I've talked a lot with clients and in on-line groups as questions come up about pricing strategy.
There seems to be a lot of confusion around making the choice of hourly charges or value based pricing / results based pricing.
Its a great question to ask and today I'm going to share thoughts on what charging for results means.
Pricing: Charging by the Hour
This model of charging for services is pretty common. Many coaches, health practitioners, designers, etc. use this model. In a typical employer/employee model, it is the same model that we learned in our first minimum wage job — show up and work and get paid for the time put in.
The Different Names of Time-Based Pricing
Just to keep us on the same page, time-based pricing is also known as:
- Hours-for-dollars
- Charging by the hour
- Charging by the session
- Charging by the day
When you charge based on time, clients often have three emotional responses:
1 – Fear of what the total will eventually come out to. “Gee, is this going to be $500 or $50,000?”
2 – Comparison to their own hourly evaluation of themselves.
3 – Back of mind thoughts that they can always stop services. This last one happens all of the time with coaching services. The coach charges by the session and the coachee looks at budget and decides they can let that expense go. Or, they come to a challenging part of coaching and decide they no longer can afford it. When you value price and charge by a program/package, the client typically stays more committed.
Pricing: Charging for Results
A results based model looks a bit different depending on the type of service industry you are in. The amount of time put into the project becomes less important compared to the results you produce. In a typical employer/employee model, this is similar to someone that is on a salary. The salaried employee gets paid X per month regardless of how many hours he/she works. The focus is on the skill that person brings to the table and the expected results.
I've used the model since my days of consulting with Fortune 100-50 companies and use the model today too. I'll share some here, but moving from hourly to results based is more than a blog post can cover. There are a number of variables and emotional hurdles the business owner needs to overcome.
The Different Names of Results Based Pricing
Just to keep us on the same page, results-based pricing is also known as
- value-based pricing
- package pricing
When You Price Based on Value vs Charging by the Hour a Few Things Happen
You step away from fear.
Hourly pricing is based in fear because you tell yourself that stuff might come up that would mess up your hourly value (which often indicates your hourly value is too low, but that is a different conversation.)
You allow your prospects to understand and step into the transformation they want.
By charging the value of the transformation, there is no question of what the end cost will be and they decide if they want to invest in themselves or not.
You get really clear on the value you bring to the world.
You get really clear on the transformations you can deliver. You get really clear on the scope of your work. When you create a program or package, you define the results that your client will get.
You treat yourself as the valuable contributor that you are vs a commodity.
When you charge by the hour you are easily compared to every other coach/healer/designer that charges by the hour. Clients start comparing like they would a commodity like a car. “Let's see, they are both made by Honda that are red with the same amenities…. I'll go with the cheaper one.”
Your billing processes become much less complex.
Charging by the time you put into your work means that in order to be in integrity with yourself and your clients, you have to track your time! When you create programs/packages you have a much more simplistic billing process.
You become more effective at what you do.
When you stop charging by the hour, it becomes important to focus on your productivity. You have financial motivation to use your time effectively. The better you can use your time, the more you can accomplish in a day, including having more time for fun.
Your communication with your client gets much more clear and you serve your clients better!
I find that my clients that switch to this model SERVE THEIR CLIENTS BETTER. By focusing on what your client really needs (vs what you think they'll pay for) you are in a totally different mindset. You listen and respond differently.
Would You Like Some Help?
Switching to charging for value can be quite a mindset change. If that is something that you have been wanting to do in your business, let's talk!
Vanessa Terrell says
Good information! My pricing is more based on value!
Stephanie LH Calahan says
Hi Vanessa
Glad you liked the post and thanks for dropping by!
Betsy says
This is a lot to think about. I will admit I do get nervous when I hear “charged by the hour”
Stephanie LH Calahan says
Hi Betsy –
Determining the pricing structure that is right for you and your business can certainly be a lot to think about. Take your time and you’ll get the solution that is right for you.
David Hunte says
This is very interesting and a lot to take in. I really have to think about what I’m doing for those I work for. Hmmm.
Thanks for writing. Very well presented
Stephanie LH Calahan says
Hi David –
Glad that you have some things to think about! If I can help provide further clarity, please let me know.
Janet Barclay says
I started working on package (rather than hourly) pricing a couple of years ago, but I just couldn’t bring myself to implement it. I’ve recently accepted that it’s really best for my clients and my business and expect to be launching my new packages very soon.
Stephanie LH Calahan says
Woohoo!! That is great Janet. Care to tell us what your process was?
