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Pricing a Service: Value vs Time-Based Billing?

Posted by PriceBeam on March 20, 2017

 

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Many professional services firms are billing their clients by the time they spend providing the service to the client. However, in many cases, the time spent on providing the service is irrelevant to your customer and you may be losing out on profit or end up with a dissatisfied customer who complains you’re working too slowly.

There are a few problems with this pricing model as the success of most services are measured by the outcome. How much benefit did the service provide? How much money did it save the client? How much easier did it make the client’s life? The answers to these questions will surely not depend solely on the time spent on providing the service, but rather the quality of the service provided. And while some correlation between time spent and quality of the service can be assumed, it is hard to tell how strong this correlation is. A terrific accountant may be able to save you $10 million in taxes in 1 hour, while a lousy one will spend 50 hours messing up your books and, in theory, have provided 50x more value than the terrific accountant. At least that’s what it will say on his pay check.

Time is the Limit!
When deploying a time-based pricing strategy, your pay is limited by time, literally. There are only 24 hours in one day so no matter how efficiently you work, you will end up being paid the same - or even less, if you don’t take additional work to compensate for your productivity. And your earning potential is restricted to 24x your hourly wage. Sure, your customers will start noticing that you work much faster and harder than rivals and you can charge a higher price, but you can’t change your price all the time to make it reflective of your ever-changing productivity level. And try justifying to new, potential customers that you charge 3x what other vendors charge because you’re just that good.

Sell your value, not your time
Unless you’re a masseuse or the like, your customer won’t get any value from the time you spend providing the service. In most cases, the less time spent the better. Therefore, it is fundamentally wrong for many service vendors to charge by the hour. Instead, they should be charging for the value they provide, just as product vendors do. The price should be aligned with the willingness-to-pay of the customer, and this will, in most cases, not depend on the time spent providing the service whatsoever!
Look at what benefits your customer gets from buying your product and make sure they pay for it!

Learn how you can use willingness-to-pay to set the right, value-based price for your services here

Written by PriceBeam

PriceBeam
PriceBeam posts regular guides, articles and news related to pricing and strategy. Go have a look!