Bill By The Hour Or A Fixed-Fee Estimate?

Thursday, March 27, 2008 by Mistlee

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Bill By The Hour Or A Fixed-Fee Estimate?

By Brett Derricott

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

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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

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:

Continue reading this article.

About the Author:
Brett Derricott is the founder and CEO of Agency Fusion, a web development company with a sweet content management system.

Brett blogs about technology at Agency Byte.

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