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Note the inherent flaw in "by the hour" billing: if you want to increase your income you either must work more hours or raise your rates. In other words, hour

Note the inherent flaw in "by the hour" billing: if you want to increase your income you either must work more hours or raise your rates. In other words, hourly billing guarantees a built-in cap to your annual income. You have a maximum, but no minimum income. This is a world that I do not want to live in: a voluntary upper limit on my achievements. Hourly billing is a method of setting prices by looking at the cost of the product you are selling. In fact a customer does not care what it costs for you to deliver a product or service. You could be delivering a product that is made of diamonds and unicorn horns. It doesn't matter. What matters is the value of your product or service to the customer. Your job, as a business owner, is to set your price based on the customer, not based on your costs. Set your price based on the value that you deliver. Then adjust the inputs (hours of worker time, etc.) until you can deliver the value at that price. Mercedes Benz adjusts the inputs for a C-class car until it hits the target price. It adjusts the inputs differently for an E-class or S-class car. There is a lot of information out there in the wide world about this. It is not "fixed pricing." Call it "value pricing." Fixed pricing is just computing the cost of your inputs, adding a margin, and declaring a price. Value pricing is a matter of working backwards from the customer's value desires to set the price. For you math people, this is an "area beneath the curve" problem. I'm an international tax lawyer. I make far more money (and have happier customers) when I charge a declared price than when I bill by the hour. All that being said, one of the points in the article is exactly right: raise your prices and you will get better quality customers. Go see www.verasage.com as a jumping-off point for discussions of pricing in professional service firms. All business are alike. Don't think that advice to an accounting firm is inapplicable to you. It's not. It's all "delivery of a service to a human being in exchange for money".

