Like everyone in advertising and digital marketing we are taught that our business is based on an accounting principle known as cost plus. Take all your costs (salaries + overhead) and add your profit. Pretty simple.
To figure out what to charge your clients, you estimate the hours to do a job and apply your billable rate. If you’ve estimated hours correctly and your billable rate properly encompasses your costs and profit you achieve your business model.
Under this model companies have a billing capacity, which is a formula to determine the revenue your company can make in a year. Cost plus billing assumes labour is the primary unit of value in the system. You can only bill as many hours as you have. This means professional services firms can only ever add people or increase their rate to grow.
Very early on Geoff and I struggled with some of these ideas. For starters, we never tracked time at Teehan+Lax. We learned a long ago that time sheets were a fiction. People just made them up. I know because for years I made mine up. What’s the point of a time sheet if the data is false? It’s not telling you anything. Don’t do them.
Secondly, we created a simplified rate card. We only had two rates: one for Partners and one for Associates. We did this because we were sick of agencies having these long rate cards that confused clients and created unnecessary complexity.
But since we started there was one idea that we could never reconcile. There was very little relationship between the time we spent on our projects and the value we delivered. We could see things that took very little time having big impacts in client’s business. Our business model wants projects to have more hours since we are financially motivated to do so. But, we are a company that values being nimble and very efficient. There is very little incentive to be the latter when your business model is the former.
At the very first Toronto BarCamp, Jay Goldman, Michael Glen and I discussed these issues on how to get clients to pay not for the time but for the value. We couldn’t figure out how to do it and the discussion died.
Without a better solution we relied on cost plus billing and estimating hours to determine pricing.
Late last year I stumbled across the writings of Ron Baker. Ron is a former CPA who is one of the most vocal and main proponents of a movement in professional services known as value pricing.
I read his blog and then bought his book Pricing on Purpose. The book was a revelation to me.
Ron lays out a compelling argument as to why cost plus billing is not only wrong but economically flawed. While there are many reasons it is a flawed system, the biggest reason is that it misaligns the incentives for clients and agencies. In any system where hours are used to determine the price of work, its your incentive to convince your client it will take many hours and their incentive to convince you it won’t take that much.
If you are cost plus billing you are selling time. We didn’t get into this business to sell time. No one at teehan+lax became a creative professional to sell time.
Last Wednesday we sat with Tim Williams of Ignition Consulting to begin the process of moving away from the hourly rate in our business. It was an amazing day and we learned a lot.
The next day we removed our hourly rate from our site, our marketing materials and our vocabulary. We do not sell hours here and clients will no longer be able to buy them from us.
written by Jon Lax
Great idea! I’ve noticed a big rift between our day rate based billing, and how much we actually spend on a project. We strive to spend less time in design and development, and very rarely are we able to actually peg down the number of days spent by the end of a project because we don’t typically put in full days.
Perhaps switching to an hourly rate would help with this, but having read this post then perhaps we need to be smarter still. I’ll look into getting a copy of Pricing on Purpose, as it sounds like a great read.
Oh and unrelated, this textarea needs a tabindex attribute.
Could you talk to the point of ‘how’ you moved away as well? How did your team get clients, potentially ones used to the cost plus model, to switch to this value pricing model?
Cheers.
Good on you guys. I think you’ll gain some real support and traction from this from both outside and inside.
A brave move Jon – bravo! This is something I’ve been struggling with as we’ve been setting up Rethink Toronto. Coming from a product company (GigPark) I know value is all about results. I’ll have to read Ron’s book but it strikes me that the more you can align client and agency incentives around results the better off everyone is. Agencies like Anomaly and Droga5 are trying to do this in the advertising world. I’ll let you know where we net out with Rethink Toronto.
Pema
Partner and Managing Director at Rethink Toronto
I think it’s a great idea but client’s have to also be prepared to buy (pun intended ;) this type of model.
I’ve found that for strategy and concept development this works great. For execution it becomes more problematic as it becomes very difficult to manage scope and phase dev over time.
I’m thinking a hybrid model might be the way to go. Still thinking on it. Would be interested in hearing how it develops over time and how clients love or feel challenged by it.
Very interesting shift, Jon. I’ve long thought about moving us down the same road, but have never taken the time to step back and actually plan, then commit, to the transition. Are you going to document some of the process and notes here for us to follow along?
Don’t throw away the time cards. Not knowing how much time it will take to deliver value will bite you in the ass eventually, no matter how you charge.
Congratulations on making a hard decision. You’ll be gratified to know that not only are you making better economic decisions, but you’re also making better *social* decisions.
I researched time use and time tracking in design agencies for my PhD dissertation. The essential finding is that time tracking is a fiction, as you say, and that the real reason it continues is because it instills “time thrift” in workers. It also transforms time into a kind of Franken Food — electronically tracking time makes it nothing like how time is actually experienced.
Feel free to check out my old project blog: http://agencytime.wordpress.com/
And the following academic articles that I published:
http://www.cjc-online.ca/index.php/journal/article/view/1981
http://tas.sagepub.com/cgi/content/abstract/18/2-3/284
I applaud your decision; it’s the right thing to do for good work and creativity.
Kudos Jon. I’m not surprised you guys have the wherewithal to make this step. From what I understand, this gives you guys further incentive to work with clients who will benefit from innovation as oppose to man-hours.
Looking forward to more details as to how you’ll effectively market and structure value-based pricing. Ron’s book is on my reading list.
We are a small digital studio based in Brazil, and we are always trying to implement a fair system to evaluate what we do and what the client gets (its really hard as you know). The post is great, really inspiring, I think it was something I had to read to start moving things in that direction too.
I still have some doubts, though, for example: how do you present that to a client? How will you put that on a proposal? I mean, isn’t this concept too abstract for someone who has always been dealing with numbers, hours, etc…?
Very interesting discussion. Having come from a flawed timekeeping model at a global agency, my business partner and I decided to eschew billable hours and rates when we started our agency. This worked well when we had three or four people but became problematic when we started to grow and realized that timesheets done properly could help us provide evaluations for staff and helped to demonstrate to clients if and when we were overservicing their accounts (which we often were). But you make two very good points – poeple make up timesheets and clients aren’t that interested in the hourly detail. Almost all of our business now is based on project fee and gone are the days where you could simply send a bill based strictly on the hours worked.
It’s an interesting topic – and something that many of us have wrestled with for years.
I’d love to hear how you’re planning to price, how you’re planning to manage against price, and how you’re planning to evaluate profit and success.
Yes, makes much sense; we’ve been billing on a project basis for over a year and seen an improvement in delivery and client satisfaction as well.
At some point it can’t always be the accountants running the business.
That’s really the difference between equity and service. You provide a service to someone because they believe they need it, you also believe they need it, but they’re capturing the value. If you have no way to measure or capture the value you create I would stick to that hourly (or daily) rate.
