Imagine you hire two developers to fix a critical bug that is crashing your e-commerce site and costing you $10,000 an hour in lost sales.
- Developer A is a junior. They charge $50/hour. It takes them 20 hours to find and fix the bug. Total cost: $1,000. Total downtime: 20 hours.
- Developer B is a world-class expert. They charge $200/hour. They look at the code and fix it in 1 hour. Total cost: $200. Total downtime: 1 hour.
In this scenario, the expert developer who provided vastly more value by saving you 19 hours of downtime got paid five times less than the junior developer.
This is the fundamental flaw of the hourly rate model.
It punishes efficiency. The better your agency gets, the faster you work. The faster you work, the fewer hours you bill. The fewer hours you bill, the less money you make.
If you want to build a highly profitable agency, you must escape this trap. You need to stop selling your inputs (time) and start selling your outcomes (value).
This is called Value-Based Pricing. This guide will explain what it is, why it’s terrifying to switch, and exactly how to do it.
Table of Contents
- The “Efficiency Punishment” of hourly rates
- The Commodity Problem: Why you are losing price wars
- What is Value-Based Pricing anyway?
- Step 1: The “Value Conversation” (Changing how you sell)
- Step 2: Calculating the Price (The ROI Anchor)
- Why you still need detailed estimates internally
- How devtimate helps you protect your margin
- Checklist
- FAQ
The “Efficiency Punishment” of hourly rates
The most common pricing model in software agencies is Cost-Plus Pricing, often realized as Time & Materials (T&M). You calculate how much a developer costs you per hour, add a markup for profit, and sell that hour to the client.
It feels safe. It feels fair. But it creates a perverse incentive structure.
The Agency’s Incentive: To take as many hours as possible to complete the work. The Client’s Incentive: To pressure the agency to work faster and reduce hours.
You and your client are immediately on opposite sides. Every time you send an invoice, the client wonders, “Did it really take that long?”
Worst of all, it penalizes your investments in growth. If you buy better tools, hire smarter people, and build reusable code libraries, your team will finish projects faster.
Under the hourly model, your reward for becoming smarter is reduced revenue. That is a broken business model.
The Commodity Problem: Why you are losing price wars
When you sell hours, you are selling a commodity. Like gasoline or grain, one hour of coding looks a lot like another hour of coding to an uneducated client.
If your rate is $100/hour, and a competitor is $80/hour, the client will choose the cheaper option. Why wouldn’t they? You haven’t given them any other way to compare you.
You are trapped in a race to the bottom. There will always be someone willing to charge less.
To escape this, you must stop selling the process of coding and start selling the business result of that code.
What is Value-Based Pricing anyway?
Value-Based Pricing is simple in concept, but hard in practice.
Concept: The price of your service is determined not by how much it costs you to produce it, but by how much it is worth to the client.
The Plumber vs. The Surgeon Analogy:
- A plumber comes to your house to fix a leaky tap. They charge you for parts and labor (hourly). If it takes 1 hour, it costs $X. If it takes 3 hours, it costs $3X. This is cost-based pricing.
- A heart surgeon performs a bypass. You don’t care if the surgery takes 2 hours or 6 hours. You don’t ask for an itemized list of the gauze and sutures used. You pay a massive fixed fee because the value of the outcome is “staying alive.”
Software agencies often act like plumbers, when they should be acting like surgeons.
If you are building a custom CRM that will save a client $500,000 a year in administrative costs, the value of that project is immense. Whether it takes you 500 hours or 1,000 hours to build it is irrelevant to the client. The outcome is what matters.
If the value is $500,000 a year, charging a flat fee of $150,000 for the project is a fantastic deal for the client (a 3x return in year one), regardless of your hourly rate.
Step 1: The “Value Conversation” (Changing how you sell)
You cannot switch to value pricing just by changing the number on your proposal. You have to change the entire sales conversation right from the start.
Most agencies spend the Discovery Phase asking technical questions:
- “What features do you need?”
- “What technology stack do you prefer?”
- “How many users will the system have?”
These are “cost questions.” They help you calculate hours.
To sell value, you must ask “value questions” to uncover the business pain and the potential Return on Investment (ROI):
- “Why do you need to build this right now? What happens if you don’t build it?”
