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Hourly billing is nuts
The document critiques hourly billing, highlighting its drawbacks for both service providers and clients, such as limiting income, discouraging productivity, and increasing bureaucracy. It advocates for value pricing, which focuses on the perceived value of outcomes rather than time spent, thereby encouraging better results and alignment with client goals. The author emphasizes the importance of selling expertise and outcomes over hours worked, aiming for higher profitability through smarter work strategies.
Hourly billing is nuts
- 1. Hourly billing isnuts Piotr Macuk piotr@macuk.pl TRUG styczeń 2018
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- 3. Why hourly billingis nuts for you ● Places an artificial limit on your income ● Punishes increased productivity and efficiency ● Stagnates your skills in the long-term ● Punishes automation and better tooling ● Causes ethical problems ● The better you are the less money you get ● Increases bureaucracy
- 4. Why hourly billingis nuts for your client ● Buys not the best work ● Causes longer time for feature delivery ● Causes the lack of involvement ● Buys more hands not more heads to work ● Increases bureaucracy
- 5. Example Junior vsSenior Junior 50 PLN / hour 20 hours 20 * 50 = 1.000 PLN Delivery time: long Code quality: mediocre Code maintainability: mediocre Senior 150 PLN / hour 5 hours 5 * 150 PLN = 750 PLN Delivery time: fast Code quality: high Code maintainability: high
- 6. Moral dilemma ● 40hours job => 100 PLN / hour => 4.000 PLN ● Discover the tool for 500 PLN and could deliver in 5 hours ● A) buy the tool, deliver in 5 hours, bill for 5 hours ● B) client buy the tool, deliver in 5 hours, bill for 5 hours ● C) buy the tool, finish in 5 hours, deliver later, bill for 30 hours ● D) Don’t buy the tool, deliver 40 hours of work
- 7. Moral dilemma work spendown bill balance client A 5 hours 500 PLN tool 500 PLN 0 PLN loves you B 5 hours 0 PLN --- 500 PLN 500 PLN loves you C 5 hours 500 PLN tool 3.000 PLN 3.000 PLN very happy D 40 hours 0 PLN --- 4.000 PLN 4.000 PLN satisfied
- 8. General thoughts ● Billingby the hour is like billing by the pixel, or by the line of code ● Clients don't buy hours, they buy results ● Clients don’t want your time, they want their goals achieved Software projects should be billed based on the client's perceived value of the outcome.
- 9. Introduction to valuepricing ● Value Pricing is like fixed bids on steroids ● Don’t estimate costs (time and materials) ● Estimate client’s perceived value of the project outcome ● Value is a maximum amount a consumer would be willing to pay for an item ● Value is NOT intrinsic property of an item ● Value is what sth is worth to a particular person in a particular situation
- 10. Change your mind ●Don’t define scope => define value for the client ● Don’t define deadlines => freezing lake analogy ● Don’t base on agreement and documentation => base on trust ● Deliver results and value instead of hours ● Sell your head instead of hands ● Be a part of the business
- 11. How to definevalue of the project ● Why do this now? Maybe you should try later? ● Why hire an expensive developer? Maybe a better idea is to outsource to India? ● Why do you want to have a custom solution? Maybe it’s better to use sth ready? ● The project will be very expensive. Maybe doing nothing would be cheaper?
- 12. Fast algorithm ● Whenyou have client’s perceived value of the project outcome ● Divide the value by 10 ● Do you want to do this for X? ○ “Hell yeah” => send the proposal ○ “No way” => divide the value by 5 ○ Do you want to do this for Y? ■ “Hell yeah” => send the proposal ■ “No way” => waste of time
- 13. Cost vs Valuealgorithm ● Guess how many hours the project will take ● Multiply that by your doubled hourly rate => you have X ● Guess the value for the client and divide it by 10 => you have Y ● Send the proposal for greater of X and Y ● The closer X and Y are the risk is higher ● If the Y is five or ten times greater than X then the risk is drastically reduced
- 14. Revenue vs Profit Revenue— the amount of money you receive from your clients Profit — your revenue minus your cost Your biggest expense is YOUR TIME! Development work is GREAT for revenue but SUCKS for profitability. Growth is NOT more revenue Growth is increasing your profits
- 15. Last thoughts You wantto charge for your head, not your hands. Smarts, not labor. Results, not deliverables. Outcomes, not activities. Multiply your head instead of your hands. Solve bigger problems… for bigger clients… with less effort.
- 16. My transition tovalue pricing...
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