Otherwise, I would read The Shared Risk Guide from the British Design Council:
http://www.designcouncil.org.uk/About-Design/Business-Essentials/Business-guides-for-designers/Royalties-equity-stakes-and-shared-risk/
But remember that without risk there is no chance of capturing value. An hourly rate is an insurance policy against the real world.
Hourly just never really made sense to us either … you essentially devalue your own services with every efficiency you put in place; efficiencies typically acquired through years of hard work and experience.
The value has always been on the success of the deliverable, not on the time provided — so why charge for the time when they hired you for the service?
Simple supply and demand should help determine a billing structure; one that adequately and appropriately grows with your business and client list. It’s the most successful, most responsible, way to ensure you can adapt to both growth and its inverse.
The more simply reality is that true creatives are always working; we’re thinking of a grid system at the gym, a color scheme over dinner and the perfect imagery while in the shower … if we billed for every thought that went into a project, it would be astronomical. Great creatives don’t turn “it” on at 9 and turn “it” off at 5 … you’re always on.
Hi Jon,
Congratulations on this decision, and I’m glad the meeting with Tim went well.
I know there are skeptics commenting here about ridding your firm of timesheets, but don’t listen to them. More and more firms are getting rid of this ridiculous measurement, as it’s a lagging indicator, is not truly cost accounting, and is not predictive of firm performance or customer results. It’s also the wrong measurement device–similar to plunging a ruler in your oven to determine its temperature. There are better methods to replace timesheets in a knowledge firm.
For those interested, you can read this summary blog post that has many more resources on how firms make this transition:
http://www.verasage.com/index.php/community/comments/ask_verassage_all_about_t_a/
As you know, VeraSage Institute is dedicated to burying the billable hour and the timesheet across all professional knowledge firms. It can, and is, being done around the world. A firm simply can’t price for value if it is tracking time.
Congratulations again!
Regards,
Ron Baker, Founder
VeraSage Institute
http://www.verasage.com
Twitter @ronaldbaker
If the project is a nice tidy package, and you can estimate well, then give it a package price. People are used to buying things with a fixed price.
But if the project is susceptible to “scope creep”, or an unknown factor, then make the additional or out-of-scope costs hourly. That way you won’t have to grossly overestimate to cover the unforeseen.
To estimate well, you will, at some point in your career, have to keep timesheets. Otherwise, you are just “blueskying” your costs and will find sneaky ways to justify billing additional real costs, or, you will become a professional cut-rater and will live on a succession of low-paid, browbeaten hourly workers.
Great post. We are on the same page!
Changing the mindset from “hourly rate” to “value pricing” is a hard process but one that makes perfect sense to reflect what we really do as a business and its worthwhile.
I will follow the blog and read the book you recommend – thanks for the links.
I do disagree with not keeping time sheets. I believe some sort of measure, even simplified, is an important management resource to make better business decisions… but maybe that is just my analytical mind speaking up.
Cheers,
Telmo Carlos
This article was particularly interesting to me, as I just happened to blog exactly the opposite of what’s said here. :-)
http://www.thisux.com/articles/on-the-pricing-of-service-work/
Don’t get me wrong, I’d love to find a better way to charge, in order to remove precisely the limitations you pointed out. And if we were, for example, only designing logos, I could imagine how it could work.
But, in a firm that does everything related to conceiving, designing, building and operating a product, I simply can’t find a consistent model for pricing other than hourly. (Maybe I should read the book! :-)
A flawed notion is that design is a service so we should bill by the hour just like the development shop down the street…
You lose out on creativity once you put a time/service stamp on design.
Glad to hear about the transition…it would be interesting to hear *how* you made the transition.
I’ve read Pricing on Purpose. Such a great book. I recommend it to all!
I guess I also need to read the book since I also find it difficult to sell clients the idea of ThisProjectCostsXAndDontAskWhy. This may not be so difficult for things like, say, a logo but it is complicated for me to give a number for a kind of project I have never done before but that I know I can do.
@Matt Henderson… why does pricing have to be consistent?
Value is subjective. Every client will determine value differently. If we can do something that takes and hour and deliver $10 million in sales for a client would a fair price be
a) our hourly rate
b) $200,000
Any business person would gladly spend $200,000 to generate $10 million. That is an amazing ROI.
>>Any business person would gladly spend $200,000 to generate $10 million.<<
Ah. You obviously haven't spent years working for the public service where it's not that uncommon to have someone promoted for spending $10 million to generate $200,000 in 'sales'.
This is blasphemy! And very, very interesting to us.
Without doubt there are tons of problems that are “ignored/fudged” with the timesheet costing/billing process. Of course, it’s not enough to simply find the weaknesses in a process (that’s usually easy to do). I am intrigued to want to know about the possible alternatives.
I’ll follow the receipt here and check out Verasage’s blog. Thanks for sharing.
Well done! The next challenge is how to sell this concept. How do you convince clients that you’re 8 hour job is worth $10,000?
I’m struggling with this. If I’m a marketer with an idea and I want to hire a team to execute it, why would I pay one agency $10,000 (for hours) + value compensation when I could pay another agency just the $10,000?
On the agency side, if you’re accepting a lower up front fee because you’re confident that the campaign will succeed and provide a payout later, aren’t you taking a lot more risk? If you have 10 campaigns like that any only 1 of them pays of, how can you be sure that you’re covering your expenses?
As an independent designer I have often grappled with the issue of value over hours. The tangibility of design and therefore it’s perceived value is a difficult commodity to quantify, especially if your client is not selling a physical product.
I am going to follow this subject with great interest as I’ve been contemplating producing an R+D paper of exactly this topic of value of design.
I guess I’m saying thank-you, but I wish someone would write down the answer and email it to me. I’m that lazy sometimes.
Steve Price (London)
Interesting… Six years ago, I founded a creative, professional outsourcing firm (BSETC)… Sort of like virtual assistance but at a much higher technical and creative level. We’ve been billing hourly (without retainers or minimums) for the entire six years. We’ve maintained highly accurate timesheets that actually aren’t made up (we use Freshbooks to do so – amazing to track!)
I also have 26 sub-contractors on our team that I also pay hourly. This means that for every hour they work / track, my clients are billed and I’m not paying my team out of my own pocket. I don’t know how I would do that easily with an incentive-based fee or even a packaged price system.
I’ve also experimented with the idea of incentive-based billing at Successocity.com. It failed. Miserably. When people have no incentive to pay until the results are there… they take forever. The clients, regardless of how much they appeared ideal, continued to add variables and it was very difficult to propose / manage. In fact, zero of the working arrangements through Successocity.com actually worked in our favor.
We have found that hourly billing, even with us being super quick and efficient, is the easiest way to bill. Although not ideal, it is black and white for the clients and makes them get clearer before they come to us for services as they know they are paying for every single minute.
Sure, we lose out a bit since we are fast… but I haven’t found another solution that keeps the clients happy and keeps paying my 26 sub-contractors easy / cost-effective.