Christine says
I am in the middle. I am making the transition to results pricing but am currently in more of a retainer style pricing so an still tracking hours and products. If the client transitions to a package, I offer discounts on sessions and products. After this season I will go to strictly 90 day and 180 day packages. Thanks for the info!
Stephanie LH Calahan says
Hi Christine – Thanks for stopping by. Good luck transitioning to your new model. Realize that you can do it any time you want. Yes, it is a good idea to have a transition plan for regular ongoing clients; but new clients could go straight into value pricing (and you wouldn’t need to discount it either.)
Brenda Adams says
I am just making the switch to results pricing from hourly. The emotional responses to charging hourly I found really intriguing. Especially #2 and #3. I had never thought of what might go through my clients head in “by the hour” pricing versus results pricing.
Stephanie LH Calahan says
Brenda – Awesome! Glad that you have a few more things to consider as you think through your business pricing structure. Hope you’ll come back and tell us how it went when you make your switch.
Vatsala Shukla says
When I changed models, 2 important things happened – my clients stepped up to the plate and achieved more because they became more accountable for their results. The sessions became more enjoyable because the transformation was oh so visible and the pleasure in seeing the client being more proactive rather than wanting to be spoon fed cannot be articulated. It has to be experienced.
Together the clients and I create history, each time, every time!
Stephanie LH Calahan says
Vatasala – YES! Thank you for sharing your experience. I see the same thing.
Tai Goodwin says
Having worked with many people making the transition from employee to entrepreneur, the hourly rate mindset is one of the hardest things to let go of. We need better models that help us calculate the value of what we do.
When I price my services for designing information products, I base it on the intended price of the product and my fee is a percentage of what they will make on the first 100 products sold. This ensures that I am paid for the worth of my my work, but it also weeds out some people – if you don’t plan on selling at least 100 copies of your product, then why invest in building it.
Stephanie LH Calahan says
Hi Tai – Thanks for stopping by and sharing. I agree. Getting out of the hourly mindset is really difficult for many.
Love that you have built a system that works for you. As you are developing your pricing for your work, I’d encourage you to consider the long-term return on investment (ROI) that your clients have. Once you teach them to make that first product they will have the sales on the product AND the knowledge of how to make another and another and another. You are contributing to their ongoing success beyond just the first product they make.
Give a man a fish… teach a man to fish…
Kimberly Eldredge says
How timely! I just attended an event this weekend where this was discussed.
I recommend that even if you’re not CHARGING by the hour, you still track the hours involved. Sometimes, you discover that you’re still not charging enough for your time even if the transformation is being delivered.
Stephanie LH Calahan says
Hi Kimberly –
I’ll have to respectfully disagree with you on this one. When you track your hours you are still in the mindset of charging by the hour, only you have packaged it up and decided to do bulk pricing. That is not what I’m suggesting here, but it is a confusion point for many people.
When you charge for the value you deliver it is truly about the results the person is getting, not the time you put in to make it happen. This is a complete mind shift for many. It is a totally different way to work.
You do make a good point about having a way to evaluate if you are charging an amount that will work for your business. A great coach can help you figure that out. There are a number of strategies to go to charging for value vs for your time, but most of it involves a change inside of you and how you think about your work.
When I first made the shift in my own business, I transitioned from charging by the session to a daily investment rate and then to a program investment.
When you charge by results you are often offering way more than just your time. Your program may involve some of your time. You may offer tip sheets, exposure to your list, white papers, home study courses, MP3s, meditations, email access, phone access, etc.
Andrea Feinberg says
Hi Stephanie ~ I think there’s a bit more to this than 2 choices; here are some other concepts that go into pricing. While I don’t see it specified in these remarks, I’m assuming you’re describing a model for the service provider only. Yet, for the service professional who doesn’t work out of their spare bedroom, their income has to cover more than the client’s results; it has to cover and exceed the cost of being in business. That may include rent, insurance, my team, marketing, cost of producing services, networking memberships, continued education, the region in which I conduct business, web development, etc. This doesn’t take into account the cost for my kids’ education, the cars, vacations, retirement savings, food, etc. While the value of the transformation for the client is a part of the equation, it’s not all.
Also, as a service provider, especially in coaching where so much of the result depends largely on the client’s unpredictable ability and/or propensity to follow through, I charge based on the value I deliver which is primarily opportunity; that opportunity is a potential only. I know, guaranteed, that if the client follows through on those opportunities AND has been honest in sharing their circumstance, need, skill and willingness to change, the value will be delivered (and, by the way, I provide a guarantee based on that: you do your part and I’ll do my part; if we both participate as planned and the desired result is not achieved, I’ll return every cent paid).
