Amy-

  Add my voice to the chorus. Hourly rates put us at cross-purposes with our clients, when the focus of the work should be helping the client succeed. When the fee is fixed, the client can maximize their ROI by engaging closely in the relationship to get great results. When there's a perception that the meter is always running, it de-focuses the work, and the results usually suffer.

  Tom Scearce
• 

  Posted by Glenn Mattsson, Santa Rosa, California | May 13, 2010

  Tom,

  I agree with you whole heartedly. The goal SHOULD be to maximize the client's ROI, which suffers when they're watching the clock, or meter, so to speak. Breakthrough results for both parties are going to occur when that's not an obstacle to deal with.

  My take is that I want my clients to call me whenever they feel the need and not be constrained by first thinking, "What is this going to cost?"
• 

  Posted by Joanne Victoria, Silverdale, Washington | May 13, 2010

  Your article has certainly stirred up some stuff! Certain segments, ie, plumbers, who charge hourly, may be more fixed price in their business. Consultants, coaches, and the like, myself included, would be best centered around a project or monthly fee, as you suggest.If someone insists on an hourly fee, I place a very high benchmark so they can rethink their options. It is more beneficial to the client to pay a project/monthly fee rather than a very high hourly fee. My prospects/clients benefit more with a fixed price, either monthly or project, because they have more of ME!
• 

  Posted by Karrie Kohlhaas, Seattle, Washington | May 13, 2010

  Kent, great reminder to repost thought-proving Biznik articles on Facebook and Twitter. There are share buttons under the title for each article for those who didn't see that. It's a great way to get conversations started on your other social media sites and also helps Amy out but sending more people to read her article. When you repost, include a question for your followers to respond to there too!

  So many good points here on both sides. It would be great to see more articles that stir up so much excitement and opinions! Fun getting to know many of you through your comments!

  ThoughtShot Business Consulting
• 

  Posted by Amy Harcourt, San Francisco, California | May 13, 2010

  Wow! I am delighted to see such a thoughtful and thought-provoking discussion. Talk about value! I've learned something from every single comment.

  Whether or not you support this approach to pricing, it's clear that you care deeply about delivering value to your clients.

  Thanks to each and every one of you for your contributions here.

  Keep them coming!
• 

  Posted by Brad Miller, Chicago, Illinois | May 13, 2010

  I maximize my client's ROI by only charging for time (value) that I provide.

  Clearly, if there is a "guarantee" of making more money with a flat fee than hourly, you must charge more for your time. RIght? Yes. I get it, but that's not maximizing anything for your clients except their accounts payable. I don't look at is as a lost opportunity if I design a logo and that start-up becomes a Fortune 500 company due to their strong branding. I get paid for my time and that's fair.

  I'll raise my rates or hire more staff, so my potential is fine.

  I just had a new client tell me that they hired us over other firms even though we weren't the cheapest because we were the only firm quoting by the hour. He knew where the numbers were coming from and what he would get from us. We were quoting on a logo, now I'm just finishing their website and will be doing other projects for them as well.

  By the hour is scalable. I don't work harder, but I work more hours...or less. It's fair and easy for clients to understand what they are paying for.

  Like I said, that's me. I'm not a coach. Maybe I want my coach to charge a flat fee and my designer to charge an hourly fee. Different strokes.
• 

  Posted by Glenn Mattsson, Santa Rosa, California | May 13, 2010

  To each his own. Some people get it and some don't. For some, hourly billing may be best, but there are severe limitations associated with it.

  It reminds me of the old joke about the consultant and train engineer:

  "One day, a consultant was called by the locomotive engineer to examine a locomotive that was making a loud noise. The staff couldn't figure out what was causing it.

  The consultant walked over, ran his hand over the noisy section, and asked the supervisor to bring him two things: a large sledgehammer and their biggest guy to swing it.

  The supervisor was accommodating and brought both over to the consultant within 10 minutes.

  The consultant ran his hand over the noisy section again, marked an 'X' on the dirty steel, and looked up at the guy with the sledgehammer and said "Hit it right there!"

  Both the supervisor and large man shrugged. The large man swung and connected the sledgehammer with the side of the locomotive. Immediately, the noise stopped.

  Everyone was amazed as to how he used the "sledgehammer" approach and quickly fixed the problem.

  He submitted his invoice to the client for $5,000. Standard procedure.

  A week later, the consultant receives a letter in the mail to itemize the invoice for tax and auditing purposes.

