April 30, 2022
Value Pricing Labor
When faced with the idea of switching from hourly billing to value pricing, folks who have employees are often perplexed.
They have loads of questions about things like:
- How to measure productivity and utilization
- How to incentivize and reward employees
- How to track profitablity on a project or employee basis
There are answers to all of these in a value pricing model, but the REAL question is this:
Why do you have employees at all?
Most of the firm owners I have spoken with over the years started hiring employees as a way to scale their hands.
In other words, they increased their output capacity by increasing their labor force.
Value pricing is fundamentally different. It’s a way to scale your brains.
Or more accurately, to dramatically increase your profitability when selling your expertise.
You CAN value price labor-based projects, BUT the profit margin on selling “hands work” is usually no where near as good as value pricing “brains work”.
Here’s the thing...
Hourly billing is 100% focused on inputs (i.e., the time you and/or your employees put in), and value pricing is 100% focused on results (i.e., achieving the client’s desired outcome as quickly as possible).
So if you start value pricing, you will find yourself financially incentivized to do more brains work.
And if your employees aren’t ready or willing to do brains work, keeping them around will anchor you to lower profit “hands work”.
I’m not saying switching to value pricing means that you should fire all your employees.
But it will suddenly become quite clear which employees are good at putting in hours but not so good at delivering results.
Yours,
—J