Interested to see how this goes.
Also, would you be able to add some sociable / share this type icons? :) I would like to share this blog post with my colleagues and it would make it super easy!
@Jon
Why does pricing have to be consistent? It doesn’t have to be. There are no rules. But when it’s inconsistent, it can lead to obvious problems.
How would you feel if you walked into a store, and the pricing of goods were evaluated on a per customer basis? You go to pay, and they want to know what you earn. Say whatever you want to say, but I promise you that your reaction would be, “I want to pay what everybody else pays.”
Another problem with “value pricing” is that you don’t know beforehand the value of what you’re going to deliver will be. And if you’re about value pricing, and it’s not your time and effort that’s of value, are you then willing to go all the way? If what you deliver doesn’t lead to $10m, or actually leads to a loss, are you going to allow them to charge you for wasting their time?
” are you then willing to go all the way? If what you deliver doesn’t lead to $10m, or actually leads to a loss, are you going to allow them to charge you for wasting their time?”
Yes I believe we should share risk.
@Jon,
But, again, the problem there is precisely what you articulated earlier — value is subjective. If you’re willing to share the risk (and I applaud you for that; I’d also be willing to share the risk in many of our projects), then you might also be willing to share in the evaluation of your work’s value with your customer. And that can be an obvious can of worms.
There are extreme example, I agree. If a company comes to you, and you’re going to build something that pretty much everyone can see is going to deliver millions of dollars of benefit to the customer, then, yeah, it would make sense to value price.
But to do value pricing as a long-term strategy as a service company, across a broad range of project contexts and scopes, seems to me very difficult. As I mentioned in my blog, one of the companies that we most admire, IDEO, grappled long and hard with issue (and there’s no doubt they have delivered some huge value) and ultimately went hourly. When they spoke about this, they said, “Sure sometimes things will be inequitable, but in the long run, it’s the only sustainable model.”
@Jon — Also, just to be clear: I am by no means criticizing your opinion, or trying to discourage you from doing value pricing. I really enjoy opportunities to discuss and debate this topic, and hear new points of view. Business is ultimately about being highly profitable, and pricing is a key part of that.
Jon, this is a really interesting model I’d like to learn more about how it pans out with your clients and their reactions, assuming you will try it with new clients or jump into it with an old one??
I’m a partner of a small interactive shop (5people), we have worked hard to figure out our rate card, however we do bill based on a single project fee so we could technically justify this ‘value’ type of billing to a degree. We work with many larger agencies and they always want to know what our rate is and how many hours we are putting towards, design, flash dev, back end dev, etc.; I feel that it would be difficult to justify the value model to any second party shop??
However on the flip side I do get the ‘we spent 1 hour on this and client ABC made $10k off of it’, it happens all the time, we’d absolutely love to get paid on the ROI or that but how to do ‘sell’ that idea to a client? I’d imagine that they’d tell you to take a hike when you ask and/or risk loosing a new client?
Love that you’re ‘breaking the mold’, I really hope it works for you and please keep us all in the loop if it does!
@Matt – I hear you. I fully expect that some pricing will be very successful and some not as much. We are prepared to have some situations where we will make mistakes.
Also, value pricing does not only mean results based. Value pricing asks us to be creative in how we price our work. To try and align our incentives with our clients better.
@April Being paid for results does take the right kind of client and the right situation. I would encourage you to learn more about value pricing. If you are fixed bid pricing you are value pricing.
As for being a supplier to an agency. I think you need to stand tough. If they want you to do something like design a site in one week. Give them a price for that. If they ask you to justify the price, just say… “that is the price”.
Do you ask a car dealer to justify how much the car cost? How many hours it took to manufacture? No you make a subjective value judgement as to whether its “worth it”.
@Jon
By that reasoning, next time your broken faucet is flooding the house, may your plumber ask how much it’s worth to you to stop it. (Just kidding… ;-P
Outstanding approach. I’m a relatively new independent UX practitioner and I continue to struggle with the whole rates concept. You’ve triggered some new thinking for me and identified some excellent sources of information to flesh out a new approach for my company.
Value pricing is a tough sell. Nobody is going to pay you for the $200,000 for the 1 hour job even if it delivers $10,000,000 in sales. Simply won’t happen, especially if they know it only took you an hour. However, clients may pay you $10,000 for a 20 hour job if you’re better than all the rest who will take $12,000 and 40 hours to do the work.
Love the topic.
@Dan I think you would be surprised how many large ad agencies and large clients that are moving to this model. It is happening right now.
http://adage.com/agencynews/article?article_id=142915
http://www.prnewswire.com/news-releases/tbwa-worldwide-names-neal-grossman-chief-compensation-officer-83802027.html
Perhaps an hourly rate can work positively both ways — clients can quantify “how much” of a given service, and service providers can cover their “cost plus” by billing accordingly. There’s some room to flex for both parties with the classic “good, cheap, fast — pick any two” formula.
Yes, the flawed assumption is that value is consistently delivered at a steady clip directly proportional to time, which is almost never the case with anything, except maybe bricklaying. As you’ve pointed out, Jon, the result is a lot of “creative bookkeeping” — fudging the timesheet to show billable hours that match the invoiced $ for the value produced.
While it might seem shady to “make up” timesheets, at the end of the day, the numbers guys need numbers, and the value guys have to produce value — how both arrive at a $ figure they can agree on is largely what the song and dance is all about… Does it matter why or how it cost what it did, so long as everyone is happy in the end?
When moonlighting as a photographer, I often face this dilemma — “Why should we pay you $X when Guy #2 with a camera will do it for 50% less? A picture is a picture.”
Is a picture a picture? Photographers would certainly disagree. Skill is everything! You’re buying talent, not a camera! But at the end of the day, most clients just want it done cheap, fast AND good… The latter being the least critical, and often expendable if someone else can offer a better price.
Billing hours is a form of insurance against all kinds of slippery slopes that can arise from trying to quantify “value” — unreasonable clients can insist that the agreed “value” STILL hasn’t been delivered (where are the numbers?) and pressure the service provider into delivering more, or doing it again to “fix” it (for free). Billing hours also effectively protects against scope creep and changing/evolving project requirements. Basically, there’s a mechanism built in to account for it that “value” is hard-pressed to prove.
Maybe there’s a compromise here: instead putting on a dollar figure on your time, focus the discussion on the value you deliver — but bill it in hours anyway.
Value-based pricing is too abstract and intangible to ever work. How can a project be accurately value-estimated up front? No one can know that, so the initial price of value is impossible to predict. AND what if you value-price the project and the resultant value to the customer is disastrous… then what? Of what value to the customer was that horrible result?
The client is already hunting for the best value and it’s the reason they will pick your company over another one, because they see or feel they are getting a better value. But if you tell them you feel the project value is worth a million dollars, then at that moment they will instantly decide the value… NOT YOU. You are forgetting WHO has the real power in deciding final value and guess what… it’s not you!