  The consultant immediately sent a revised invoice back that explained the following:

  $10 - Time of materials and labor (sledgehammer and resource).

  $4,990 - Knowing where to hit."

  So, if you want to charge the $10 so you don't feel that you're ripping someone off, so be it, but that also might mean that you don't put enough value on the skills you're bringing to the client.
• 

  Posted by Donna Duncan, Haverford, Pennsylvania | May 13, 2010

  Glenn,

  Helpful post. A real-world (or perhaps in this case anecdotal) example hits the "now-I-get-it" target dead center.
• 

  Posted by Brad Miller, Chicago, Illinois | May 13, 2010

  Is this topic just for coaches and marketing consultants?

  Who was suggesting charging $10 and hour? I wouldn't work with a lawyer, for instance who only charged $10 an hour. I wouldn't work for $10 an hour.

  The choice is between charging hourly what you are worth or a flat fee that you are worth.

  As far as the consultant on a train joke goes...

  What if you took your car (or train) to the shop and your mechanic charged you for rebuilding the engine when he only changed the spark plugs? Wouldn't that be fraud? Or are you paying for his years of experience? Would you just be happy because your car works? Is the customer just a sap for paying for a rebuilt engine?

  Is the joke as funny if the consultant estimates the job first? The train company didn't pay the invoice because they didn't agree to the 5 grand up front by the way.

  Kidnappers always charge a flat fee. Hookers charge by the hour, but they also charge for specific services. Like I said before, there is not one best way for every business to charge.

  These "now I get it" "kick that bad habit" type of comments seem to imply that flat fee pricing is the only way to go...and it just isn't.
• 

  Posted by Brad Miller, Chicago, Illinois | May 13, 2010

  OK...I can't stop.

  Here's a problem with estimating the scope of a project up front: You can't list everything your project will not include. The client may assume that something will be part of the project. The reason you can't list everything that isn't part of the job is because that list is infinite.

  The logo project doesn't include the business cards? The website needs to host a video, a CMS, a Flash element...Whatever. You can stipulate that your services will only be X, Y, and Z, but you never know what your client will think "z" is. You don't know what your client will come up with and there is no way to list everything that is not assumed to be included.

  This is where having a client paying a flat fee for "everything" is a problem. I know you may have a very specific contract, but what you list as a "logo" and the client considers a "logo" may be hundreds of hours of work.

  Your flat fee client expects your fee to remain the same even though you worked twice as long on the job. "That will take more time and is out of scope" will fall on deaf ears if you are working under a flat fee.

  If you are a coach and this situation never comes up, you definitely should stick with a flat fee. I'm not suggesting the everyone should charge by the hour.

  I charge for value...I charge by the hour.
• 

  Posted by Glenn Mattsson, Santa Rosa, California | May 13, 2010

  Brad,

  I did say that to each his own, and that for some, hourly billing may be best.

  If you actually read my post, I never suggested charging $10 an hour. It was a JOKE, an old one at that, that I used to make a point.

  To use your example of the car mechanic, if you drive away happy with the performance of your car, for what you paid, regardless of what he did, then he provided a service that you found VALUE in. On the other hand, if he charged you $100 and he actually rebuilt the engine and transmission and it runs worse than before as you drive off, you'll be unhappy and feel ripped off.

  I really don't know how to make it simpler than that. Some get it, some don't. We all have opinions, and we're all entitled to them.
• 

  Posted by Brad Miller, Chicago, Illinois | May 13, 2010

  I would not be happy if I found out that my mechanic over-charged me. I trust my mechanic, Sam. Last time I went in, I had noisy breaks. He took them apart and found nothing wrong and that I have a couple good more years with those breaks. The noise was corrected with a simple cleaning and I only paid for his time. THATS ROI!

  No mechanic is going to rebuild an engine and transmission for $100. I get your point that customers only care about the results (value) if you don't know any better. The problem is that by using an example that will never happen, you are making my point. We're not discussing charging a flat fee that is lower than you would charge or we?

  I hope Sam isn't at some mechanic website being told that it's OK to tell me I have bad breaks and charge me for parts and time I don't need. I hope he's not reading that that is "value." I hope that's not what's going on here.

  Please take my comment in the best light...I appreciate that we agree "to each his own." I'm enjoying exploring our points.
• 

  Posted by Karrie Kohlhaas, Seattle, Washington | May 13, 2010

  Hey Brad, Glenn and all! I don't think anyone is encouraging the practice of over-charging. That's bad for business, bad for karma and just bad.

