Hourly vs. Fixed-Price vs. Value Billing: Which is Best?
A content and social media marketing specialist, Ben Jacobson joined the Lean Labs team in the summer of 2014. Ben has been active as a digital branding professional since the early days of social media, having overseen projects for brands including MTV, National Geographic, Zagat and Wix. His writing has appeared in Social Media Explorer, Search Engine Journal, Techwyse and the Mad Mimi Blog. Ben resides just south of the Carmel Mountain ridge in Israel with his dashing wife and two sprightly descendants.
If you’ve ever asked more than one digital services agency for a price quote on a project, you've probably noticed each company uses drastically different billing models. Some quote an hourly rate along with an itemized estimate, while others give you a flat fee for the entire project. A third group will price the project based on the value they are providing you.
If you're left scratching your head, trying to compare apples and oranges, you're not alone. Agency pricing is confusing, especially if you're trying to decide which pricing model will be most suitable for your project.
Hourly vs. Fixed vs. Value Billing
Unfortunately, all of these pricing models have downsides.
The Pros and Cons of Hourly Billing
An hourly rate means you only pay for the time it takes to get the work done. But this pricing model has no built-in motivation for efficiency if you're rewarding them for clocking hours. Simple projects can drag on and on because the agency doesn't feel the need to do their best work quickly.
What's more, when paying for hourly work outside of your office, you have no way of knowing if the hours billed actually translate to hours worked. Lack of focus, no predetermined deadlines and project scope ambiguity are just a few of the many pitfalls of hourly billing.
The Pros and Cons of Fixed Price Billing
Fixed rates, on the other hand, come with their own set of drawbacks. When agencies bill according to a preset amount, they're basically calculating how many hours they expect your project to take. Then, they add a little padding to cover miscalculations and other unanticipated snafus in the project. As a result, flat-rate quotes are almost always going to total more than you would have paid the same team on an hourly basis.
Fixed rates do encourage agencies to work more efficiently in order to complete the project in the allotted timeframe. The downfall of this pricing method can be putting emphasis on getting as much done as possible, in as little time as possible - rewarding quantity over quality. This can impose damaging limits on creativity, since everyone is focused on sticking to the original scope. New and ambitious ideas along the way are ignored due to the aversion to change orders from both sides.
The Pros and Cons of Value-Based Billing
Value billing is used, mostly, by larger agencies, where sophisticated systems can measure how much value they add to a project. They charge you according to how much value their piece of the job is worth to your company.
Because it all comes down to scale, larger companies will often pay more than smaller businesses. For instance, an agency who uses value-based billing would charge Pepsi or Ford a whole lot more for a logo than they would a small business in town with 2 employees.
The advantage of value billing is that the relationship doesn't end by default as soon as the project is over. The agency will continue to work with you until you have reached your business goals. On the other hand, you are often locked into a long-term service retainer contract, which can be confining if you aren't satisfied with the quality of work provided.
A Better Billing Method for Agencies
Out of those three, fixed-rate presents the least amount of risk. In our opinion, if you have to choose from those three, go with the fixed-rate. At least you'll be able to pick a reputable agency with good references, and you'll know exactly how much you'll pay for your project.
There is a way to avoid the downsides of all of these pricing models. We call it Velocity Billing.
This model is based on your business objectives, broken down into specific sub-steps. It prevents you from overpaying while stressing creativity. It minimizes turnaround times, while still focusing on quality. Velocity Billing combines the advantages of all the other pricing methods while effectively removing the risks and uncertainties that accompany them.
If you want to learn more about Velocity Billing, we've written a short eBook you can download here.