The ups and downs of value-based pricing
I was recently chatting with a talented designer and artist who runs a successful agency in Southern California. We got to talking about his experience with value-based pricing models, and the challenges of calculating profitability. At one point, he threw up his arms and concluded “you win some, you lose some.”
My own agency experience with value-based pricing had been similar, up to a point. So I shared with him our own story. After having lost money on one too many projects, our agency had to get better at pricing. The first thing we did was use time tracking software to validate our pricing.
Benchmark your value
Value-based pricing is hard because agencies are bound by time. Regardless of what service you are selling, there are only so many hours in one day. If you are selling your services at a flat rate, you still have deadlines and budgets to meet. On top of all that, you have to be sure you aren’t earning less than if you were billing hourly — or worse, less than what you are paying out to your employees and subcontractors
There are several ways to track your time, as I’ve written about before. But online time tracking software is going to be the best option. In my experience, we were able to capture 30% more of our time by using software, as opposed to paper timesheets or an Excel spreadsheet. Another advantage to using time tracking software is the ability to run detailed reports to find out where, exactly, your time is going.
The more disciplined you are in tracking your time on each project, the more accurate your data, and the more conclusive the results. And you don’t have to track your time on every project. Just track enough of them, periodically, to benchmark your pricing.
The process itself is straightforward. Identify a project to be benchmarked and make a solid effort to track all your time spent working on it. Enter your time in the software as soon as you can, while it’s still fresh. If the software has timers, use them. Tracking your time will take some effort, but will give you invaluable data in the long run.
Once you have enough data, calculating profitability is as simple as dividing the project price by the number of hours tracked. Are you happy with the hourly rate? If it looks good, you are on the right track. If not, increase your prices.
At our web development agency, we eventually transitioned from value-based pricing to an hourly billing model. Most of our work was custom development work that had no precedent for determining market value. Hourly billing was more accommodating to the agile nature of our projects.
For agencies offering more consistent services, value-based pricing can be a better fit than an hourly billing model. I encourage anyone using a value-based pricing model for their services to periodically validate it with time tracking software. If the data shows you are diminishing your hourly rates, adjust your pricing model to compensate for it. The end goal is to make sure your project’s fair market value is fair to you.