In business situations I aim to create a situations where the outcome I want to see is beneficial for everyone involved. This is surprisingly difficult due to the complexities of work, the inherent vagueness of projects, and the need to get paid enough to survive. That is one reason why it is so important to work with great people – the care they put into their work bridges the gap between incentives.
So let’s talk about the incentives with different types of pricing and I am going to specifically talk about pricing in the business to business service industry. I know of three primary pricing models: 1) hourly, 2) fixed bid per project, and 3) retainer.
I ran out of time to write this due to a meeting this morning, so I’ll break it up into multiple parts. Today I’ll talk about hourly billing.
When billing by the hour the client’s incentive is to keep the number of hours low so they don’t have to spend as much money. This can lead to them wanting to cut corners in order to reduce the total price. The service provider’s incentive is to charge for as many hours as possible to increase their income.
This imbalance of incentives leads to tension and possibly distrust. Unless the client and service provider have a strong relationship, the client doesn’t know if the service provider is recommending things for their own benefit or for the benefit of the client. They don’t know if the service provider is dragging their feet to rack up more hours. As a relationship is built these problems tend to fade but that takes time and consistency on both sides – the same people need to be working together because that trust isn’t easily transferable.
I feel like hourly billing is a necessary evil. I don’t like it but sometimes that is the only way because the task isn’t easily defined.