The other issue is that the cost of doing business is based on a monthly and thereby reductive hourly rate. You have to know how much the cost of doing business is per hourly, daily, monthly, and yearly figures.
Now let’s take it all a step further. Go and tell your employees that you aren’t going to pay them by the hour anymore, but only by the addition of value they provide to the company and see how many get up and walk out the door.
Value-based pricing is actually “intangible-abstract-dream-pricing” and it’s a stupid idea…so good luck with that mess.
“Cost plus billing assumes labor is the primary unit of value in the system.” Wrong!Your hourly rate determines the value of each hour, or in another way how valuable you are per hour. If you feel your work is more valuable, then you simply raise your rates to align with that value. It couldn’t be any easier.
“…your incentive to convince your client it will take many hours ” Wrong! If this is your mindset, then you are simply not charging enough per hour.
“If you are cost plus billing you are selling time.” Guess what. You can try and claim that you are not selling time, but no matter how you slice it YOU ARE! Your client is only going to pay you for your time. They aren’t going to be paying for anyone’s time when work (time) is not being spent on their project. You will not ever be able to get away with removing time from the equation.
Re: Erin Blaskie “Sure, we lose out a bit since we are fast” Ok. If you are better and faster than your competition, then that is value to your client… is it not? Your hourly rate is a summation of the overall value you provide. Your hourly rate (value) is composed of many factors: speed, efficiency, quality, accuracy, customer service, management skill, problem solving, creativity, on time delivery, etc.
Re: Ron Baker “A firm simply can’t price for value if it is tracking time.” You are 100% wrong! The value is the price per hour and the price per hour is based on value. Just because you think an idea will generate huge value doesn’t mean that it ever will. And if it generates no value or a loss for the client.. then what? Why should the client be penalized for a successful outcome, when they are trying to seek the highest ROI in every situation.
If I pay $2K for a great logo and it “happens” to help me increase my visibility and sales, then why would I want to be penalized by the provider for that “potential” outcome? If my provider says the logo is worth $10K before hand, then how does anyone know what the resultant outcome will be for my “value investment”? They don’t and therefore a value-based pricing model is totally subjective.
@RazorX All value is subjective you are right. You make subjective value decisions in everything you purchase. We make subjective decisions about the value of goods and services constantly.
There are many things in your comments that are not properly understanding value pricing. Value pricing asks that both the agency and the client share the risk and both benefit in upside. It is meant to align incentives. Trust me in all the examples I’ve seen the client benefits far more than the agency.
Clearly you don’t see the value in this approach and its obviously not for you. We have a different opinion and are going to be creative in how we price our services. I want our clients to find value in what we do and that value is not related to how much time we spend on the project.
Re: Jon Lax,
“I want our clients to find value in what we do and that value is not related to how much time we spend on the project.” Of course clients care how much time you will spend on their project. They have deadlines that must be met. Saying that value is not related to the time spent on a project is pure nonsense. Tell me how a client is going to find value in what you do if it takes you 6 months to produce one logo? No matter what you claim to believe, time is clearly an undeniable factor in value.
In Ron Baker’s book he opens with movie popcorn. The real answer is that he cleverly left out the fact that people are not allowed to bring in any food or drink into a theater. It’s not that people who love popcorn are willing to spend the rip-off price for it because it has any “value” for them, it’s because they are “forced” to pay the high price because they have no other option. If they could bring in their own popcorn from home (which is just as good) then that would be their real value option. The simplistic popcorn story is not comparable or transferable to any average business situation where clients are not limited to one choice and can take their business elsewhere at any moment if they don’t like the price.
Do this… tell everyone here how much price-value you are going to assign to my project if I come to you and say I need a new logo, a re-designed 40 page web site, an online CMS, and one dynamic contact form. How are you going to tell me a price for my project based on some dreamy idea of value that you perceive? Because I (pretending to be the client here) have previously gone to 3 other web shops and I have a good idea of the price (value) already. Are you going to quote me a price based on some lofty number you came up with based on your idea of imagined value?
You claim you have a clear approach to this elusive value pricing model, but yet you do not seem to be able to illustrate or can give a real-world example of how it would work. Even your return comments are noticeably vague.
RazorX: Ever hear of Crispin & Porter? They are doing precisely what you say can’t be done. So is Anomaly. So is Coca-Cola, and P&G, with their agencies.
It never ceases to amaze me how people can deny reality, especially when it’s right in front of them.
Ron Baker
Interesting. Though, time is the most valuable thing in life.
Thanks for sharing.
Re: Ron Baker
Coca-Cola and Proctor & Gamble are not design agencies. And no I’ve never heard of Crispin & Porter. Ever hear of AgencyNet, firstborn, 2Advanced, Group54, North Kingdom, Blitz, Blast Radius, Big Spaceship, AKQA, B-Reel, these top-of-the-world creative agencies charge by the hour.
It’s really bizarre you would make such a strange statement that charging by the hour is denying reality.
Putting aside the T&M vs value pricing approach to billing for a second, there’s another reason why you might want to track time.
If you don’t track the amount of time things take, how do you know if you have a reasonable grasp on what’s involved to create your projects? Fair play if your projects are straightforward enough for you to always know what’s involved, but most people would want to learn from previous activity so they can better estimate if something can be done in a reasonable timeframe, without working their staff too hard.
Or are you saying that value based pricing means you can put such considerations to one side?
@Mike P – For 8 years we’ve never tracked time. Not once. We’ve grown from 2 people to 30 people. We have a financially healthy business (i.e. profitable). I still look at profitability at a macro level, we just don’t do it at a micro level.
We still have scope, deliverables and timelines. We have a pretty good idea of when those things go off the rails and we mange them.
Having filled out time sheets for 10 years prior to starting my own business and running a creative dept of 15 people for 3 of those years, I can tell you that the information in them is fictitious. Tracking time never told me, what was important to a client or how the work could be better. I know it feels wrong because we’ve been taught that time is what we sell.
We are always looking to be more efficient, produce work, faster better. But right now, there is a financial penalty for us to do so. I don’t agree that you can infinitely increase your hourly rate to encompass efficiencies and value.
This idea that the more you work the more value you bring to a client is just wrong. That a 20 hour project delivers twice the value of a 10 hour project. It’s insane to me. I know others don’t agree.
We’ve done the time thing. I know what its all about. It doesn’t work for us.
RazorX:
Crispin Porter is the USA’s best ad agency, bar none. It hasn’t prices by the hour or kept timesheets for at least a decade.
I wasn’t confusing Coke and P&G with design agencies. My point is their compensation models to pay their ad agencies has nothing to do with time, timesheets, or hours. They pay based on value.
I’m very aware most firms price by the hour. You seem to be totally unaware that many agencies–and indeed, other firms across all professional sectors, from CPA to law, and IT to consulting–do not price hourly or keep timesheets, and they are highly profitable, have very happy customers, team members, and owners. How you can think that this is impossible without knowing it’s being done astonishes me.