makalumhenders 14y ago
Philip, if you can raise your rates, then how is there a maximum income? We raised our rates until supply balanced demand.
- philiphodgen 14y ago
  I have raised my rates again and again and I am still overworked. (Full disclosure: currently I am $800/hour). The difference is that now I am working on much bigger deals for people who appreciate my value. I cannot tell you how important this is to my general sense of happiness.
  - lifeisstillgood 14y ago
    That last is the killer - clients who are willing to pay more, turn out not to be fools but actually respect quality and don't waste your time.
  - jacquesm 14y ago
    How many hours do you book at $800 / hour?
    - philiphodgen 14y ago
      Not too damn many, because of the pressing needs of running a business. If I can hit 100/month I am doing well.
      - jacquesm 14y ago
        That's still pretty damn good! Congratulations!
bguthrie 14y ago
Measuring value in software development is difficult. If you can tie your activities directly to either higher revenue or lower cost, that's great. As an international tax lawyer, I'd think you have a relatively straightforward way to demonstrate value: it's proportional to the money your clients save on their taxes. patio11 has the same advantage: consulting time spent optimizing conversions through A/B testing can be directly tied back to increased revenue. But what if you end up working on a product for a company that never makes them any money at all? You haven't provided any direct business value, although you may have done quite a lot of work--maybe months or years. Are you going to charge them nothing? Rates are a proxy for value that accounts at least in part for the risk of project failure. High-risk individuals might account for this by trading equity for hourly rate or accepting some other form of in-kind compensation, as many startup employees do. But you have to be a strong believer in the project in order to do so, and most freelancers, to put it bluntly, aren't. Otherwise they'd be employees. Nonetheless, don't start at the bottom by calculating costs. There's a market value for your services in the area where you live. If you can, start by asking other freelancers and consulting firms. The value of a good is what people will pay to get it, not what it costs to make.
- philiphodgen 14y ago
  The value to my clients comes in two forms: (1) amount of tax saved and (2) stress and fear eliminated. The first is easy to quantify. It also means there is an upper cap on your income. The upper cap is the amount of tax saved. As your price approaches that number, the likelihood of a "yes" decreases. Do not set your pricing based on easily quantifiable criteria, unless you're working on huge deals where you can take a small fraction of the value as compensation. (By small I mean low single digit percentages). The second is where the true value sits. People are willing to exchange money for a peaceful brain. People are willing to exchange money in exchange for more time in their lives. It is here that personal value choice discontinuities work in your favor. Set your pricing based on intangibles. A business owner is willing to throw money at a problem to not have to think about the problem at all. This frees up the owner's brain to think about stuff that really matters and will make money. An hour spent by a CEO looking at tax returns could be an hour taken away from making a deal that brings in $1 million for the company. It's worth spending $1,000 to make the problem go away. You are happy to take the $1,000 because it takes you $125 of time input to solve that problem. I have seen this with very large companies. There is a reason why their compensation packages include "your employer will pay for a lawyer, accountant, and personal financial planner." You don't want an executive with 10,000 employees under him/her to be sweating credit card payments, or "Is my will up to date?" or any trivia like that. Moreso, however, I see this with entrepreneur-driven companies. The owner is the manager and this person's time is incredibly valuable and should not be spent on trivia, especially emotion-laden trivia.
baddox 14y ago
> Your job, as a business owner, is to set your price based on the customer, not based on your costs. That's true, but customers will consider your costs when deciding what price they think is fair for them to pay, so neither metric is isolated from the other.
- SilasX 14y ago
  I think you just obviated about 200 years of economics debate. I don't mean to sound trite, but that's basically a resolution of the whole debate between the subjectivist/marginalists and the "labor theory of value"/"cost the limit of price" camp.
  - baddox 14y ago
    I'm not an expert in the history of economics, but I don't see how anything I said is controversial or obviates any debates. I find it hard to believe that any economists think that consumers do not consider these things when deciding what prices they believe are fair.
    - SilasX 14y ago
      I don't claim you were the first to come up with that resolution, but it's an insight without which the two camps were effectively talking past each other, unable to identify where the real disagreement was.
bdunn 14y ago
This. It might sound strange, but most service providers are "selfish" in their pricing. Meaning, a rate is determined by looking inward — how much do I need to charge to make more than my monthly fixed expenses? What's the equivalent hourly rate when I was a salaried employee? What are my peers charging? I've been able to continuously raise my rates over the years ($50 -> $250+/hr) by getting better at understanding the business problem at the root of a project request (i.e. they don't "want a new website designed", they really just want more walk-in customers) and tailoring my proposal, discussions, and execution toward that end. As long as you can position yourself as an investment instead of an expense, and wield your technical + business skills to make your client's business better off than they were before hiring you, your ceiling is whenever the project cost outweighs the potential payoff. (FYI, I wrote a book on this: http://doubleyourfreelancingrate.com http://doubleyourfreelancingrate.com)
jacquesm 14y ago
> In other words, hourly billing guarantees a built-in cap to your annual income. In practice that cap works out to a hard ceiling of 350K. Which is pretty good considering you need to feed only one family of it.
- tome 14y ago
  What are you saying? That no one can charge more than $1k per day? Why?
  - jacquesm 14y ago
    What it means is that for normal IT consultants that work 'normal hours' if you are paid by the hour that is roughly what it works out to. 1000 hours at 350 / hour or thereabouts. Sure there are some gods that can charge more than that but for mere mortals this seems to be roughly the cap. Sure you can charge more than $1k / day. It's just that at that rate you'll find it hard to book 350 days / year. Billable days are anywhere from 125 to 200 / year depending on your rate, reputation and skillset. If you bill $2k/day (definitely doable) you'll find that it gets harder to book all your days, it's simply demand and supply. Elsewhere in this thread someone is charging $800 / hour, which is great, you would only have to work a very small number of hours at that rate to have a living, or you could work a much larger number of hours and save like crazy. But I don't see that as the norm for IT consultants, programmers (Ruby, PHP, Java that sort of thing: $80 to $150 / hour, clojure and other 'exotic' stuff $120 to $250 / hour, M&A work $300 to $500 / hour but that is definitely not the kind of work that you could reasonably speaking book a whole years worth of unless you are the pet of some VC and involved in every deal in the pipeline).
grey-area 14y ago
As a customer, I can look up the price of a C-class, but how can I judge the value? I do it mostly by comparing with other cars available, and what they can do, but what was the price of the other cars based on? And what is the value anyway? How fast it goes, how it makes me look to others, how big the luggage compartment is? There is no one true objective value. I'd argue the reason your customers are happier with a fixed price is not to do with value (after all, what is value - can a customer tell you?), but to do with predictable expenditure and risk. It's a good policy and popular with clients (and also helps to make scope very clear and costed), but it's popular with customers because it gives you a very good incentive to finish on time and on budget, as compared to hourly billing. I'm not sure that's really comparable to shopping for a car.
- polymatter 14y ago
  A lot of the value in a car is the social signalling it represents. Which is (in a curiously recursive fashion) largely determined by its price.
joedev 14y ago
I've tried fix-rate project delivery. It's a nightmare. Either you spend so much energy up-front to document in detail the finish line, or you spend so much energy on the backend fighting scope creep. Maybe I did it wrong the times I've tried.
msutherl 14y ago
This article provides an entertaining economic theory based on getting paid as much as you can cleverly manipulate somebody to pay you: http://www.ribbonfarm.com/2013/01/31/stone-soup-for-the-capitalists-soul/ http://www.ribbonfarm.com/2013/01/31/stone-soup-for-the-capi...