A consultant who charges for a solution or for execution of a project may charge for time in the first example or for a percent of the result in the second. That’s because they’re completely in control of the project and have complete confidence in what they do and the result they’ll produce.
However, coaching is different; we consider it a partnership with the client. Until the client does their part, the transformative potential in their engagement with me is that – potential only. And that’s largely what I base my price on – the potential in the value of what I deliver which I know is there based on my experience, past results, education. And, without the value of my time (the time I take to be educated, contemporary, focused, honest, reputable, expert) there’s simply no possibility of transformation, except that of the client taking a hike. So, for me, my time is a strong indicator of the value I’ll deliver; I simply know that my time is worth more (or less!) than others in my field.
For programs I develop that engage less of my time (frankly, the most valuable thing I sell), such as group or e-based programs, the price goes down significantly. That doesn’t mean the transformation possibility is less; it means that a greater portion of the responsibility for that result lies with the client, not me.
Very interesting discussion; thanks so much!
Stephanie LH Calahan says
Andrea – Juicy juicy! Thanks for taking the time to share your thoughts. Of course, one blog post is not going to be able to cover the myriad of choices someone has when designing their pricing structure. The video I shared in the post covers more of that too. This post was meant more to get you thinking than to solve anyone’s specific situation.
My tribe are all purpose-driven (mostly virtual or want to be virtual) entrepreneurs, coaches, messengers and healers. So, that is who I talk to when I write.
The overhead costs associated in running a business exist regardless of where you work. All of the things you mentioned (“include rent, insurance, my team, marketing, cost of producing services, networking memberships, continued education, the region in which I conduct business, web development, etc.”) should be considered when you set your pricing no matter if you are charging for your time or charging for value/results.
Here’s the thing, I never said charging by the results your client gets.
I said charge for results. That is different. It is a big mind shift.
I use the term results and value interchangeably and you’ll see that even in my title above. I do not take responsible for my client doing the work. My client is responsible to take what they receive from me and to use it in their business. That is why I also use the word “value.”
I actually think we are saying the same thing but looking at where “results” are defined differently. Using your example as a coach, the result that you deliver is the specific knowledge and eye-opening questions that you impart to your clients, not what they do with that knowledge.
I love how you have outlined what you expect of your clients. I have a similar set of agreements with mine. In the video above, we talk a LOT about defining scope of the program/product/service you’re providing. Defining what will need to take place for the results to be met or the value to be received is a critical component to moving from charging by the hour to charging for results/value.
I’ve been coaching and consulting since 1995. When I first started it was with Fortune 50-100 clients. We always had value-based-high-end pricing. The story was the same there too. The client had to do their part in order for the outcome to be what they were looking for.
We’ll have to agree to disagree on how much your time is worth and why in coaching you have to charge by the hour. I have been coaching for a very long time and moved out of tracking my hours years ago.
I have had instances in my private work with clients where we reserved 2 hours to cover a topic and within 15-20 minutes the client had the breakthrough they needed. We ended the session so they could get going on implementing! Was that less value? I’d argue that there was more value because they got what they needed and had more time available than they expected.
We do agree that more access to you (or any other provider of service) should have a higher investment point. In any program I design, the investment will be higher if you have more access to me. The value you bring to the table can be calculated by your time or by the sheer fact that you are brilliant and come with an amazing background. You define that value and how it is measured. You could measure based on time or you could measure based on program.
Andrea Feinberg says
Gotcha! However, I don’t think I’ve said I have to charge by the hour however; it’s one option that provides clarity to a client who needs it. One of the great benefits of being the biz owner is that I get to make all the rules, providing they continue to bring me the kind of ideal clients with whom I want to work, whether they want an hourly rate, program rate or monthly retainer invoice. I think the bottom line is that, knowing what the varied options are and the thinking that creates them, gives us all more information with which to make good choices.
Kirk Bowman says
There are several issues with hourly billing. Here are two:
1. Hourly billing creates a conflict of interest between the customer and the professional. It is in the customer’s best interest for it to take as few hours as possible–lower price. It is in the professional’s best interest for it to take as many hours as possible–higher revenue.
2. Hourly billing focuses on the inputs not the outputs. The customer does not really care how many hours it takes. He simply wants to achieve the result within the budget and schedule of the agreement.