MikeP: As for timesheets, most businesses don’t keep for a simple reason: their business models aren’t based on selling time. Professionals that do have them don’t use them for cost accounting or project management, they use them primarily to bill by the hour. We have other methods to do project management and cost accounting that don’t require timesheets. Timesheets are lagging indicators that are not predictive of team member performance, customer satisfaction, and don’t help with project management as they are backwards-looking rather than forward looking. There are much better methods to implement for a knowledge firm. See my link in my comment above for more information.
Regards,
Ron
Re: Jon,
Ok, I can see we are talking about two separate ideas concerning time. You keep talking about time in the after-sense of timesheets, but myself and most of the other commentors here are not interested in timesheet tracking, but about quoting the job upfront based on time. I’ve ran my own web development corporation for over two years now, and we don’t do timesheets either. What we are trying to get out of this conversation is what do you tell a client upfront for the price?
If client A comes up to you and wants a web site developed, but you can see that your ideas for their project will double their business, then are you saying that based on that “potential value” that you are going to charge them twice as what you normally would for that web site?
Re: Ron Baker,
I don’t know why you keep throwing timesheets into the mix, because that’s not what most of the commentors are trying to understand here. We don’t care about timesheets because those are after-the-fact measuring devices that may or may not be helpful.
What concerns me about you Ron is that you blatantly insinuate that anyone who charges by the hour is an idiot. I guess that makes 99.99% of the businesses in the United States idiots because they charge by the hour. I’m totally fine that you want to help businesses make more money. I wouldn’t be taking time out of my day commenting if I didn’t have a desire to understand your concepts, but how you present it all is what no one here can get a hold of.
1. How do you price a project based on the elusiveness of perceived value?
2. How do you determine the price-value of a project upfront?
3. What if your value is different than your client’s value?
4. You keep taking about pay based on value, but how is that value determined or measured?
5. When does that value get measured? Before the project begins or after its done?
If you are so clear on your own concept of throwing time out of the window and this whole “pay based on value” idea, then I would expect that all of my questions will be easy for you to answer sir.
Well first off you need to understand that there are three ways to derive a price
Fixed
Results
Usage
You are thinking that everything needs to be results based. If you set a fixed price for a series of deliverables, you are value pricing. We have costs in our business. And I look at how much work will “cost us”. But the price of the job is more subjective. I try to understand how much the client will value the work and I price it accordingly. It’s an art not a science.
When you buy things do you ask the store clerk “How did you arrive at this price?”. If a client asks how we got to the price, I say “that’s the price.” I then try to understand why they don’t see value. If I have to justify how I arrived at a price, I haven’t done a good job upfront selling my value or this is a client I don’t want to work with.
We are trying to be creative with our pricing. Sometimes it will just be a fixed bid, we’ll do this for this amount and it has a more direct relationship with costs and profits but on other jobs we will come up with wildly creative ways to do it. There is no one size fits all.
With one client right now, there is no price for the work. At the end of the project they will write us a cheque for what they think the work is worth. Now this is a long term client with a good relationship so I wouldn’t do this for every job but this is the kind of thing I want to do more of. Be as creative in our compensation as we are in our work.
You seem to be looking for a repeatable formula for pricing. It’s an art… not a science.
When we survey our clients they consistently feel like they get value from the work we do. How much profit we make is our business and shouldn’t be dictated by our hourly rate.
RazorX: I can’t answer all these question in a comment to a blog post.
I’m not suggesting people who bill by the hour are idiots, as you accuse. I am saying it’s suboptimal. The fact that you write that I’m 100% wrong on hourly billing not relating to value tells me you have not yet gotten beyond the labor theory of value, something that was falsified by economists in 1871. If you have the wrong theory, you’ll never understand–or accept–any answers to your questions. And btw, 99.9% of business DO NOT price by the hour, though the majority probably price using some form of cost-plus pricing. Though this changing every day and businesses become sophisticated with their pricing, which is why organizations such as the Professional Pricing Society exist.
All of your questions are answered in my work and on my site, but it requires you to read, research and grapple with the issues yourself, as well as experiment with Value Pricing. This isn’t a piece of Ikea furniture that comes with an 8-step instruction manual. It requires judgment, wisdom, experience, and art. There is no formula, because all value is subjective.
I’m happy to answer your questions, but you have to read beyond the first few pages of my book, then stop throwing out red herring arguments about movie popcorn, especially when the chapter you cite deals with your arguments against it. You also have to stop telling me I’m 100% wrong about hourly rates. That just shows me you have no idea what you are talking about. You don’t think I’ve answered your questions in 5 peer reviewed books published by a major publisher?
It’s not my job to convince you. It’s your job to educate yourself. I’m happy to talk to you if you are serious about wanting to learn, but that will be fruitless if you believe the labor theory of value is true.
I suggest you start off by reading the post I first cited in my first comment, especially the little book, Burying the Billable Hour. You do that, and then get back to me, and we perhaps we can make progress.
Regards,
Ron
Re: Ron
“shows me you have no idea what you are talking about” Yes, thank you Ron for another blatant disrespectful comment that I am again an idiot and I have no idea what I talking about. That’s great sir! Thank you again for confirming how stupid I am even though my business has been highly successful in its first two years of quoting based on time and charging by the hour. You claim you aren’t calling businesses idiots, but yet you just did it again.
Jon made the statement that in 8 years he went from 2 people to 30 people based on charging by the hour, and now he just said he’s going to throw that clearly successful model out the door for a new model where he works for free until a project is done and hopes that his client will see the value in his work and hopefully he gets paid a good chunk on money based on his client’s perceived value of that work. Wow!
This lofty idea may work in a few isolated client cases, but the fact remains Ron your Pricing on Purpose book was written in 2006 and yet the biggest creative agencies in the world still to this day quote based on time and charge by the hour. The sustainable model of what works best for the vast majority of businesses is quite obvious.
RazorX:
You amaze me, sir.
Best wishes and continued success billing by the hour.
@Ron Baker
Just some random thoughts…
If you deeply understand the points you’re making, you should have no problem providing some concise answers to the questions RazorX asked, at least in summary form and in less words than you’ve otherwise already commented in this post.
What RazorX (and myself) would like to see is this: Provide a few examples of how value pricing works, in practice. The only specific example provided in this entire thread is self-funding work, and then asking the customer to reimburse their determination of the value after the fact. That was a qualified example, but still, obviously not of interest to any company concerned about cash flow management.
The whole idea of value pricing seems to rest on the notion that you’re going to earn more through it, than hourly pricing. (Otherwise, it’s nonsensical, as the objective of business is profit.) The revenue of any project you might base on value, could equally be achieved through higher hourly rates.
Once you detour into the land of sharing in the risk of your work with your customers, i.e. sharing in the future returns on your work, well, that’s a whole different business model altogether, and beyond the scope of “pricing model” discussion.
