I'm considering moving over to a value-based pricing model.
Right now I charge hourly. But this has some downsides:
- If I want to research new tools, I won't be able to work on the project. It feels like I'm wasting time not working
- I'm not motivated to work fast(er), because that means I would kill my own wage.
- timesheets take up a lot of effort and micro-managing each hour or estimations of a new project (which are always off, because it's an estimation, right) take up so much time and effort
- the longer the project, the better for me, the worse for the client. If there's a nasty bug or something unexpectant (which always happens), clients become unhappy.
- my income is capped. Earn more means raising my hourly wage, which can become a deal breaker for clients.
- I'm being compared to others for my hourly rate, instead of value I can deliver
It's a business deal and the outcome should be that all parties involved, should somehow have an improvement on whatever stake there is (money, sales, product, etc).
So how to move to a new model? There is fixed pricing, which means I'll offer a product, you pay me and I'll give it to you. But this often doesn't work for me, as most of my work is quite custom. I don't deliver "a standard website with 5 pages".
And there's value-based pricing.
Why is this better for both parties?
- I can earn more by finishing work faster.
- I'm incentivised to learn new tools to make me produce faster or buy a code snippet. I wouldn't have bought the code snippet before, because that would not just cost me money, but also kill my "hours".
- less overhead on timesheets, etc. The client doesn't care the actual hours I put in, the client only cares about the outcome.
- I can create without being afraid of going over the budget of the client
- The client doesn't have any financial surprises
But there's a new challenge. How should I charge the client?
Understanding the business of your client is the first and most important factor. Why does the client want to hire you? They are looking to improve their business of course!
1. How many sales do you currently get each month? 5 times
2. What is the average sales value of item X? 2000,-
Calculate their earnings: 5 * 2000 = 10k a month
Now explain how the new site can help them sell more items. Maybe 2 sales a month more. Which is 2 * 2000 * 12 = 48000 revenue on top.
Now charge between 5-10% of this price. Make the client understand it's a worthwhile investment.
Make the client understand YOU are an investment, not an expense.
I immediately feel there's a new challenge in how I should communicate with my clients. I have to justify the price and persuade them this way by talking about the value I can deliver to their business. Before with hourly based pricing, I would just show the number of hours I could do it in and then they magically trust me I will do the job. Which is kind of weird of course.
Biggest take-aways for me:
- I do, but clients don't care about the hours
- change the way I communicate with clients
- clients don't get penalised for your misjudgements or miscalculations
- you get rewarded for efficient work
some good resources used for this post: