Firms Are Moving to Value Pricing over Hourly Billing. Here’s a quick explanation of the difference between the two.
The thing that differentiates a value-pricing business model from an hourly billing model is value pricing starts with the client and works backwards. This method also allows for offering the client options. This doesn’t mean that you quote a range to your client. It means giving clients silver, gold and platinum (or whatever levels you choose), and then letting them decide what their price-value trade-off is (which, by the way, is never shortcutting quality performance). So it’s basically the value that determines the price. And then it’s the price that the firm has to look at and say, “Can we invest in the resources that it’s going to take internally to produce this work at this price and make a profit we can live with?”
Then you decide if you want to do that work or have that client. It forces you to know your costs before you do the work, not after. You have to do the cost accounting upfront like Toyota does. They know how much it’s going to cost before they build the car because they’ve already set the car’s price before they build it. It’s not set by tallying the cost at the end. That’s not how sophisticated pricing works. It works by the value determining client price and then saying, “At that price, can we invest in the cost?” That’s the big change on how those two business models contrast.
Many more firms are now experimenting with value pricing due to time-saving technologies sometimes resulting in less profit on the hourly method.