makalumhenders 14y ago

Philip, if you can raise your rates, then how is there a maximum income? We raised our rates until supply balanced demand.

philiphodgen 14y ago
I have raised my rates again and again and I am still overworked. (Full disclosure: currently I am $800/hour). The difference is that now I am working on much bigger deals for people who appreciate my value. I cannot tell you how important this is to my general sense of happiness.
- lifeisstillgood 14y ago
  That last is the killer - clients who are willing to pay more, turn out not to be fools but actually respect quality and don't waste your time.
- jacquesm 14y ago
  How many hours do you book at $800 / hour?
  - philiphodgen 14y ago
    Not too damn many, because of the pressing needs of running a business. If I can hit 100/month I am doing well.
    - jacquesm 14y ago
      That's still pretty damn good! Congratulations!

bguthrie 14y ago

Measuring value in software development is difficult. If you can tie your activities directly to either higher revenue or lower cost, that's great. As an international tax lawyer, I'd think you have a relatively straightforward way to demonstrate value: it's proportional to the money your clients save on their taxes. patio11 has the same advantage: consulting time spent optimizing conversions through A/B testing can be directly tied back to increased revenue. But what if you end up working on a product for a company that never makes them any money at all? You haven't provided any direct business value, although you may have done quite a lot of work--maybe months or years. Are you going to charge them nothing? Rates are a proxy for value that accounts at least in part for the risk of project failure. High-risk individuals might account for this by trading equity for hourly rate or accepting some other form of in-kind compensation, as many startup employees do. But you have to be a strong believer in the project in order to do so, and most freelancers, to put it bluntly, aren't. Otherwise they'd be employees. Nonetheless, don't start at the bottom by calculating costs. There's a market value for your services in the area where you live. If you can, start by asking other freelancers and consulting firms. The value of a good is what people will pay to get it, not what it costs to make.

philiphodgen 14y ago
The value to my clients comes in two forms: (1) amount of tax saved and (2) stress and fear eliminated. The first is easy to quantify. It also means there is an upper cap on your income. The upper cap is the amount of tax saved. As your price approaches that number, the likelihood of a "yes" decreases. Do not set your pricing based on easily quantifiable criteria, unless you're working on huge deals where you can take a small fraction of the value as compensation. (By small I mean low single digit percentages). The second is where the true value sits. People are willing to exchange money for a peaceful brain. People are willing to exchange money in exchange for more time in their lives. It is here that personal value choice discontinuities work in your favor. Set your pricing based on intangibles. A business owner is willing to throw money at a problem to not have to think about the problem at all. This frees up the owner's brain to think about stuff that really matters and will make money. An hour spent by a CEO looking at tax returns could be an hour taken away from making a deal that brings in $1 million for the company. It's worth spending $1,000 to make the problem go away. You are happy to take the $1,000 because it takes you $125 of time input to solve that problem. I have seen this with very large companies. There is a reason why their compensation packages include "your employer will pay for a lawyer, accountant, and personal financial planner." You don't want an executive with 10,000 employees under him/her to be sweating credit card payments, or "Is my will up to date?" or any trivia like that. Moreso, however, I see this with entrepreneur-driven companies. The owner is the manager and this person's time is incredibly valuable and should not be spent on trivia, especially emotion-laden trivia.

baddox 14y ago

> Your job, as a business owner, is to set your price based on the customer, not based on your costs. That's true, but customers will consider your costs when deciding what price they think is fair for them to pay, so neither metric is isolated from the other.

