As AI takes on more business processes, more businesses are having to rethink their approach to fee-charging. The reality is that many traditional time-based pricing strategies are becoming obsolete. And it’s not hard to see why. When AI can dramatically reduce the time taken to complete a project, how do you justify billing by the hour?
Typically associated with law firms, the billable hour has, for decades, been the pricing model of choice for businesses across a range of sectors, including marketing and advertising agencies, consulting firms, IT consultants, architects and accountants. Questions have been raised about the ethics of billing by the hour, but it is the growing presence of AI in so much of the work carried out by firms that is forcing a rethink. Just recently S4 Capital announced it was moving to output-based pricing because of the impact of AI.
Calling time on the billable hour
Changing a pricing model to assign a value or output to services poses significant challenges for many businesses. SCOPEBetter is a pricing platform designed to help them transition from a time-based billing model to one based on outputs and deliverables.
Founder and CEO Tracey Shirtcliff says: “Over the last seven years we have convinced and moved quite a few smart working businesses. Some ‘got it’, but many didn’t, and didn’t feel they needed to move. Over the last 12 months, this has changed. All the talk about AI has been about how to use it for efficiency in working, but lately, the realization has come that these gains will decimate the billable hour. We are getting a noticeable increase in enquiries.”
Measuring impact, not effort
Small businesses are seeing AI as an opportunity to level the playing field and leapfrog larger organizations. However, many believe that moving from time-based fees to value-based pricing isn’t just about billing. It’s about shifting the focus in terms of the concept of value in the AI era. This forces a halt to measuring effort and instead encourages the measurement of impact, at a time when many process-based tasks will become faster and cheaper to complete.
The Brick Coach operates an outcomes-based pricing strategy, demonstrating to clients that the business cares more about the results than how long it takes to achieve them. Founder Amale Ghalbouni says: “It demands tighter scoping, clearer communication, and a deeper understanding of what success looks like for the client. This may be uncomfortable for those looking to make a quick buck, but essential if you want to stay relevant and genuinely care about the work you do for clients.”
Value-based pricing strategies
Measuring impact is key to a successful value-based billing model and Ghalbouni approaches it by spending time upfront in discovery mode with clients to understand their desired outcomes and outputs, what their reality is and what the gap looks like. “It often gives clients insights into their business they weren’t aware of,” she says. “It also makes the relationship less transactional and ensures we’re both committed to achieving the desired impact.”
Far from being resistant to change, Ghalbouni’s clients have been strongly in favor of it. “Clients sometimes struggled with hourly or day rates, as it often meant budgets were harder to manage, and outcomes badly defined,” she says. “Value-based pricing gives them confidence that they will get the outcomes they need, regardless of how much work or time we put into the project. It took some adjustment to get the margins right first, but after a few projects it became easier to price and predict performance.”
The next frontier
Some believe that time-based billing can misalign incentives, rewarding inefficiency over impact. That was why FIG Agency made the shift five years ago to a senior-by-design approach, a structure that allows them to solve problems more quickly and deliver sharper, more effective solutions. Founded 12 years ago the marketing and creative agency consulting firm serving a diverse range of clients, including mid-cap brands such as Benjamin Moore, Tropicana Brands Group and Publix.
Partner and CFO Richard Tan says: “With our proprietary creative data system, StoryData, that harnesses various forms of machine learning and AI to deconstruct the storytelling opportunities, we can evaluate an entire category within 48 hours of a brief. We knew a time-based price wouldn’t be appropriate remuneration for those results, so we decided to shift our strategy.”
Establishing a new set of billing parameters brings many challenges. Clients need to trust that the results they receive are worth the money they’re spending and that the price is fair. Nevertheless, pricing models are evolving, and Tan insists that historic time-based models are becoming less relevant. He adds: “Outcome-based pricing is the next frontier, and agencies are ready to tackle and embrace it. My advice to other firms is to future-proof their business by focusing on quality outputs and results rather than time.”
Blended pricing strategies
Others are not quite ready to consign billable hours to history and believe they still have a place in business. Continuous Improvement Projects has a blended model that allows them to use either value-based pricing or time-based pricing based on a logical pricing strategy.
CEO Kiran Kachela says: “Value-based pricing is our preferred model for projects with clearly defined objectives and measurable deliverables, empowering clients with transparent cost-benefit analysis and a clear understanding of their potential return on investment upfront. It shifts behaviors, aligning everyone toward a solution-focused, output-driven outcome where the tangible value we deliver is clear for all to see.”
Drawbacks of value-based pricing
But she is adamant that the day-rate model still has its place, not least because of the many unknowns and variables, evolving scopes, and high risks that can be baked into a project. “When things are too risky or ambiguous, value-based pricing simply doesn’t work as it necessitates excessive risk premiums, undermining its core benefit,” says Kachela. “Ultimately, it’s about finding that sweet spot; a blended approach that weighs up output-focused solutions with the inherent risks. We choose the model that’s going to deliver maximum ROI for our clients.”
Valuable versus billable
According to Shirtcliff, the argument that billing by value is better than billing by the hour, for both the business and the customer, is a compelling one. “Professional services businesses that productize what they do and charge for outputs or outcomes find it more attractive overall,” she says. “You can increase revenue without increasing proportionally the staff need, breaking the traditional hourly billing linear model.”
There are also opportunities to reduce operating expenses, and the administrative burden of tracking, reconciling and defending billable hours, which can consume 20% of business operating expenses, and which productization can help eliminate. “In a time-based model, high-value talent is often a cost center,” she adds. “In a productized model the impact can be scaled across multiple solutions, generating higher returns and not labor costs.”
AI powered pricing strategies
As AI continues to evolve and play a bigger role in work practices, and pricing strategies, will the setting of service pricing parameters become even more challenging? Shirtcliff believes that teams will develop to have a series of AI-powered products, or outputs that will be chosen and presented to clients based on the scenarios that the clients need to solve for. She adds: “I also believe that over time we will see AI Agents asking those scenarios or questions of teams which will produce the products that the business will deliver best and in which circumstances.”
Read the full article here