  The problem with analogies is they are not perfect. But I love them for that. They make us think of new angles on a topic and break us out of grooved thinking about a subject we think we know well.

  Something to consider: If you ARE going to change the way you price your offerings, be sure that you explore/understand A. how to express this to your returning clients, B. why it's a value to new and returning clients, C. that keeping your integrity is more important than any amount of money--don't try to fool people, and D. be clear on the value you offer (which, by the way, I see as an integrity issue with yourself).

  I do see that many, maybe most, small business owners sell themselves short. When I help people raise their rates I get more resistance than any other topic--even anger and tears at times. People have so many reasons to undercharge and will dig their feet in. Often we don't realize how much value we offer. So, if you doubt your value, do something about it. Everyone can always improve and with that comes confidence in raising your rates (or maybe changing the way you charge).

  I love how people in this thread have chosen to disagree vehemently while respecting each other. : ) That's a major reason why I stick around this joint. People are real here, not just blowing smoke and not just causing flame wars. Great dialogue.

  ThoughtShot Business Consulting
• 

  Posted by Carolina Dursina, Spring Green, Wisconsin | May 13, 2010

  Great article, I like your approach. As you offer your customers value, they appreciate it and come back or send friends your way!
• 

  Posted by Glenn Mattsson, Santa Rosa, California | May 13, 2010

  Karrie,

  EXCELLENT! I agree. For those who chronically under value themselves or their services, check out anything by Alan Weiss on the subject. The man has chutzpah like there's no tomorrow, which most of us could learn from, and I'm a big fan.

  Another example, my last one on this, is when someone gets $100,000 for a keynote speech, which is what, about 45 minutes of work? One is either going to express admiration or horror. That's $133,000 an hour. Is that value? Apparently some people must think so since that's not all that uncommon a fee. It all comes down to the client's perceived value as to whether it's worth it or not. End of story.
• 

  Posted by Amy Harcourt, San Francisco, California | May 14, 2010

  Thanks, Glenn, for mentioning Alan Weiss. When I began my marketing consulting practice, a fellow entrepreneur told me that I had to read one of his books, Million Dollar Consulting. The chapter on pricing alone was worth the entire read.

  For all those who want to apply value-driven pricing to their business but aren't quite sure how, I would recommend Weiss' books.

  Here's the link on Amazon http://tinyurl.com/2bsd5wl
• 

  Posted by Glenn Mattsson, Santa Rosa, California | May 14, 2010

  You're welcome Amy.

  I have 6 of his books in my bookcase. He value prices EVERYTHING he does. I want to get his "How to Write a Proposal That's Accepted Every Time." When I see the list price, $149, I want to choke, but you see the reviews, people say it's a bargain at $1,000. 'Nuff said.

  Amazon link here:

  http://tinyurl.com/2dcovwu
• 

  Posted by Lanny Udell, San Rafael, California | May 14, 2010

  Glenn, thanks for the sledge hammer story. That makes it perfectly clear. Now I'm going to look for Alan Weiss's books. :-)
• 

  Posted by Marc Passarelli, Paramus, New Jersey | May 14, 2010

  Awesome article and obviously you have triggered a hot topic! I agree With Tom Dawson with the categories of consultants being either order-takers or value creators. If most of us are consultants here, we should all ask ourselves which one we are. However, I believe our firm predominantly creates value but I can't ignore a few of those A-list clients that make us fall into the order-taker category and pay us hourly. At least not yet ;). There's nothing wrong with shooting for Amy's ideal and occasionally taking an order. I have often guided potentials away from the hourly when they request it and decided to start the relationship that way in anticipation of servicing them with retainer-based or project based work in the future of the relationship after trust is established. Thanks again Amy! Can't wait to read your next article!
• 

  Posted by Janine Gregor, Ellenton, Florida | May 14, 2010

  As a virtual assistant, whose ideal clients are primarily ongoing, as opposed to project-oriented, the hourly option still rules... why?

  It is very difficult to quote on-going work because new jobs with clients change over time as needs change. I would constantly be quoting and re-quoting which can become complicated.

  Some days I am working on contact database management from documents which are either easy to understand or require additional research. Most times I won't know what it is I am up against until I am actually in the throes of the work.

  Other days, I am working on blog posts, article marketing and setting up affiliates and again, unless my sleeves are rolled up; I won't know what additional details need to be sought.

  Some clients do require project or 'on-off' work such as adding audio posts to a website or updating website information; this I can quote project fees easily; hands down.

