Are you having a bad day rate? The true price of creativity
The best way to track progress in product development isn’t by day rate. I’ll tell you why; you can’t measure the value of innovation in hourly units.
Did you know that billable hours were first popularised by the American Bar Association to boost its member’s salaries?
So it begs the question: Why are so many London agencies measuring innovation like American 1950’s lawyers?
Why good day rates are bad
Billing projects by the hour saps morale. It’s bad for the agency, because it forces less professional habits like time-stuffing and dallying. Or worse, it makes teams rush when they need time and space to develop ideas.
It’s bad for the client too. Instead of thinking about outcomes, we focus on output. How many hours did that take? Could we rush the next sprint? Why haven’t we made more progress, given the size of the last bill?
Old habits die hard
In the 1950’s, billing by time made perfect sense. It helped businesses earn more and receive bonuses for extra time spent on client work.
This pricing model doesn’t fit anymore. There are two big reasons for this:
As technology speeds up, we will spend less time on processes. This shouldn’t mean the value of our service goes down.
People work at different speeds depending on skill. Less experienced hires shouldn’t cause billing inconsistencies.
If you really think about it, hourly or daily pricing structures screw both the brand agency and the client.
Avoid the race to the bottom
If agencies compete on time, seemingly ‘cheap’ agencies offer a more attractive prospect. This is a false economy.
“Perhaps the reason price is all your customers care about is because you haven’t given them anything else to care about.”– Seth Godin
You wouldn’t want to measure the value of your brand’s core proposition in something as basic as hours. The original Swoosh cost $35 and brought enormous long-term value for Nike.
Thinking in a linear ‘X amount of time should produce Y result’ is unhelpful. That’s why we shouldn’t measure in days.
One of our clients RMAPI embody this, they look at asset value rather than output in the revenue management industry. If investors aren’t focusing on output, then agencies should follow suit.
Fixed fees - pros and cons
The natural alternative to charging by day rate is the ‘fixed fee’ model. You choose a series of fixed project fees, and your client selects the best fit.
Does this work for product development agencies? Arguably no. Fixed fee pricing doesn’t allow for flexibility. Every project is completely unique, with varying requirements, deadlines, scope and interdependent entities.
Value-based pricing has the advantage of showing how each client values your service. Instead, you charge what you’re worth.
The beauty of value-based pricing
We’re not here to answer the question, ‘How much should I be paying my agency, then?’ We want to get away from focusing on outputs, to focus on outcomes.
"Pricing is actually pretty simple...Customers will not pay literally a penny more than the true value of the product." - Ron Johnson
Value-based pricing creates the freedom to finish projects ahead of schedule
As technology speeds up processes, value-based pricing doesn’t penalise working more efficiently
Clients can pick a scope of work that is clearly defined, allowing them to choose a plan that fits the size of their business
Meanwhile, the client is always certain of the complete value they will receive, which is a basis for healthier ongoing conversations and happier clients
I believe the financial push-pull dynamic of time tracking sours otherwise harmonious relationships between a client and an innovative brand agency. Day rates need to go, bro. Do you agree?
Have a good day!
If you want to dig into this with me further, I’m based at The Ned in Central London every Wednesday, meeting new people doing interesting things. If you’d like to have a chat about how you price your projects, I’d love to hear about it.