Should You Track Your Time When Value Pricing?
One of the goals of value pricing as a service business is to break the link between the price you charge and the time you put into a project. But should you still track your own time even when you’re not using it to price your services?
A value-based price is one that reflects the outcomes that your customer will receive as a result of your inputs. The effort, time and energy required for those outcomes isn’t relevant to the price.
Your customer places little, if any, value on your time.
As a knowledge-based professional, this can be a tough pill to swallow. After all, you’ve spent years learning your craft; and the amount of time you put into a project is likely to be very valuable to you.
So should you be tracking your time, even if you’re pricing based on value?
Time is an Operational Cost of Business
Regardless of how you price your services, you need to see yourself as an operational cost of your business.
And just like any cost, you need to make sure that you are providing a return for the business; ultimately, you need to be profitable for your business.
Value-pricing purists might say time tracking can be abandoned, but despite every effort, I’ve really struggled with this. I’m still not quite there yet, and throughout my transition to value pricing, I’ve continued to track my time (using Toggl) for pretty much everything I do in my business.
This includes not only “billable” work, but also internal tasks, such as updating accounts, filling in tax returns, writing books and courses, marketing, and so on.
I’m even tracking the time I spend writing and editing this article (1h 25m).
Why would I do this? After all, keeping track of time is an inconvenience at best.
But keeping an track of how I spend my time allows me to know my cost to the business, as well as giving me the opportunity to identify inefficiencies and delegate tasks that get in the way of more valuable work.
Whilst it may be irrelevant to your customer, I think knowing how you spend your time is still important for you and your business.
Time is a floor to (but does not determine) price
Despite tracking my time, it’s crucial to remember that it is not used to determine the value-based price of a service, except perhaps as a baseline, i.e. a break-even point.
After all, you want to ensure that your business creates a profit on your input.
If you work solo, it can be easy to forget this — you almost have to see yourself as two separate entities: the business owner and a separate, salaried team member.
When determining a value-based price, regardless of the value to the customer, you need to ensure you are covering your operating costs. Tracking your time allows you to benchmark different jobs and help provide a guesstimate of how long a piece of work might take.
As you begin to productise your services, tracking your time can also help you monitor efficiency.
Remember, though, that the value of the outcomes you deliver should be several orders of magnitude above your operating costs, and at least several times the price your charge.
This can often be difficult to determine; if you’re struggling to justify (to yourself) a value based fee that meets this criteria, then it’s likely you’ve mis-identified where the value lies for the customer; or — and it has taken me a long while to accept this — it may be that the work is simply too small or not suitable for a value based price.
This is a subject I’ll cover in an upcoming post, but generally, the former can be resolved by continuing the value conversation with your customer. The latter might actually be better resolved with a different pricing model or, preferably, offering a value-priced, productised service that fulfils the needs of the client whilst maintaining a profit margin for your business.
As a business owner, it’s essential to understand your operating costs and where (in)efficiencies lie in your business.
With this in mind, should you track your time when adopting value-based pricing in your business?
My thinking on this may change in the future, but at the moment I would say yes. With the strict caveat that time reports are “for your eyes only”. Your timesheet should never be a concern for your customers, nor used as the basis for pricing your services.
Would you like to get another perspective on your software business? As I’m considering doing exactly this for my own business, I’d love to help others who are on the journey to value pricing.
Start a discussion by getting in touch.