Charting Value

One of my teachers told me to draw a picture to better understand a problem.  So this crude chart is my attempt at making an economic depiction of the value pricing proposition compared to the hourly billing model.  Your service generally has a set value to the client, which is the maximum price they are willing to pay for your work.  If your price is based on hours worked as shown by line P, then as your hours increase, your price increases according to the rate. 

So long as your total hours keep your price under the value line, you will easily collect what you bill, as the client knows they would have paid more and feel they have received your services at a discount to their value.  However, if your hours put you at a price point above the value line, the client will either pay grudgingly or attempt to negotiate back down to the value line.  If you are consistently over this value line, you will encounter haggling with clients who don’t want to pay your price.

If you are consistently under this value line, then you are always leaving money on the table that the client would have given to you if you had asked for it.  This scenario is why value pricing increases profitability.  The efficient service provider is punished in an hourly pricing model (same profit margin with less total revenue), but will be rewarded in a value based model with a higher profit margin and higher total revenue.

Good economics dictates that firms wish to maximize profit, not billable hours.  Be efficient, deliver great value, and make obscene profits by pricing for value.