  But then the accounting can become overwhelming. I need to make the most of my own time and extra invoicing is not the best use of this commodity.

  For projects such as setting up WordPress blogs with a defined set of services, i.e., uploading themes, adding x amount of plugins, creating a header, setting up Google Analytics, adding video, etc. quotes are easy to accomplish.

  So I don't believe that for every consulting service a project-fee based option is applicable.

  I also feel that by setting my hourly rates at xx, I am sending a message that my work commands the higher end of what my industry averages. I'm confident enough to do this and I have excellent testimonials to support my hourly rates.

  I don't discount for anyone. I do offer a sliding rate for block time purchased. I don't offer free time or 'trial' periods.

  Unfortunately, the virtual assistant business is up against $4.00 an hour overseas operations which call themselves virtual assistants.

  I hear what you are saying and I totally agree that quoting a set fee for value is ideal. Some potential clients view a virtual assistant as a cheaper means to find business support. The hourly rate adds to that notion.

  It's a catch-22 for some industries!

  Thank you! Your article is very informative, nicely formatted and easily understood.

  Janine
• 

  Posted by karl christopher, Seattle, Washington | May 14, 2010

  "value-driven pricing" sounds like made up marketing speak. you are suggesting flat-fee's. trying to disguise that by giving it a new-age name doesn't change what you are suggesting into something new.

  sure way to start a controversy where none should exist, is by saying something that makes people feel like you are telling them "this is the only right way- this way, and yours is wrong" i that is how i felt after reading the article, and i immediately felt like defending myself, and others who are in a business where flat-fee pricing isn't practical or doesn't feel like its an honest way to charge clients.

  flat-fee or not- if you are being payed to do a job - you ARE a commodity.

  when i do an hours skilled work, and get paid for it, i do reward my clients, and myself. if charge a flat fee, and the job ends up getting done in half the time, but my flat-fee is based on the whole time, i reward ME and take advantage of my clients. if i charge a flat fee, and the job ends up taking twice as long, i get screwed, and my clients get a big reward. that is, in the business that i do.

  as clearly pointed out by commentators, flat-fee AND hourly methods are both viable, valuable and profitable. it all depends on what your business and service is.

  an article that addresses those of us who are in a type of business where the flat-fee model will work better than an hourly would be more helpful, and avoid all the sputtering in the comments.

  for some business - time is money. hourly rate. for some business - the job is money. flat fee.

  example: paint a room. time is money. hourly rate. key-note speaker. job is money. flat-fee.

  i actually use both methods. depends on the service. and the client.
• 

  Posted by Mr. Dennis Ford Jr, Houston, Texas | May 14, 2010

  This is Great timely Information that Always never goes out of style.
• 

  Posted by Ronald Johnson, Guelph, Ontario Canada | May 14, 2010

  Amy, I enjoyed your article and all the comments, questions, and opinions it raises. I've had a value-driven fee structure for years. All of my students pay a monthly fee. Of course, because I meet with most clients the same number of hours per week, they often do the math themselves and simply divide to calculate "the hourly rate."
  When one of them raises the issue of hourly rate (e.g., why do you charge more per hour than another service) I remind them that my service is personal and directed solely to the benefit of their child (or sometimes themselves in adult students). Also, I don't charge extra each month for new books, resources, phone calls, letters to schools, etc. I am always available to discuss worries or issues. Those are valuable services for which they pay no extra. I also remind them that mathematically, one shouldn't simply divide the monthly fee by the 8 sessions provided because I am working before the student arrives and after the student leaves on his/her file - marking work, preparing the next session, writing his/her journal and monthly report, etc. Most clients respect the pricing after such an explanation. However, there are still flaws. I am working on making sure that potential clients value the pricing method (and cost) before bringing up the incorrectly determined "hourly rate!"

  Thank you again for an interesting, thought-provoking article.
• 

  Posted by Amy Harcourt, San Francisco, California | May 14, 2010

  This conversation is rich and rewarding. Clearly, how we price our services has great meaning, personally and professionally, for all of us.

  I want to clarify a few things.

  First, we all deliver value to our clients. I would never want to suggest otherwise.

  I believe everyone has to find the pricing model that's most comfortable for them. In my article, I shared an approach I feel strongly about and advise everyone to consider. However, it's advice and only advice. I would hope everyone would weigh it carefully and then decide if or how to use it.

  Value-driven pricing can take many shapes and forms. It's not simply one flat fee for your work.

  You can break your fees down into chunks, by phases of a project or by specific deliverables. Having several smaller pieces, each with clearly understood objectives, makes accurate quoting much easier.