Value pricing aligns the interests of the professional with the interests of the customer by focusing on the value they will create together.
Kirk Bowman
Art of Value
Stephanie LH Calahan says
Yes! Great points Kirk. Thanks for taking the time to share them.
I love your first point because there are many service professionals that say that their clients don’t implement well or don’t take the action that is recommended. While it’s true that some clients just don’t do the work, when the client is worried about “racking up costs” then they may not totally hear what is being said to them. They have a split focus and that is never good for coaching, etc.
Debra Jason says
Interesting conversation. Thanks!
RE: the hourly rate discussion. I have always provided a proposal based on the “scope” of a project (not an hourly rate). Yet, there are many times, a client comes back and says “well how many hours is that?” Or, are you going to track how much time you spend on this?
I never heard the term “scope creep.” However, I have always built that into my proposals (without knowing that is what it was called).
In response to Jason’s graphic designer example, what may take one designer one hour, may take another a few days because he/she is more precise, spends time doing research, and have much more experience & therefore, takes more time to get to know his/her client and understand their needs.
Having been in business almost 25 years, I feel that my clients are not just paying for hours it takes to execute a project, they’re investing in themselves and in my years of experience.
There will always be someone who does it cheaper. And, if that’s what someone wants, they can go to Fiverr for it.
Thanks for this thought-provoking discussion.
🙂
Debra
Stephanie LH Calahan says
Hello Debra! Thanks for joining in on the conversation. Seems to me that the client was stepping over boundaries by asking you if you were going to charge hours or how many hours is that? I used to have that experience, but it does not come up anymore. When people have asked that type of question, I explain that I do not charge by the hour and that my business model does not include the overhead of tracking time. I share that I’d rather be focused on my client and giving them what will be of the best service to them. In almost 20 years I have only had 1 client prospect push back on that. Sometimes it is a simple matter of educating your prospects on how you work.
I believe “Scope creep” might have originated from the computer programming world. Many people struggle with charging by the project because they define a project and then the client comes back and says “oh let’s add this or that…” and all of the sudden that simple 5 page web site has turned into a huge project. This is a boundaries issue too! By having a clear project scope defined you and the client are clear on what you will deliver. Then, when the client starts to creep (happens often) you have a conversation with them letting them know that you would love to help them with X or X is a great idea, but it is outside of the project as it is currently designed. Then discuss the implications of that.
Yes! I agree that your clients are investing in WAY more than your time. “There will always be someone who does it cheaper. And, if that’s what someone wants, they can go to Fiverr for it.” made me smile. Agreed.
Elizabeth says
I have found it extremely frustrating when dealing with a potential client. I provide a package quote, listing what will be done, and the results they will receive. Now because I work one-on-one I also give a time frame how long it will take. I do mention the package includes any follow up they require to ask questions or to be shown again how to do a procedure I should when with them. Often I am able to send a pdf the shows and explains the process so they can have it for future reference.
BUT 90% of the time the question still comes back to, what is your hourly rate. The reason I am told it is measurable them. I always explain we are not on the clock when they accept a package. The package is the whole price and don’t need to look at the clock. I much prefer provide packages but the client is still stuck on hourly.
So my question is how do you stop a potential clients for continuously asking, what is your hourly charge?
Stephanie LH Calahan says
Hi Elizabeth –
In answer to your question, I simply firmly state that I do not charge by the hour. If they insist (which I have not had happen) then I would suggest that we are not a fit to work together and I’d be happy to provide them a referral to another pro that could help them.
However, there could be some other hiccups in your process. I believe you provide organizing services. Oftentimes, when quoting an investment amount to overwhelmed people, it is more effective to break down the parts and get them on board with the program first and then talk investment amount. This can jump them out of the math that they are doing in their heads. Sell them on the results they will get first. Answer any questions there.
If you’d like help mapping it out, let me know!
Brian says
“When you create a program or package, you define the results that your client will get.”
I have found this the most amazing exercise in bridging insight-creation to value… packaging aha’s created as a tangible deliverable… especially if those insights cannot be predicted, nor their value defined with any immediacy relative to action-ability… agreeing on… recognizing aha-event as a tangible and valued experience; and the value of categories of insight to be achieved prior to consult is key… communication and alignment of value before service interaction. Especially for meta-insight work.
Stephanie LH Calahan says
Hi Brian –
Thanks for sharing your insights here. Having clarity on ahas as value is big.