Starting Tomorrow, You Can No Longer Bill for Time

By Tim Williams

Let’s imagine that tomorrow you begin your business day confronted with a startling announcement in the business press: governments around the world have suddenly banned the use of hourly billing. Can you and your colleagues continue to run a successful business — like the agencies in the pre-timesheet era preceding the 1980s — or would your firm have to close its doors?

Faced with the threat of business suicide, it’s certain you and your team would find alternative ways to price your services. In effect, an hourly-rate ban would force your firm to implement the same kinds of pricing strategies and approaches used in the rest of the business world. You would be compelled to leave behind the outmoded cost-plus approach to compensation and join the world of modern pricing.

In your urgent search to replace the hourly rate, you would shortly discover that the simplest solution is to model the pricing strategy used by most other businesses: price the product, not the time spent developing it. Charge for deliverables instead of activities. Outputs instead of inputs.

Other businesses — including service businesses — have a price list. Their products and services, offered up in different sizes and different versions, have a set minimum price determined not just by the cost, but by the market value. Professional service firms like agencies can do the same. Agencies produce a recurring set of deliverables, year after year, which can be cataloged in the equivalent of a pricing guide — a database of deliverables that indicates a minimum price for various “sizes” of each deliverable.

A shortcut to pricing success

Your firm’s pricing guide should be organized under broad classes of work. Create a complete catalog that lists all the deliverables developed and produced by the agency — not just creative artifacts but outputs of all types in all disciplines. For each deliverable, specify the required resources (roles), the time requirements for each role, project duration, and a minimum recommended price for different levels of complexity (small, medium, large).

Having a standardized approach to pricing isn’t meant to imply that creative concepts should be standardized. As always, the thinking will be completely custom. But the process and framework that surrounds the solution can be thought of as a “product.”

Search consultants, who sometimes refer to this approach as “deliverables first” pricing, report that a growing number of large marketers are voicing a strong preference for this approach. In fact, over half of all major agency-client relationships now involve some form of deliverables pricing (vs. the conventional agency retainer).

Most of the resistance to making this simple change comes not from marketers, but from agencies themselves, largely the result of habit and inertia. Agencies imagine that their clients won’t support a change to outputs-based pricing, but experience shows the opposite is true. When offered the choice, most marketers prefer paying for a delivered product rather than the time required to produce it.

An advantage for both new and existing clients

In new business, showcasing your deliverables-first pricing approach can be a significant competitive advantage. You’ll be providing prospects with yet another point of differentiation.

As for current clients, each relationship can be transitioned, one-by-one, by engaging key stakeholders in a conversation like this:

“As we plan budgets for the coming year, we’d like to recommend a more effective way of structuring our commercial relationship. As an agency, we believe that our clients are not buying activities or efforts, but rather solutions to business problems. While means we’re moving away from the concept of selling inputs (agency time) to selling outputs (agency deliverables).

So this next year, we propose to deliver the same scope of work, staffed by the same talented team, provided at the same total price, but rather than describing the work as agency hours (inputs) we will list and report the actual deliverables (outputs).

This means “scope” will be defined not as hours spent but as work completed and deadlines met. We find our clients actually prefer this way of working, as it provides them with greater clarity around what they’re actually buying: completed agency work, not agency efforts.

This also means that we, as your business partner, will take complete responsibility for staffing your business and allocating and managing the time required to deliver consistently excellent products and services.”

Building on this foundation of simple output-based pricing, you can then work to productize your entire business by developing a series of programs designed to solve your clients’ most pressing business problems. A fully productized firm is the future of the agency business, where you price the program, not the person or the hour.

Output or product-based pricing also solves the emerging problem of monetizing AI, because you can be sure that no firm will be able to make a living billing by the nano-second.