As a final thought, we, as providers, participate in a free market together with consumers. Those consumers (our customers) will choose who provides services to them, so ultimately its up to them to decide whether you, in the long term, are going to be doing value pricing or not, and whether or not hourly pricing will continue as a viable model.
Matt,
We have provided many examples, and answered the questions you have on our Web site. I simply cannot repeat all of this tacit knowledge in comments on a blog. Check out the link above and read some of our Trailblazer case studies to see how firms implement Value Pricing.
You are correct, this is not just about pricing, it’s an entirely new business model: from “we sell time” to “we sell ideas and intellectual capital.” That is why it cannot be explained in this venue.
Please read some of the information, and if you want, I’d be happy to talk with you.
Ron
Re: Ron Baker,
And you sir amaze me yet again by leaving me with a sarcastic “good luck billing by the hour” comment. That sums it up for me. You have no respect for any business that doesn’t derive value, pricing, or success concocted your way. You remind me of the self-deluded mentality of Richard Dawkins, who parades through life having convinced himself there is a wealth of sustainable evidence in the face of predated contrary.
Quick scan of Burying the Billable Hour, and I’ve hit the reference to Austrian Economics.
I’ve had plenty of debates with Austrian economists, and here’s the rub: While the theory may be fine and good (understandable, as it exists only in the abstract, and gets little more practical than “humans react”), when I have presented real-world, concrete problems to Austrian economists, and asked, “So, what specifically would you do in this particular situation?” the response has been, “Look, it’s not my job to convince you. It’s your job to educate yourself. You’ll just have to read the book yourself.”
This precisely explains the strong sense of deja-vu I felt reading the same response from you above, when asked to provide a few simple real-world, concrete examples.
Anyway…
I’m just starting the “Implementing Value Pricing” now, and the feeling I’m getting is that your basic assumption is that engagement scope is *for the most part* fixed, and that “unanticipated services”, to be “priced and billed separately”, are *for the most part* exceptional, and that leads you to recommend fixed-priced contracts (and based on estimated value, not estimated effort).
My company designs, builds and operates (software driven) products. The biggest “revolution” in our industry, in the past decade, has been the move away from fixed-price engagements, based on detailed requirements definition up front, to an agile process in which requirements and budget are initially loosely defined, and allowed to change as mutually agreed throughout the evolution of the project. The “revolution”, in fact, was the recognition that, particularly in this industry, detailed up-front analysis and definition of requirements is futile. Change in scope, requirements, etc. is the norm, and, often, frequently during our kinds of project; not the exception. Products rarely resemble what was specified up front.
An enormous history of failed fixed-priced in the software industry, a growing body of literature supporting the T&M/agile approach, and my own experience of running a company for 12 years, and having switched to a such a model four years ago, very strongly supports the notion that T&M/agile leads to higher profitability.
As mentioned earlier, I wrote about here:
http://www.thisux.com/articles/on-the-pricing-of-service-work/
Selling by value is great, until one of your customers gets the same value for half-the price elsewhere. :)
Matt,
Your question is one we get all the time, and there are methods to deal with scoping–from phasing jobs, offering alternative pricing arrangements to deal with the unknown risk and uncertainty factors, etc. This issue is predominant in legal firms, especially with complex litigation that can drag on for years, with a myriad of unknown and unknowable factors.
Yet there are firms that still price this work on a value basis, giving the customer complete certainty at all times. The same is true of software firms, of which we work with many who follow this pricing strategy (my colleague Ed Kless works for Sage and has single-handedly converted hundreds of Sage VARs to this method).
For an example of how a law firm scopes complex litigation, check out:
http://www.verasage.com/index.php/community/comments/how_should_professionals_scope_complex_jobs/
I just returned from Australia where for one month I worked with both law firms and their customers helping them implement fixed pricing on these types of complex jobs. Customers want certainty in price, just like we do when we buy something. Firms that can offer this have an enormous competitive advantage, much like banks can charge a higher interest rate for a fixed rate mortgage versus a variable rate mortgage. (Actuaries price risk for a living, we can learn a lot from them too). We see this trend around the world, which is why the billable hour is under enormous pressure in the professional sector.
We also know why fixed pricing fails–an over optimistic estimate of cost to serve resulting in too low of a price; and not catching scope creep and issuing change orders. There are ways to deal with this as well. Accenture does nearly 40% of their gross revenue on Value Priced agreements, of which there are many variations. Again, it can be done; it is being done. We just have to apply some skill and intellectual capital to it. The benefits are more than worthwhile, as a profits are driven by pricing more than any other factor.
Ron,
Your ideas seem articulated towards industries where the buying of time is explicit — legal, accounting, and extending to management consulting (e.g. Accenture). In the legal industry, a lawyer might bill three hours, saying, “that’s how long it took to file that motion”.
In my industry, I would say that our time is bought implicitly. For example, we might sit with a customer who says “Ok, for the next iteration of the product development, we need it to achieve this objective within a budget of X, and within two weeks”. We might then propose two approaches in which it can be achieved for perhaps even values less than X, and one which would cost 1.2*X, each with their own trade-offs and required time. Together with the customer, we agree and proceed, and the result is taken into account in the next iteration.
These iterative cycles can go on for a long time throughout a product’s development, and only at each stage would it be possible to, in hindsight, look back to see the totality of the value that has been created. I do not see a way to manage such a process, iteratively producing within a context of constantly changing objectives, and cost/schedule constraints, without relating the required effort, in some way, to the charged cost.
By the way, saying that fixed-pricing fails because of “an over optimistic estimate of cost to serve resulting in too low of a price; and not catching scope creep and issuing change orders”, is simplistic (and common) conclusion looking in hindsight as an observer. It misses the real heart of the matter (in software development) — It is simply not possible to accurately and completely specify complex systems in advance.
It’s not that estimates are “over-optimistic”. Nor that “scope creep” isn’t caught. You might specify “the user shall be able to login to the system,” and then far later during the development, realize that, within the context of the system that has actually been built, some additional feature is required, or else the user will be too confused to even be able to login. That’s not scope creep, but it is additional effort required that couldn’t have been foreseen. The larger and more complex the system, the more the cumulative effects can doom a fixed-price project.
This realization is what has led to the agile-development movement, which is to a large extent incompatible (or sub-optimal) with fixed-pricing.
@Ron Just want to insist again, that I’m only expressing my opinion, based on my experiences, studies and observations. I’m don’t want to be understood as trying to claim anything as “the absolute truth”. :-)
Jon,
If a business wants to switch to a value based pricing model, then there has to be a sure way to measure that value. Let’s take web development and application development for example, since that is what we both do. Let’s say you develop a great web site for a client that greatly increases their site traffic and product visibility for them, then how would you be paid by the client in a value based system? Would you tell them upfront that through analytic measurement that for every unique person (IP) that visits the new site you want a nickle? Would you tell them that for the wonderful e-commerce store you build for them you want a 1% cut of the monthly profit? Would you tell them you want a dollar for every person who becomes a follower on their Twitter account? Where would be the measuring devices for evaluating a pay-for-performance or pay-for-value model? What is the overall value delivered and how are you going to measure it all?
