Ditching Hourly

Hello and welcome to Ditching Hourly. I'm Jonathan Stark. Today I'm going to talk about the morality of value pricing. When folks are first exposed to the notion of value pricing, some people have a knee-jerk reaction to it. The words extortion or gouging or immoral or unethical often come up. Now, ironically, I don't ever recall hearing a reaction like this from a buyer because buyers love value pricing. These reactions always come from sellers, who I believe are looking for any excuse to maintain their status quo, which would be hourly billing or cost plus pricing or time and materials pricing. So these are reactions that I usually get from developers or other freelancers or consultants or contractors when I'm sort of evangelizing about the benefits of ditching hourly. They kind of have this reaction that is almost visceral. So let's define a couple of these words. Extortion is the act of obtaining money, property, or services from an individual or institution through threat of violence. Gouging. Price gouging is when a seller spikes the prices of a basic necessity after a supply shock caused by something like a natural disaster. So unless you're threatening your clients with violence or spiking your prices during a natural disaster, you cannot be accused of extortion or gouging, regardless of how you price, on value or otherwise. Furthermore, if your client has even one single alternative to hiring you, neither of these terms could possibly apply. Again, this has nothing to do with hourly or value or anything. So the ethical thing. I find this super ironic that people would think that value pricing is unethical. Because to me, it's clearly more ethical than hourly billing or cost plus. Because it requires that you set your price lower than what it's worth to the buyer. This is not the case with hourly and in fact is how you end up with clients from hell and horrible project outcomes. With hourly, you don't start off with a price. The buyer has to make a usually a really big buying decision without having the most important fact at their disposal, which is how much is it going to cost? They have only an estimate of how much it's going to cost. And if you're great at estimating, then fine, it works out. But if you're not great at estimated or you're not great at controlling scope creep, then a project can easily end up costing a client more than it was worth to them. And by the time they find that out, it's too late. That's when they turn into micromanaging monsters because they tried to gain control back of a project that they clearly feel is out of control. The cost overruns are out of control, certainly. So if you're ever talking to a friend about value pricing and they react to it with words like extortion or gouging, simply ask them to explain their reasoning. Why do you say that? Why do you think it's extortion? Why do you think it's gouging? And pretty quickly, you and your friend will learn that they don't have a rational argument. They either don't understand the definition of those words or they don't understand how value pricing works. I want to talk one last bit about the ethics of value pricing. Some people think it feels immoral because you could theoretically do the exact same work in theory for two different customers and you would charge two different prices. So there's something to people that feels inherently, at least let's say unfair about that. The thing is, there's no such thing as essentially the same work in a service business. If you're doing custom projects for clients, there is always something different. So that argument is straight out. I think you can think back, if you have any experience at all, you can think back and easily determine that absolutely none of your projects were exactly the same. It's not like two cans of Coke that you're pricing differently for different people. These are different. These are actual different activities that you performed, different stress levels for everyone involved, different risk levels. Everything was different. The other thing is the price that you're setting is not for your work. The client's not paying you to sit in their office and type. The client is paying you for some outcome and you could do, if it was theoretically possible, to type the exact same set of keystrokes for two different clients. If one of those clients is a mom and pop pizza place and the other one is Domino's, the outcomes are going to be very different and the outcome is what the clients care about. The crux of the pricing morality question is the assumption that one's work is of the same value to everyone. This is absurd.

And by the way, stems from Marx's debunked labor theory of value, that the value of an item is sort of aggregate of all the labor that went into it. It doesn't make any sense. So assuming normal market conditions like, you know, you're not lying, you're not coercing the client, you don't have a monopoly, you're not engaging in price fixing with your competitors, a price can't be immoral or even unfair. Sure, a price can be bad, but in that case, the client would just reject it. So I'll give you an example. Paul Rand was a famous designer. He's passed away now, but he routinely charged multinational corporations seven figures for a logo design. He did logos for ABC, IBM, UPS, Westinghouse. You've seen his work. Now, would it have been immoral for Rand to propose a million dollar logo to a mom and pop pizza place? No, the question doesn't even make sense. The pizza place would just say no. They would reject the proposal. Morality has nothing whatsoever to do with it. The price is either profitable or unprofitable to the parties in the transaction. If it's not profitable to both parties, one or the other is going to reject it. That's it for today. I'm Jonathan Stark, and this is Ditching Hourly. Thanks for listening. The next time someone questions one of your hours entries, go to valuepricingbootcamp.com to sign up for my free email course. Again, that URL is valuepricingbootcamp.com. Hey, Jonathan again. Do you have questions about how to improve your business? Things like value pricing your work instead of billing for your time? Or positioning yourself as the go-to person in your space? Or maybe productizing your services so you never have to have another awkward sales call or spend hours writing another custom proposal? Book a one-on-one coaching call with me and get answers to these questions and others in the time it takes you to get ready for work in the morning. Best of all, you're covered by my 100% satisfaction guarantee. If at the end of the call you don't feel like it was worth it, just say the word and I'll refund your purchase in full. To book your one-on-one coaching call, go to jonathanstark.com slash call. That URL again is jonathanstark.com slash call. Hope to see you there.