In my previous post on value pricing, I explained how I first came to realize that billing for software projects by the hour was fundamentally flawed. In this post, I reveal a paradox which I hope will help illustrate my point.
Imagine that you've estimated a 40 hour job at $200/hr for a total of $8000. The client happily approves it and you rejoice.
After some initial research, you discover that there is a tool available for $1000 that will allow you to deliver the project in 5 hours, rather than the 40 hours that you've estimated. What do you do?
A) You buy the tool for $1000, you deliver the work in 5 hours, and bill the client for 5 hours. Result: You work 5 hours, pocket $0, own the tool, and the client loves you.
B) Have the client buy the tool for $1000, you deliver the work in 5 hours, and bill the client for 5 hours. Result: You work 5 hours, pocket $1000, the client owns the tool, and the client loves you.
C) You buy the tool for $1000, you finish the work in 5 hours but wait to deliver it at 30 hours, and bill the client $6000. Result: You work 5 hours, pocket $5000, own the tool, and the client is very happy that you finished faster and cheaper than promised.
D) You don't buy the tool, you deliver the work in 40 hours, and bill the client $8000. Result: You work 40 hours, pocket $8000, don't own the tool, and the client is satisfied.
I think that all of these options suck, and I don't advocate any of them. What's interesting to me is the moral dilemma between C and D. C is clearly dishonest, but it's undeniably better than D for both you and the client. The client saves $2k, receives their work 10 hours earlier than expected, and you make $1000 per hour!
I can imagine a variety of other options, and I'm sure you can, too. Unfortunately, none of them would address the underlying issue: that billing by the hour for software projects makes no sense. Software projects should be billed based on the client's perceived value of the outcome. Period. How many hours it takes you to deliver it is irrelevant; in fact, the fewer the better!
When I first switched to value pricing for software projects, I was struck by my sudden inclination to research and purchase tools. These days, I don't think twice about dropping $500-$1000 for something that will make my work go faster or better.
Herein lies an insidious truth about hourly billing: If you are billing by the hour, you have a subconscious incentive to NOT become more efficient. Because of this, your skills will stagnate and your clients will suffer.
To be continued...