  You can also take a variety of services and value-laden enhancements and offer them as a package. You can tier these packages so your clients have choices and can upgrade or downgrade depending on what's most useful to them

  These all involve some form of flat fees (vs hourly), but not necessarily a single flat fee that's intended to cover all of the work.

  With any kind of flat fee approach, it's really important to spell out the assumptions (all the knowns that you and your client agree upon) and indicate that if the scope of the work goes beyond the current assumptions (the unknowns that always crop up), you will provide a separate quote. This covers you (and your client) for all that could go wrong (and right!) that would change the landscape of the work.

  Most important clarification of all: I'm proposing a pricing model that stretches our way of thinking. It's not the be-all, end-all for everyone. But it does challenge us to examine our assumptions and entertain new ways of doing things.

  The dialogue here has done that for me. And I thank you.
• 

  Posted by Marc Passarelli, Paramus, New Jersey | May 14, 2010

  I keep coming back for more! Just like no two clients are the same and the solutions for them, it only seems appropriate that pricing and how we arrive at it should be custom too, at least for us it is. Which is why we have a flexible model for all cleints and determine the fit for each.

  The biggest challenge for us with the hourly model is for designing new graphic identities, brands, or even what client's painfully refer to as "just a logo" ugh. After 24 years of experience in marketing and design, if I am able to think a client's design solution (after our normal research and collaboration) at an instant while sitting at a red light, or showering, should I only be paid for those 2 seconds of time? I think not. We would have gone out of business a long time ago if we priced certain jobs hourly. Obviously, each situation is indeed different / custom/ and must be appropriate! Thanks Amy!
• 

  Posted by Roy Pyatt, Vancouver, Washington | May 14, 2010

  Amy,

  I am a practicing attorney in Vancouver, Washington. Pricing for legal services is more often than not based on time spent. I am comfortable with value-based fees when the real "value" is less than the time spent. I do not feel comfortable with value-based fees when the value exceeds the time spent. I suppose time spent can be relative. It could consist of the actual time working on the client's project. It could also be defined as time spent working on the client's project plus time spent gaining education and experience necessary to handle the client's project. I suppose there is merit to both definitions to some extent. However, at the end of the day, one can only arrive at a fair "value" based in large part on time actually spent working on the project; otherwise, I think we run the risk of becoming unethical and greedy.

  Roy
• 

  Posted by Brad Miller, Chicago, Illinois | May 14, 2010

  Marc...I know just what you're talking about. A branding project would be the most likely canidate for me to quote a flat fee. Still, I'm not a flat-fee guy when it comes to branding. I know that is a project where many designer have a set price to get in the game.

  Even if you have 2 seconds of brilliance that the job will flow from, you spend hours on research, sketches, layout. You offer alternative design comps for the client to choose from. You present color options, you develop a book of standards.

  Sometimes a client will not care about my 15 years of experience and reject my brilliant ideas. Sometimes they just change their minds and don't get it. Sometimes a client will want to see extra color options and point projects in the wrong direction.

  I'm not in danger of going out of business because I haven't figured out how to charge clients for more that the time I spend. Actually, I have...They're called employees.
• 

  Posted by Nehal Rupani, Ahmedabad, Gujarat India | May 15, 2010

  Hey Amy,

  Thanks for sharing wonderful article. I really like approach of "Value base charging method" and will accept for all my clients from now onwards.

  I am sure if i adopt these my clients will come back to me for sure.

  Thanks again for wonderful value base article
• 

  Posted by Glenn Mattsson, Santa Rosa, California | May 15, 2010

  A value-driven fee structure is not the same as a flat fee. Those who keep using the terms synonymously should do themselves a favor and do some research on it. You may learn a few things, and though it may not work for you in your own situation, you'll at least gain a better understanding about what some of the differences are.

  Even though an hourly pricing model may work better for you, you may develop a better sense of the skills and value you bring to clients and reassess your own pricing structure. Who knows, you may even have an Aha! moment and become a convert.

