Value Pricing vs Hourly Billing

If you're a freelancer or independent consultant pricing your services based on value is essential. However, there is a common theme among value pricing advocates that suggests hourly workers don't value price, which simply isn't true.

An hourly wage is determined not by how much value is created by the service provider (likely an employee), but instead by how much the overall market values the service. When a local market puts pressure on an hourly wage to rise it means it values that service more or in technical terms the quantity of labor supplied by employees is lower than the quantity of labor demanded by employers and the return on the investment of the employee is greater than the cost of the wage. The inverse is also true for lowering hourly wages. Unless a hourly rate is being artificially inflated or capped due to a minimum wage or other price floors/ceilings implemented by the government or guilds/unions, the hourly wage will reflect how much the market demands (values) a service.

Hourly wages can vary widely across geographic areas and regions. One might would be quick to say that the reason people in silicon valley make more than people in Surgoinsville, Tennessee is because the cost of living is higher, which it is. However, if it was as simple as that a smart firm would move to Surgoinsville to setup shop and take advantage of the relatively cheap labor. The determining factor is value. The quality of talent (based on the value provided) is much higher in a tech center then it is in a very small town. Hourly wages are value priced, but rather than being based on the performance of an individual or specific firm, the expected level of value is aggregated across a market.

A firm or individual who bills their services using value based project pricing on the other hand is billing based on the value they create. Rather than charging for and providing the average amount of value that the market expects to receive for a service, they can provide (and charge for) the level of value their expertise allows them to create for their clients.

Think of it from the perspective of a smart decision maker. It doesn't make sense to hire a firm or consultant in the customized creative services industry and pay them the market average when you're not looking to buy the average service.

Hourly billing only works for productized services that take low/no effort to replicate and where the deliverables are the same each time because the expectations and values received are averaged across the market as a whole. When you charge an hourly rate you are saying "I am average." Average service providers aren't experts and can't charge based on the value they create, instead they must price based on the value the market expects average firms to provide.

Are you just average? Then take the standard deduction so to speak. Provide the same value and get paid the same price as everyone else. But if you are providing customized creative services that create value for your clients you must price in a way that reflects the value your provide.

Everything is priced based on value. You just have to decide what level of value you want to provide.