How would the resultant value be measured before the project begins? And to add fuel to the fire an agreed portion of time (perhaps months) would need to transpire before more accurate measurements of success could be determined. Just help me understand with an example of how value based pricing would work in a case like web development..?
@RazorX
I think all of those suggestions are potential options for results based pricing. Those are all Key Performance Indicators that you would need to work with each client in each scenario to determine what makes sense.
There will be scenarios where the success portion takes months and you may not be in a position to wait for those results due to your business situation. For us, let’s say we have a client who wants to increase twitter followers. We quote the project as follows…
We determine a fixed price to diagnose the problem and come up with some ideas. This pricing is based on our costs and some subjective value measures.
We generate ideas in collaboration with the client. We discover some ideas that we think have huge potential we then say to the client we feel strongly these ideas work, in fact we will tie part of (or all) of our compensation to getting you X twitter followers in 3 months. If we achieve these results you will pay us Y.
We take on the risk that it could fail. But we also capture the upside if it succeeds.
You may need to wait 3 months to get paid some portion of the job. You will take on risk. It may not work out. But you are throwing your hat in with your client.
Each client each project is an opportunity to be creative about how you get paid. Not all compensation agreements need to be results based. Its not one size fits all. Be creative!!!!
Fascinating discussion! Lots here to chew on. Coming from the freelance world, where companies often bait talented gurus with promises of big returns on speculative work, I was pretty resistant to the notion of decoupling the fixed constant of Time from the work I did. But cost and value are two entirely different things, as any economist would say. I have a price. I deliver a value.
On one hand, there was some protection in associating my work with an hourly cost. I made the decision not to accept speculative work early in my career as a freelancer. My few experiences with spec work were unrewarding, to put it nicely.
As I outgrew my freelance status, and started taking on more involved work, and started bringing in more people to grow my business offerings, the kinds of clients we attracted began changing as well. Our sales cycle is longer now, more complex. We no longer sell theoretical drill bits, we sell holes. Our shift to a focus on value has been pretty organic, and it has been necessary. And suddenly the hourly billing that felt so protective as a freelancer has started to feel restrictive as a small business. Perhaps we are leaving money on the table. Perhaps tying our profits to results and not to Time is a better path to growth.
But then Time is a part of every single valuation I have ever witnessed or been a party to…
…estimated valuation of a business based on historic or projected revenue during a specific time period
…the speed with which ROI (value) goals were achieved or exceeded
To say that a client spent $200,000 and saw a return of $10 million sounds great, until it is discovered that the return was spread over a 40 year period. Suddenly it doesn’t sound so great any more.
So whether or not I want to share risk with clients or not, whether my business is compensated based on delivered value or an hourly price, Time is an undeniable part of the equation.
I like the idea of being creative in my pricing approach, and to have the flexibility to try out many different arrangements, on a specific project or client basis. But I think hourly fee-based contractual arrangements are already a pain in my backside… I cannot imagine the complexity of an alternatively derived value-based contractual agreement. It would really have to be a large client with a very well understood business model, an intimate understanding of their corporate structure, verifiable health of their company….and a willingness to allow such an intimate and substantial material participation… Seems to me it is the rare business that can afford to bear that kind of risk to become that kind of stakeholder.
I like this spirited debate and can see both sides, but still lean towards traditional time – at this point.
One nit – the .ppt in your footer references what clients are charged for in 2 categories. If I read correctly, you are getting rid of the hourly rate for everyone, right?
-trav
@travis thanks, that was an oversight will fix…
Billing by the hour is clearly suboptimal. It is also immoral and unthical.
Not to bring razor boy back into the conversation, but I have spent much time on Ron’s website and have traded questions with him as well on his website.
The whole value pricing concept did seem hard to grasp at first too. It is a different way of doing business. No, not everyone is doing it, but for some of the folks that are doing it, it works for them. If you want to follow the herd, that’s perfectly fine too.
How do you do it? Well, nobody is going to hand you a step-by-step manual. It comes with product knowledge, experience and working in your industry for awhile to know what are acceptable prices.
How much to charge for a website? If you’ve made more than a few, you should know. If a medium sized business approaches you for a website and in your experience know that they would pay $50k for what they’re asking, you go with that. You should also know, based on your years of experience that it will cost you, say $40k to produce, ensuring a profit.
Just like with cars, if they priced them by the hour and it only cost them $12k to build a car people would spend $20k on, they’re leaving money the table. Conversely, if it took them $25k to build a car and nobody would spend more than $12k on it, they need to adjust their costs, or revisit their product/offering.
If you have no idea of how much work it takes to produce something, you probably also don’t know how to firm up requirements of what the client is getting. If you’re winging it and leaving everything open-ended, you’re surely the one to lose in the end, but if both sides know what they’re getting its more likely to stay on track.
Change requests? That’s fine, adjust the initial price, or spin off another value price, don’t break down into hourly mode.
Try with a client first, before saying how it won’t work.
At Double Art (my agency) we too are a small, nimble and cost efficient operator. We bill by project. Sometimes the client is pleasantly surprised at how low the costs are. Sometimes they are stunned if they appear high when they claim that it ‘won’t take that long to have an idea’. At which point we win them over / alienate them completely with what we call the Whistler argument…..apologies for cut and paste from Wikipedia:
John Ruskin (reviewing Nocturne in Black & Gold by Whistler) – ‘I have seen, and heard, much of Cockney impudence before now; but never expected to hear a coxcomb ask two hundred guineas for flinging a pot of paint in the public’s face.’
Whistler, seeing the attack in the newspaper, replied to his friend George Boughton, “It is the most debased style of criticism I have had thrown at me yet.” He then went to his solicitor and drew up a writ for libel which was served to Ruskin. Whistler hoped to recover £1,000 plus the costs of the action. The case came to trial the following year after delays caused by Ruskin’s bouts of mental illness, while Whistler’s financial condition continued to deteriorate. It was heard at the Queen’s Bench of the High Court from November 25th to 26th 1878. The lawyer for John Ruskin, Attorney General Sir John Holker, cross examined Whistler:
Nocturne in Black and Gold: The Falling Rocket (1874),
Holker: “What is the subject of Nocturne in Black and Gold: The Falling Rocket?”
Whistler: “It is a night piece and represents the fireworks at Cremorne Gardens.”
Holker: “Not a view of Cremorne?”
Whistler: “If it were A View of Cremorne it would certainly bring about nothing but disappointment on the part of the beholders. It is an artistic arrangement. That is why I call it a nocturne….”