  Obviously, Amy's article has been great at getting people to think and has triggered a lot of discussion. The key points she makes around the ideas of ROI, expanding your earning potential, and not becoming a commodity are so important, you're doing yourself a disservice by not digging into it further.
• 

  Posted by Brenda Bernstein, Madison, Wisconsin | May 15, 2010

  I'm quickly becoming a fan of flat rate or packaged pricing! I started with flat rate pricing for my resume and cover letter services, and it is the fastest-growing piece of my business. People are comfortable paying when they 1) trust the referral source and 2) know their total outlay up front. I started with an hourly rate for professional bios and got no clients. Changed to to $150 flat rate and now get clients (some of them take way less than the time I estimate!) I am about to change my rates for college essay services to flat rate fees as well, on a per essay basis. I know the average number of hours that gets spent on a project, so I'm comfortable that sometimes I'll spend less time than projected and sometimes spend more. The clients are always satisfied because they get the service they paid for, and billing is a LOT easier because there's no estimating, counting or adding on of hours. Clients just pay and then get the service.

  Also note: If anyone is paying independent contractors, flat fee is the way to go for paying them. Otherwise you risk being audited for having what amounts to employees.
• 

  Posted by Monika Kristofferson, Lake Stevens, Washington | May 16, 2010

  Thank you for this helpful article-it came just at a time that I've been working on moving away from hourly rates!
• 

  Posted by Amy Harcourt, San Francisco, California | May 17, 2010

  A number of you have mentioned that this article was well-timed; that you're interested in changing your pricing model and would like to learn more.

  I'm writing an article now on how to apply value-driven pricing. It may not be for all, but for those of you who are thinking about moving away from hourly pricing, please watch for it.

  My friend Michelle, a personal trainer, has offered to be the case study. Seeing how this applies to her business may help you determine how it might work for you.

  More to come....
• 

  Posted by Maulitta Brown, Bothell, Washington | May 17, 2010

  I'm a professional organizer and trying to figure out how to go from hourly to value based pricing as well. This is very helpful. Thank you!

  Maulitta Brown
• 

  Posted by Vicki Kunkel, Chicago, Illinois | May 18, 2010

  You are SO right!! I've been in business for 14 years, and I have NEVER given an hourly, daily, or even monthly rate. It's strictly per project!! The odd thing is: I've never even been asked for an hourly rate.

  At the start of this year, I wrote a blog post predicting that one of the changes we would see in 2010 is the death of the hourly rate for professionals such as lawyers, ad agency professionals, and training experts. The reason? The economy. As companies belt-tighten, executives are demanding "per project" fees and scoffing the (often exorbitant) hourly fees of law firms and large ad agencies. For budgeting purposes, they want a single project fee. (At least that's what I found in a survey of Chicago-area businesses that I conducted back in late December, 2009.)

  People will always pay for value. But when you charge an hourly fee, you are turning your services (and yourself!) into a commodity.

  Great post! I'm excited that I stumbled upon this blog! I'll definitely be back to read more! :)
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  Posted by Daniel Apostolov, Sofia Bulgaria | May 18, 2010

  Thank you for this article :)
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  Posted by Amy Harcourt, San Francisco, California | May 19, 2010

  Many of you expressed interest in trying value-driven pricing for your businesses, but weren't sure how to go about it.

  I've just published an article that may help you. It's based on a B2C example, but the principles hold entirely true for B2B.

  You can find it at:

  http://biznik.com/members/amy-harcourt/articles/how-to-increase-revenues-with-value-driven-pricing

  Thanks!
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  Posted by Brad Miller, Chicago, Illinois | May 19, 2010

  I've done my research and I know what value-driven pricing is all about. I call it flat fee pricing not out of ignorance, but out of honesty. I get it. I'm not missing anything.

  It's not a good fit for every business and every situation. The world is not filled with companies the use the the value-driven model and the rest who "don't get it."

  Also, as a company that bills by the hour I don't appreciate the implication that we don't provide a value to our clients or that we've turned ourselves into a commodity.

  MANY COMPANIES ON HERE SHOULD BILL A FLAT FEE BASED ON THEIR BUSINESS. VIcki Kunkel has been in business for 14 year and only billed a flat fee. Perhaps she knows what she's doing. I wouldn't suggest that she "doesn't get it." Please stop suggesting that I don't understand something.

  Only in certain situations does it make sense to set up a retainer agreement or take on a project for one lump sum...for my company. Additionally, It would be a very bad idea for my company to work this way based on our business, our clients, our competition, and our potential clients. Again, I'm not suggesting everyone needs to charge by the hour or they "don't get it."

  Don't value pricing is your religion and anyone that has not seen the light is going to Hell (or our of business). If a flat-fee is the way to go, go for it.
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  Posted by Vicki Kunkel, Chicago, Illinois | May 19, 2010

  Brad:

  I apologize if you misinterpreted my comments. I certainly would never say another business person doesn't know what he or she is doing, and I don't think I DID say that.