SilasX 14y ago
I think you just obviated about 200 years of economics debate. I don't mean to sound trite, but that's basically a resolution of the whole debate between the subjectivist/marginalists and the "labor theory of value"/"cost the limit of price" camp.
- baddox 14y ago
  I'm not an expert in the history of economics, but I don't see how anything I said is controversial or obviates any debates. I find it hard to believe that any economists think that consumers do not consider these things when deciding what prices they believe are fair.
  - SilasX 14y ago
    I don't claim you were the first to come up with that resolution, but it's an insight without which the two camps were effectively talking past each other, unable to identify where the real disagreement was.

bdunn 14y ago

This. It might sound strange, but most service providers are "selfish" in their pricing. Meaning, a rate is determined by looking inward — how much do I need to charge to make more than my monthly fixed expenses? What's the equivalent hourly rate when I was a salaried employee? What are my peers charging? I've been able to continuously raise my rates over the years ($50 -> $250+/hr) by getting better at understanding the business problem at the root of a project request (i.e. they don't "want a new website designed", they really just want more walk-in customers) and tailoring my proposal, discussions, and execution toward that end. As long as you can position yourself as an investment instead of an expense, and wield your technical + business skills to make your client's business better off than they were before hiring you, your ceiling is whenever the project cost outweighs the potential payoff. (FYI, I wrote a book on this: http://doubleyourfreelancingrate.com http://doubleyourfreelancingrate.com)

jacquesm 14y ago

> In other words, hourly billing guarantees a built-in cap to your annual income. In practice that cap works out to a hard ceiling of 350K. Which is pretty good considering you need to feed only one family of it.

tome 14y ago
What are you saying? That no one can charge more than $1k per day? Why?
- jacquesm 14y ago
  What it means is that for normal IT consultants that work 'normal hours' if you are paid by the hour that is roughly what it works out to. 1000 hours at 350 / hour or thereabouts. Sure there are some gods that can charge more than that but for mere mortals this seems to be roughly the cap. Sure you can charge more than $1k / day. It's just that at that rate you'll find it hard to book 350 days / year. Billable days are anywhere from 125 to 200 / year depending on your rate, reputation and skillset. If you bill $2k/day (definitely doable) you'll find that it gets harder to book all your days, it's simply demand and supply. Elsewhere in this thread someone is charging $800 / hour, which is great, you would only have to work a very small number of hours at that rate to have a living, or you could work a much larger number of hours and save like crazy. But I don't see that as the norm for IT consultants, programmers (Ruby, PHP, Java that sort of thing: $80 to $150 / hour, clojure and other 'exotic' stuff $120 to $250 / hour, M&A work $300 to $500 / hour but that is definitely not the kind of work that you could reasonably speaking book a whole years worth of unless you are the pet of some VC and involved in every deal in the pipeline).

grey-area 14y ago

As a customer, I can look up the price of a C-class, but how can I judge the value? I do it mostly by comparing with other cars available, and what they can do, but what was the price of the other cars based on? And what is the value anyway? How fast it goes, how it makes me look to others, how big the luggage compartment is? There is no one true objective value. I'd argue the reason your customers are happier with a fixed price is not to do with value (after all, what is value - can a customer tell you?), but to do with predictable expenditure and risk. It's a good policy and popular with clients (and also helps to make scope very clear and costed), but it's popular with customers because it gives you a very good incentive to finish on time and on budget, as compared to hourly billing. I'm not sure that's really comparable to shopping for a car.

polymatter 14y ago
A lot of the value in a car is the social signalling it represents. Which is (in a curiously recursive fashion) largely determined by its price.

joedev 14y ago

I've tried fix-rate project delivery. It's a nightmare. Either you spend so much energy up-front to document in detail the finish line, or you spend so much energy on the backend fighting scope creep. Maybe I did it wrong the times I've tried.

msutherl 14y ago

This article provides an entertaining economic theory based on getting paid as much as you can cleverly manipulate somebody to pay you: http://www.ribbonfarm.com/2013/01/31/stone-soup-for-the-capitalists-soul/ http://www.ribbonfarm.com/2013/01/31/stone-soup-for-the-capi...