This post is going to deviate a bit from the technical realm but I just read a report in the latest HOW Design magazine that was based on a recent survey of designers’ rates. One of the questions in the survey asked whether designers disclose their hourly rates to their clients.

The question, as written, seemed odd to me until I realized what they were getting at. This is how they should have asked the question: Do you bill your clients by the hour or do you provide a fixed-fee estimate?

I was disappointed to read that the majority of survey respondents bill hourly for their work.

If you’re in the hourly-billing camp, I’ve probably just offended you. Let me try to explain why I think fixed-fees are a much better way to go. To begin, I’m going to switch terms and refer to billing fixed-fees as “value-based pricing,” whereas hourly billing would be considered “time-based pricing.”

Time or value?

So, what is it you’re selling to your clients? Are you selling your time? Or are you selling something more than that? Everyone has time. 24 hours per day, to be exact. So it’s unlikely that your clients are trying to buy “time” from you. Rather, they need your creativity, your ideas, your experience, and your skills. They need the value that you provide. If asked, I’ll bet your client says they’re paying you for a logo, a brochure, or a website, not for your time. Time just happens to be the unit of measure used to generate the cost.

Reasons we use time

So why do most people in the service industry use time-based pricing? Here are a few reasons:

• It’s easier. Just establish a rate and count up the hours the project takes.
• It’s less risky. If the project takes a little longer than you anticipated, no problem.
• It mitigates scope creep issues. Most clients are going to end up asking for changes or additions. If you’re working hourly the client can ask for as many revisions as they want. The clock is still running so you’re still getting paid.

Those are all solid reasons to use time-based pricing. And for many service providers, those reasons are compelling enough to counter the arguments I will make in favor of value-based pricing.

Benefit of value-based pricing

Actually, I have just one major argument in favor of value-based pricing: you’ll make more money.

How so? Here are a few reasons you’ll make more money using value-based pricing:

• It shows you know what you’re doing. If you can affix a firm price to something, you clearly understand it and know how long it will take. I think this inspires some confidence in you.
• It increases opportunity for profit. If your client agrees that a new website is worth $10k and your first direction on the design is spot-on, you’re going to make more profit than you would have had it taken 3 or 4 directions to get the design right. You’re incentive is to get it right the first time and you’re rewarded for doing so.
• Clients all want to know how much it will cost. Most clients have accepted the reality of getting billed hourly for certain things. But the reality is that all clients want to know how much the final, total bill is going to be before they start a project. It’s comforting for the client to know and you’re providing a better service by answering that question.

My company rarely uses time-based pricing anymore. It’s a bit scary, I confess, to abandon the security that comes with knowing every hour you spend is going to be compensated. But now that we’re in the groove with value-based pricing, we’d never go back.

As a final note, I recently attended a great presentation given by Randall Smith, founder of SLC-based agency modern8, in which he also outlined his arguments for value-based pricing. As a creative with years of industry experience, his opinion carries a lot of weight in my book.

What do you think? Are you convinced that one method is superior to the other? Are there any other pricing methods that are better than both of these?

Update: Here’s a related post on FreelanceSwitch.com.