  When I stated that if people charge an hourly rate, they are turning their businesses into a commodity, I did not mean that your business is not a good business, nor that your business doesn't offer value. I worded that poorly and, again, I apologize. What I meant to say is that in the eyes of your customers, you COULD--COULD set them up to grind you on price. If they think you're hourly rate is too high, then they'll likely try to find someone else who can do it lower --even though you do a better job. Then, they'll come back and grind on price.

  Again, I am not saying ALL businesses that charge an hourly rate run into the price-grinding problem. But I have some colleagues who used to charge by the hour, and switched. Most (not all, but more than 80%) have found customers thought their service was more valuable.

  What do I mean by "valuable"? Well, there's only one way to measure that in my business: do the client's sales and revenues or increase? (Again, this is not the case in all industries, as not all things can be measured this way.)

  Let me give an example:

  I provide a money-back guarantee to my clients, and all of the programs I do guarantee a direct, measurable, bottom-line return on investment--the amount of which is agreed upon before my team even starts a project. My fee is always lower than the guaranteed return. I can do that because I know my programs work. (And...NO...I am NOT saying that someone who charges by the hour has a program that doesn't work. I'm just referencing my own experience, and speaking ONLY of my own products.) The only time I did not offer a flat fee is when the client balked at my fee. I offered him an option: Okay, no flat fee. But I get 10% of any sales net revenue increase post-training for the first six months. He thought he was getting a deal and jumped on it. (His company sold smart phones, and this was a dealer/vendor training). In the first three months, sales exceeded $600,000 across his vendor network. My take was far higher than what my project fee would have been. The next time I did a training for his company, I said I wanted to do a percent-of-gross-revenue-improvement again. He said he would only consider a project fee. LOL!

  I bring this up not to brag, but to make the point that sometimes you can make a lot more --and produce exceptional results for your clients -- with a flat fee or percent of sales agreement. If the client agrees to a flat fee, and if a vendor meets the company's ROI goals, everyone is happy, and everyone makes more money.

  True, this structure works for MY particular business; it may fail miserably in other industries.

  I am only basing my comment on my 14 years in business. As you pointed out, I must have at least a little bit of a clue about my clients; otherwise I wouldn't have been profitable for all of the 14 years I've been in business. (And, just in case you're wondering, I am single and 100% self-supporting-- I have no spousal income, and never took a dime of VC or other funding

  Again, I sincerely apologize for upsetting you. And thank you for pointing out to everyone in this forum that there is no one right way to do ANYTHING in business. I don't think that was the tone of the discussion; I think the forum was merely offering an option that some folks may want to consider to see if it MIGHT work for them. But I can certainly understand how some readers could be offended.

  Hope you have a great day!
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  Posted by Michael Hartzell, Seattle, Washington | May 23, 2010

  Yep, No one likes to "rent' another person with open ended "maybe".

  On the other hand? As with any hourly rate person, having a "just in case" there is add on, changes and re-planning? Having something up front that defines a calculation for how much will cause pause and pondering and evaluation of the importance.

  thank you for this.

  Guerrilla Marketing Ideas that Rock!
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  Posted by Stephen Lalla, Candler, North Carolina | May 27, 2010

  Excellent positioning strategy! Will share with within my professional network and begin implementing it myself. Had stuck this article in my Read Later folder but glad I read it when I did as it will greatly benefit my business.
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  Posted by Amy Harcourt, San Francisco, California | May 27, 2010

  Thank you, everyone, for your comments and for continuing the dialogue. It's so good to see.

  It's funny how the I'll-read-this-later pieces are often the choicest nuggets. So glad this one found its way to the fore.

  If anyone's looking for more on how to do this, check out

  http://biznik.com/articles/how-to-increase-revenues-with-value-driven-pricing

  I'll be doing another piece soon on proposal writing to show how to line up the value of your solution so well that the fees quoted make perfect sense to your clients.
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  Posted by Glenn Mattsson, Santa Rosa, California | May 27, 2010

  Excellent Amy!

  I'll be looking forward to this.

  Best regards, Glenn
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  Posted by Alan Boyer, Liberty, Missouri | May 31, 2010

  Amy

  As a business coach I've faced the same issues around charging by the hour or charging for a specific program with a specific result. But when you trip across the answer you'll never go back to hourly rates.

