On Billing Methods: Value Based and Project Based Pricing

Last week I wrote a bit about hourly billing and some reasons why I find it broken and unsustainable (there are many more). It was (quite rightly) pointed out to me by Jonas that I should offer some good alternatives too. So today I want to take a moment and do just that: Value Based Pricing and Project Based Pricing.

Let’s begin with Value Based Pricing. It’s idea is simple and builds on the idea that you should get paid for the value you create and not specifically for the time you spend on the project. Putting it simply, if you increase sales by $100,000, it might be reasonable to base your compensation on that figure.

The advantages should be obvious. Such a model will have you earn more money, while still in fact being just. There exist downsides too though. Most importantly, for smaller projects this is not as viable a method as the value really does not mirror a fair price. It does also put more pressure on you to deliver value increases to the client. This I wouldn’t however consider a necessary downside, but rather something you should be doing anyway.

With Project Based Pricing we are approaching a cross-section of hourly billing and value based pricing. Instead of billing by the hour, we create a project and sum it on its whole. What this allows you to do is better account for your expertise while not having it factor into an hourly price.

As mentioned last week, if I do something twice as fast as the next developer, but have an hourly rate at double the price, this hourly rate is going to seem less appealing (even though it really shouldn’t). With a project price, this becomes a little less transparent, at the benefit of a more just competition. You can also partly account for the overall value of the service you are providing in this way, which you cannot do in the same way in an hourly fee.

The downside of pricing full projects is of course that they may change in scope, or may be hard to precisely pinpoint. Over time and as you gain more experience, your estimates here should get much better. From my own experiences I know that some projects may come in slightly over and others slightly under in workload.

Since these fees still do base a market value of the services, I would however still suggest that these are just for both client and service provider. Both now have the same interest: Getting the project completed as quickly as possible.

I should say that we at Bernskiold Media use a combination of these. It does depend on the project at hand. While we quote project based fees for most website projects, sometimes it just isn’t feasible and we are forced to bill by the hour in some cases, even though it is fairly rare.

What are your experiences?