Value-based billing: Escaping the trap of trading hours for dollars
In the Billing Like a Boss series, you’ve learned about how to work through the uncomfortable money talk with clients and the basics of an invoice for web designers. We’ve also shared some easy ways to get your invoices paid lightning fast. In this post, we’ll share with you the problems with hourly-based billing and how to take your business to the next level with value-based billing.
The problem with hourly-based billing
“So what’s your hourly rate?”
It’s a simple but loaded question every potential client will ask you at some point. Giving a single rate can reduce the immense value you provide down to a single number. In the complex world of web development and design this can ignite unappreciative attitudes in clients that don’t understand the nuances of your efforts.
But – perhaps more importantly – it a logistical nightmare for you.
Let’s say you landed a project that enlists various aspects of your talents. Each responsibility requires a different amount of specialized knowledge (or lack thereof). For example, tasks like site architecture design need more effort and senior-level experience than database entry. In the world of hourly-based billing, you would price out and track each task at different rates. However, projects containing more than 3 tasks quickly becomes an administrative burden.
If you run an agency with staff, charging different rates creates politics as to everyone’s “worth” and can feel degrading for some.
Also, when the conversation focuses on your hourly rate, clients start to fixate on “how fast” and “when it’ll be done” vs. focusing on the value they can get from your services. They’ll want to spend as little time as possible with you while obsessing about the clock.
Shifting the mindset: Value-based billing
Value-based billing flips the conversation toward the value your services deliver. It’s important to remember that the value is determined by the client, not you. If they don’t think you’re worth the money, they won’t pay it.
That’s why educating clients is so important. It’s your job to provide informative, high-quality information on what benefits your services will bring their business. From there, value can be established and accepted.
The overarching value you provide is only one part of the equation. You must also convince your clients that this new form of billing is preferable. In order to accomplish that, you’ll need to change their mindset.
Let’s look at how a web designer could look at their services from a value-based billing perspective:
Say your client needs a website redesign. Your initial conversation reveals that this new design has the potential to increase their yearly profit by $100,000.
Now, the $2,500 you’d charge based on an hourly rate seems pretty miniscule in comparison. Looking at it in these terms, you could feel confident charging $10,000 or even $20,000, as this is still just a fraction of what your client will recover.
Clients will also be better able to justify that type of investment when it’s viewed from this angle. It’s all about the way you look at it. And once you get your client looking at it the right way, great things can happen.
Suddenly, they’re not as worried about how to reduce costs (i.e. your hourly rate), they’re looking for new and innovate ways to increase overall profit.
So how do you implement value-based billing? Here are 3 steps:
1. Get down to the numbers
Since value-based billing is all about what value you can bring to your client, you’ll need to spend more time researching with them upfront. Don’t be afraid to break down the numbers. Establish clear, attainable goals that can be achieve through your services.
A few examples include:
- What increase in sales is your client trying to reach with a new web design?
- What % lift in leads for their sales team?
- What is the % lift in conversion rate?
In many cases, your client may not be able to articulate the goals in a measurable way, so you’ll need to work with them to help. This will not only demonstrate that you’re a talented web designer, but focused meeting business goals and not a pretty website that doesn’t convert. Bringing value before you ever even draft a wireframe is a powerful sales technique.
Aim to charge between 10% – 20% of the value you’ll provide for your services.
2. Give pricing options
People love having options – though not too many options. Because of this, it’s important to lay out a few different choices for various levels of value.
This is where a value-based system really shines.
With hourly pricing, you’re limited to the hours in a day and your varying efficiency levels. However, invoicing based on value means that you’re delivering a result – regardless of how long it takes. And that’s much more powerful than just exchanging your time for a paycheck.
Some strong option categories include:
- Ad-Hoc Jobs: Task A costs $XX each time a client orders it.
- Maintenance Plans: You deliver ABCD for $XXXX per month/quarter/year.
- Tiered Service Levels: Clients get A for $X, AB for $XX or ABC for $XXX.
Depending on the client’s needs, you may want to offer several options for various categories. Once you know the general value, put together 2-3 package choices that will fit their needs. Spend some time developing your pricing strategy so you’ll be prepared with the right option for your client.
3. Find the “right” customer
Ultimately, using this system successfully relies on your ability to track the right clients. You can’t convince people of value when they aren’t willing to shift their mindset, or simply want the cheapest route to their goal.
The right clients form a bond with you that’s hard to break.
With a good working relationship built on trust, these customers will appreciate the value you’re providing – even if the results aren’t always what they wanted.
And, don’t forget, people spend time with other like-minded individuals. That means if you’re able to win the heart of your client, they likely know another ideal client that could use the powerful value of your services.
Are you ready for the change?
Shifting your invoicing process to this system is a great idea for many service-based entrepreneurs, freelancers and business owners. Take some time to evaluate the above points and decide if you’d like to dive a bit deeper.
Want to learn more about value-based billing? Download our FREE e-book Breaking the Time Barrier: How to Unlock Your True Earning Potential. The e-book outlines more about the problems of hourly billing and more importantly, shows the power of value-based billing for freelancers.
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