Holker: “Did it take you much time to paint the Nocturne in Black and Gold? How soon did you knock it off?”
Whistler: “Oh, I ‘knock one off’ possibly in a couple of days – one day to do the work and another to finish it…”
Holker: “The labour of two days is that for which you ask two hundred guineas?”
Whistler: “No, I ask it for the knowledge I have gained in the work of a lifetime.”
Isn’t this the value we can bill for? The value of a swiftly executed, effective solution to a client brief. A solution arrived at through experience and the application of that experience in the service of your client.
http://en.wikipedia.org/wiki/James_Abbott_McNeill_Whistler
Pete Blackman
peter@doubleart.co.uk
twitter – freethinkeruk
I really found this interesting, as I’ve been raised on a steady diet of timesheets since I started my career. That there are other agency pricing models out there is a breath of fresh air.
However, I’m curious to know what impact this has on salaries for both current staff and new hires, in so far as that under the standard cost+ model, pricing has a direct relationship with salaries.
How does one value talent under this alternative pricing model? Does it have an impact on how much you pay employees, or otherwise compensate them?
Hey, hope this approach will work for you in a long run. Seems very risky to bill for project’s potential. If it’s relatively simple (not many man days/hours) and it has got potential, others will make it cheaper.
I think those arguing for hourly rates, probably don’t value (or have) the experience of some others. I can (and have) ask(ed) two people for the same thing, a number of times where they charge the same hourly rate. The solution is never exactly the same, and it doesn’t mean that the better solution should be charging more per hour, you can’t do that, you will price yourself out of the market.
At the end of the day, one of my hours is worth ten of yours, and I don’t need to charge $1000/hour to justify it. I just need to set a fixed price for the work, with the confidence that I will deliver the desired result based on my wealth of experience, where someone else, might burn cycles on lessons I’ve already learned. (Which I’m sure the hourly folks would argue are not billable, yeah right.)
Good for you, but I think that it’s depend of the project. We have many projects where we use a retainer basis.
It’s depend on the kind of project and the kind of clients too.
It definitely does not depend on the project or the customer. Fixed pricing works for all projects and all customers. We have been fix pricing every project from a single custom report to implementing 50-user manufacturing ERP system for almost 3 years.
Alan Weiss posted a great quote today on Twitter and Facebook: “Hourly billing is unethical and dumb. The quicker you can help, the more you’re worth.”
Hi Jon,
I love this discussion. I guess my question is more about internal management for companies using value-pricing model.
Are you going to share your profit with your awesome employees, who collaborate on projects and help your company being successful creating all the great work for your clients? Should your great designers do the same way you do to your clients based on value-pricing model?
And how do you measure your employeescontribution/performance so that you know how you could defer a portion of the profit you make from the value-pricing model?
As the employee of an agency, they often give up their right of the work they designed/developed for the agency. How do you see this change?
Cheers,
@kengwei Yes that is something we are looking at. Creating incentives to employees on specific client assignments makes a lot of sense. We currently have some basic incentives where we do this.
I think you can define it however you want. I would just make a bonus pool for the assignment that is equally distributed to the team if the desired outcomes are met.
On the last point I’m not sure that changes, ownership is often dictated by the client so we need to own the work from the employee in order to pass on that ownership or even usage to a client. Managing the individual creative rights of 30 individual designers would be too complex.
This is the report for shared risk I mentioned before, I guess it was the wrong link:
http://www.designcouncil.org.uk/resources-and-events/Designers/Continued-professional-development/Guides/Royalties-equity-stakes-and-shared-risk/
Our Value Pricing deck from last week’s NXNE Interactive conference. From the Abolish The Hourly panel with Sam Ladner, Jon Lax and Simon Conlin.
http://yousayyeah.com/article/2010/06/our_value_pricing_deck_from_last_weeks_nxne_interactive_panel
To generalize, engagements are projects, and projects are initiated to deliver value. If done correctly, this value should be defined upfront – how else does a client agree to part with their money?
The skill in implementing this approach would appear to be in clearly defining / validating the value and having sufficient influence on the factors that impact the realization of said value.
This is a longer-term approach to project delivery and avoids the focus on short-term deliverables (,which can end up as duds especially in waterfall style delivery models).
YouSayYeah.com’s deck appears to have moved to http://yousayyeah.com/post/837147145/our-value-pricing-deck-from-last-weeks-nxne
Thanks for catching that, Lee. The switch to Tumblr unfortunately killed our URLs.
As a small business consulting agency we moved away from the hourly rate a year ago, due to the immense workload and the unrealistic expectations of some of our clients. It was nerve-racking at first, but we are now more efficient.
Such a great idea, that will reduce also the market price as well. But, to make it real, can u bring some paper document…!!!
This is fascinating! Some of my friends, Ron Baker and John Shaver are above in the comments. Jon, I too wrote on this subject in A List Apart (http://www.alistapart.com/articles/pricing-strategy-for-creatives/) and started some fights in the comments!
People hold onto their false belief that their time is valuable. I guess they feel slighted when they find out that the customer doesn’t care what they spent on their project. Nobody cares. Customers only care about the value you deliver to them at the end of the day (which they should). Why would anything else matter?
I love the quote John Shaver mentioned above by Alan Weiss: “The quicker you can help, the more you’re worth.”
Jon’s approach to measuring value (without using time) is possible by considering an economic concept called “marginal revenue product”. Basically, value can be assessed by measuring the resulting change in revenue that a particular project/service provides… This is very effective for jobs that have smaller hourly commitments but large revenue impacts.
Jon – your blog certainly got people talking, even two years later!
Having worked at agencies that employed both hourly rates and fixed price estimates, the debate is ongoing. Coming from public relations, it is difficult to quantify the impact of a campaign, versus the hits to a website or eyeballs on a commercial – so value is fluid. It may be a bit simpler in other industries that have more metrics in place to help determine value.
I do acknowledge there are some nefarious time sheet practices that can occur – and I hope I’m doing my part as an operations consultant to clean it up. I encourage my clients to be transparent if they are using a time-based model, to share where they have over invested or under estimated with clients and eliminate the ‘fudging’ of time sheets.
Would love to chat with you more to learn about your transition and how you measure the other things that time sheets can indicate (productivity and efficiency, training/knowledge gaps etc).
I was recently approached by two different clients with similar offers, “This is what we have to spend, this is what we need.” In both cases I accepted the work, but after reading this today, wonder how I might have negotiated in those situations.
And, per some earlier comments, Paula Scher at Pentagram designed the Citibank logo in twelve seconds on a napkin, by her account. It then took a year of boardroom meetings before the logo was green-lighted.
When questioned about the twelve seconds, her answer: “Yes, twelve seconds and thirty four years.”
The Whistler argument. I have also been retained for several months on a client’s very modest budget, to find, despite discussion, the clients believed they had 30 day access to my time at sixteen hours a day. Sometimes these situations are tricky to keep profitable. Often the best word to remember is NO.