Hourly billing and cost plus pricing aren’t sustainable

I’m obviously passionate about value in software development. Committing to worthwhile results shouldn’t be taken for granted.

All too often decisions are made and actions are delegated. Those that act have no understanding of purpose, desired results and the value of those results. They have no ability to correct course to ensure the results are obtained and the effort is a success. They aren’t a part of making the decision. And, they can’t be a part of adapting that decision as they work.

Actions only require effort. Those that are asked to act are only able to carry out their task and wait for the next. Accordingly, payment is reflected in terms of effort. Hourly billing runs rampant in software development precisely for this reason. It’s a reasonable fit. You tell me what to do and I’ll do it. Pay me for my effort because that’s what you’re asking me to contribute. If you change your mind three times, you pay three times.

Of course this doesn’t always work, because nobody really likes to pay by the hour. Especially at the rates that are common in software development. The next approach is an attempt to estimate effort. Sometimes this is done with hourly billing. But, when the estimate is codified into a fixed price, it becomes cost plus pricing. The estimated cost of the effort plus whatever mythical margin is added to account for the uncertainty. At the end of the day, it’s effort based pricing. It aligns well with being asked to supply effort.

Without an understanding of value though, the supplier has no way to know what their efforts are worth to their customer. All the supplier can be certain of, is how much money they cost the customer. The supplier has no way to control the value of their efforts. The results of their labor may be of immense value, but are more likely of marginal value. And, occasionally of no value.

Of course it’s tempting to blame the customer for asking for the wrong things. Or the supplier for substandard efforts. The blame game is fruitless. What matters is that when efforts aren’t worthwhile, everyone suffers. In the long term, this isn’t financially sustainable for the customer. And therefore it’s not sustainable for the supplier.

So, it’s in everyone’s interest to make sure efforts are worthwhile. The only way to do that is to move from an effort based model, to a results oriented model. Effort based models simply aren’t sustainable. Both the customer and the supplier need to understand what’s worthwhile. This requires discussing purpose and value. And then working together to fulfill that purpose. Deciding together on what efforts are best suited. Every step of the journey, anyone can assess progress in terms of desired results and correct course to maximize the value.

It shouldn’t come as a surprise that this results based model of business doesn’t align well with effort based billing and/or pricing models. This model of business requires a new model of pricing. A model based on results, not effort. A model typically referred to as value based pricing. From the outset, the customer and supplier must agree that the value they seek to create far surpasses the price the customer will pay. With a commitment to value, that’s not hard to do.

Effort based business isn’t just a problem for software development. It’s the norm in the personal training industry too. Combined with the fact that fitness is hard work, both physically and mentally, it’s no surprise customers rarely see results. It’s not hard to find trainers that offer effort based packages. X dollars per hour, and Y dollars for Z training sessions. And every variation there of. Trainers are often sustained by a revolving door of new customers, the majority of which walk away without the results they hoped for.

When’s the last time a trainer offered a package based on results? Want to build strength? I’ll help you add 100 pounds to your bench press. Want to bulk up? I’ll help you add 5 pounds of muscle. Want to slim down? I’ll help you lose the weight necessary to feel confident in a bikini. Put yourself in the shoes of someone joining a gym. What would you pay to have guaranteed results? I imagine there’s quite a bit of margin in there for the trainer to deliver the results you might desire.