  1) People buy results, and they buy VALUE -- so when you sell yourself hourly your customer is at risk that X hours won't deliver the results they want, or they keep getting charged more and more hours without results. But when you sell them a results based . . . you'll get this for this many dollars they'll jump through hoops to get your services. Of course, you've got to be good at delivering and you can structure something that delivers all fo the time, right?

  2) But the other side of that coin is that I'd rather be making more, MUCH more by the hour by structuring my own business to sell those packages I mentioned above, and not be focused on "filling my hours" and charging by the hour.

  If your prospects believe that hiring a consultant or coach should be so many dollars per hour, when you go head to head with that thought you won't win. You'll always be negotiated down for lower prices than the next guy. But when you sell results that are VALUABLE price does not become an issue.

  Also, restructuring what you do where you generate more with less effort will work far greater than continuing to do what you've always done (selling your hours) and expecting different results.

  For instance, selling coaching by the hour is a waste of time, at least if you want to get paid what you are worth. But selling a target result in a package will work 10 times greater than selling an hour of coaching.

  But, then there are still greater ways. For instance, selling mastermind group programs with a specific result results in me making 5 times what I make by the hour while doing one on one coaching. And help 15 times more people for the same number of hours. But that's only the FIRST step in the right directlion.

  I started a marketing forum for only $39 a month and have hundreds signed up, with that I make many many many times more by the hour, and have reduced the time I work on my business down to less than 5-6 hours a week while more than tripling my coaching income.

  And, that still isn't the final answer. Recently I tried another approach and within one weekend workshop make what most coaches ever make in a whole year.

  It all boils down to the fact that if you are willing to "sell your hours" then that's all that will ever happen, and even if you do succeed at that, you'll max out your hours, and likely get burned out working so hard. Other's just plain fail and never fill their hours.

  But, backing off of "selling your hours" and looking for a way to structure your business to make more in 4-6 hours a week will lead you in the right direction.

  Alan Boyer The $100K Coach

  A Shortcut to your first $100K (2nd, 3rd, or more) for small business owners within a couple of months
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  Posted by Marie Haggberg, Seattle, Washington | Jun 11, 2010

  Thought-provoking, thanks for posting this.

  In my experience, flat-fee is extraordinarily difficult to implement in software design, since knowing what the client wants is an iterative process. Often for custom development, delivering one feature makes the client realize a related second feature/function would be useful as well. I typically will spec out a proposal, using a low to high range, and will walk the client thorough estimated costs for changes and adds as the project goes on.

  It's also very true, as you point out, that hourly subcontracting has its own costs, but you can work around this by carefully calculating your administrative overhead costs when establishing your subcontractor's hourly rate.
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  Posted by Merri Taylor, Aurora, Colorado | Nov 30, 2010

  Hi Amy! Though this article was written in May, I just stumbled upon it and it is very timely for me. I'm a Virtual Assistant who, as an AssistU graduate, was trained to follow a retainer fee structure which keeps me focused on tracking my time. I am overly conscientious about being efficient and effective when doing client work, careful to stop the clock when I'm learning new tools to do the work, etc. I'm guilty of shaving off 10 minutes here, 20 minutes there in the time taken to complete a task because it 'felt' like it took too long. This is devaluing my time and not helping the Virtual Assistant industry, because a client will question another VA on how long it took her to accomplish something when she is billing her time accurately.

  I know other VAs who have switched to the value-based or package pricing and another potential client raised this issue with me recently. It doesn't matter how efficient and fast I am, potential clients are thinking only of the time it will take me to accomplish a task when the fee structure is based on my time. A retainer, after all, reserves so many hours per month and you must track your time to deduct against the retainer. So I've been considering a value-based model but don't know how to go about it. Different clients have different needs and I'd rather have something predictable and ongoing, in place versus having to come up with a quote per client. I see you added another link on how to figure your value-based pricing, so I'll go take a look at that now.

  I will confirm that another VA who recently switched to packages told me it was the best decision that she's made for her business. There is no more haggling over hours or questioning the time it took to complete a project.
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  Posted by Sharon Larson, Davenport, Iowa | May 31, 2012

  You got me thinking. Thank you. Usually, it's me who does that to other people. ;)

  I'm going to have to shift my current way of thinking to see how my clients and I would benefit from this. I must admit, I like the ease of just saying a flat hourly rate. But...as I sit here and think about it, the idea of setting a price based on the end goal is alluring.

  Creating packages might be a great idea. I could see that working. Just thinking out loud here, it's possible to say that for $??? I will deliver to you a focus point, and plan of action, 24/7 support, etc.

  Thanks for getting my brain turning!