I actually wanted to write about value-based charging a while ago. As it happens sometimes, I got sidetracked and my mind was on many other things, as you might have seen by my recent lack of blog posts.

That’s when Brian Marick reminded me to write about it now. So here we go…

There are various models of charging in current business. The main models we can recognize are:

Fixed price
Time based
Value / Result based

Fixed price based charging

In this model of charging providers will set a price depending on their understanding of the scope of the project at the inception time.

One of the flaws of fixed based charging is that you are setting the price given on the current (early) understanding of the project, which might be flawed (especially if you consider the cone of uncertainty. )

This model puts the entirety of the risk on the provider’s side. This sort of charging should be only done if the task at hand is a routine endeavor for the provider’s team and requires very little interaction with the customer.

Most times, when providers use this form of charging they would build in the offer a buffer calculating their internal costs. One possible formula for calculating the total cost would be the following:

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Fixed price = (scope * your hourly price * fixed price overhead factor) + material







Time-based charging

In this model most providers of services charge for the time spent doing the work. The time charged for varies from hourly, daily to iteration based (when working in an agile team).

When charging for the time the provider considers that the amount of time he spends doing the work has a certain price. It does not consider the actual value provided to the customer during the time worked.

There are variations to this though. Some companies will charge time, but with a notion of value in it. I have seen this done when an iteration has a certain cost attached to it and the total amount charged varies depending on the story points delivered by the team (i.e. if there was less delivered the provider will charge less according to the committed number of story points).

The only problem when charging a certain price per iteration is that given the team is working in an agile way, they will develop the most valuable stories first, leaving the less valuable stories for the end of the project without varying the price of the iteration.

Value-based charging

In this model, we base our charging model on the premise that our customers should only pay for the value they are getting from our work and not for the time we spent doing it.

Similar to time-based charging models, there are different models and approaches to value-based charging.

The possibly simplest way to charge per value (although the one that requires a lot of trust between the customer and the provider) is the one that I like to call What was my work worth to you?

When working like this all the risk resides on the provider as you are putting the payment decision entirely in the customers’ hands and you will have no control whatsoever in the outcome. It requires a high level of trust from both parties as the risk lies solely on the provider’s side.

Another modality of value-based charging, which works for bigger projects or training/coaching services, is based on an upfront study of the work at hand.

When engaging in such a project the provider will try to understand the customer’s context and the variables that play in this context. As a provider, you are trying to get as many insights about the project at hand as you can before you commit to any price.

When the provider has evaluated all the factors that make up the project he and the customer will calculate which expected revenue growth the customer will benefit from after the project will be completed. Once this has been figured out the provider can make different offers (with different levels of options in every offer), charging a percentage of the gain the customer will see when these targets are met.

Similar to fixed bit charging this can put the entirety of the risk on the provider. The difference though is that as a provider you have to keep in mind, and never forget, to first try to understand your customer and his context before you commit to any price. You should always give different offers with varying costs and scope so that the customer can decide which will suit his needs best.

It is important when charging like this that measurable outcomes are set so that the customer and provider can assert to which level the targets have been met.

This can be seen as well as a result based approach to charging, although result based charging is different in that the charging will occur when the project gives the desired (or a fraction of the desired) outcomes. There are modalities to this charging model which work when working with start-ups, which could be based on equity percentages, etc.

These are just a few examples of charging models (especially the value based ones) that I wanted to share with you. There are some more based on retailers, margins, etc.

I myself am exploring the possibilities of value-based charging and most of the time I use the What was my work worth to you? the value based form of charging which seems very natural to me. I have worked with equity-based charging as well and retainers.

Have you any expervalue-basedcharging? Do you have any questions about all this? Share your thoughts!

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