In the Age of Subscription Pricing, Can Value-Based Billing Return?
In our line of business, we have always worked under the premise that what we deliver to clients is value. That value comes in no small part through the software solutions we provide, but it really stems from the results accomplished by the client with the help of our consultants and the relationship that is formed along the way.
Value comes from understanding and cooperation; understanding the client’s needs and working together to deliver results that bring great value to their organization. Enter value-based agreed pricing.
Value-based pricing offers an experience based assurance by the consultant that they are confident in delivering the value for the estimated price at their own peril. In industries where delays can be costly and technical expertise does not get communicated upfront, this offers clients a level of transparency and accountability from the consultant that generates a higher degree of confidence and focus on delivering results. It does require trust and commitment that are not necessary in hourly billing.
Yet clients that deal with any consulting industry are used to invoices made up of billable hours. With origins in the 1960s, charging by the hour is the standard for most service professions like accountants, lawyers, and business software consultants, but is it the best way to do business?
Hourly billing is the practice of placing a value on the time expended by a service provider based on expertise, experience, and reputation. Although practical, it does not properly reflect the relationship between a business, its clients and the value that it is providing through services rendered. It is however, useful in its simplicity and objectivity as it allows for clients to quickly compare different service providers up-front without placing much effort into the initial discovery phase of a project.
Here are some of the characteristics of Hourly Billing:
- Simple and mainstay, allowing for work to begin immediately and for comparison between service provider alternatives.
- Client has control and work can be started/stopped according to client’s cash-flow.
- Divides time into equal parts, although not every hour of work is equally productive.
- Does not encourage professional improvement or innovation, efficiencies, technological advances, nor does it align client’s and company’s objectives: clients want the work done faster while the company benefits from extending the work.
- It focuses on efforts, inputs, hours, costs and activities, rather than outputs, results, and value.
- Fosters a production mentality, not cooperation or entrepreneurship.
- It does not establish total costs upfront.
Clients do not buy hours, they buy value. So why not charge for what businesses will actually deliver? Value-based pricing focuses on the value that is created by services provided by a business. Simply put, it’s price based on the worth of the work done. So if a company is in a situation where developing a project to implement ERP has value of $500k as compared to not developing the project, it can work with providers with a clear budget that maximizes its results.
Having the end result in mind allows it to develop a project with a fitting scale and time frame for both client and service providing company. In this customer centric and collaboration approach, emphasizing a solid understanding of the results both client and provider are going for. So even though costs, market prices, and competitors’ rates still play a part, the value is determined inherently by the project, and a fixed price is agreed upon.
- Upfront price transparency for clients, ensuring interest of provider are aligned with client objectives and giving incentive to reduce costs and beat deadlines.
- Encourages innovation as businesses look to find new ways to lower costs and improve efficiencies.
- Price quoted will appear high in isolation leaving room for competitors to underbid with alternative projects.
- Up front workload may be discouraging to uninformed clients.
- Not as flexible in nature as project is established upfront.
- Outlines service requirements and execution plan upfront.
- Emphasizes shared responsibility and risks during initial phases of projects.
- Promotes continuous communication between firm and clients, key for building better client relationships and returning customer base.
- The better a business becomes at providing services, the more it profits.
- Forces businesses to become better project managers and to project that confidently.
Even with all the advantages of value-based pricing, hourly pricing is still the standard used in most service or consulting industries and changing standards take time. At The Answer Company we have often considered and discussed the possibility of operating with a value proposition and we would love to hear what other professionals’ experiences with either of these strategies have been like in the past.