- “You mentioned your current process is slow. How much time is your team wasting per week? How many people are on that team? What is their average salary?”
- “If this new software works perfectly, how much additional revenue do you expect it to generate in the first year?”
Your goal is to get the client to articulate the financial impact of the problem they are trying to solve.
Step 2: Calculating the Price (The ROI Anchor)
Once the client has told you the financial impact, you have your “anchor.”
If the client reveals that their current inefficient manual process is costing them $200,000 per year in wasted labor, you have established the value of the solution.
Now, instead of presenting a price based on hours, you present a price based on that anchor.
The Pitch:
“You told us this problem costs you $200k a year. We will build a custom automation platform that eliminates that cost forever. The investment for this solution is a one-time fixed fee of $75,000.”
The client is no longer thinking: “Is $75k too much for X hours of coding?” They are thinking: “Is it worth paying $75k once to save $200k every single year?”
The answer is obviously yes. The price feels cheap in comparison to the value, even if that $75k price tag works out to an effective hourly rate of $300/hour for your agency.
Why you still need detailed estimates internally
This is the biggest misunderstanding about Value-Based Pricing. People think it means you stop estimating hours.
Absolutely not.
You still need a rigorous, detailed internal estimate (like a Work Breakdown Structure).
Why? Because you need to know your Cost Floor.
- Value Price (The Ceiling): $75,000 (what the client pays based on value).
- Internal Cost (The Floor): You estimate the project will take 300 hours. At your internal cost of $80/hr, it costs you $24,000 to build.
Your Profit Margin is the difference: $75,000 - $24,000 = $51,000 profit.
If you don’t estimate internally, you might sell the project for $75,000, only to find out later it cost you $90,000 to build. You must know your costs to ensure the value price is profitable.
How devtimate helps you protect your margin
You need two numbers to run a profitable agency: the price the client sees, and the cost you see.
devtimate is essential for calculating that internal cost floor accurately.
- Internal Estimation: Your team uses devtimate to build a detailed, bottom-up estimate of hours and internal costs, adding risk buffers to ensure safety.
- Margin Clarity: You know exactly how many hours you have to play with. If you sold the project for $75k, and your internal rate is $100/hr, you know you have a budget of 750 hours.
- Scope Management: Because you have a detailed breakdown in devtimate, you can still manage scope creep effectively. If the client asks for new features that threaten your margin, you have the data to push back or issue a Change Request.
Value pricing sets the top-line revenue; devtimate ensures the bottom-line profit.
Start calculating your true project costs with devtimate.
Checklist
✅ Stop leading sales calls with technical questions; start with business value questions.
✅ Try to quantify the client’s pain in dollar amounts during the discovery phase.
✅ Always calculate your internal cost floor (hours x rate) before setting a value price.
✅ Present your price as a fixed investment anchored against the client’s ROI.
✅ Never reveal your hourly rate breakdown in a value-based proposal.
✅ Shift your mindset: You are selling outcomes, not effort.
FAQ
1. Isn’t Value-Based Pricing just the same as a Fixed Price contract?
To the client, it looks the same they get a single price. But how you arrived at that price is totally different. A standard Fixed Price contract is usually calculated by “Costs + Markup.” A Value-Based Price is calculated by “A percentage of the client’s ROI.” The latter is almost always higher.
2. What if the client won’t tell me the financial value of the project?
Some clients are secretive or truly don’t know. If you can’t uncover the financial value, you cannot use Value-Based Pricing. You must revert to Time & Materials or a standard Fixed Price. Value pricing requires trust and transparency during the sales process.
3. Is this model risky for the agency?
Yes. Because you are giving a fixed price based on value, you take on the delivery risk. If you severely underestimate the work involved, you eat the loss. This is why you still need rigorous internal estimation and strong scope management.
4. Can I use this for small projects?
It’s harder. Value pricing works best when the ROI is high and clear. For a small $5,000 website update, the ROI might be hard to calculate. It’s often easier to stick to hourly for small tasks and use value pricing for large, transformative projects.
5. Do clients resist this model?
Clients who are used to buying “commodity hours” will resist. They will ask for your hourly rate breakdown. You must be firm: “We don’t bill by the hour; we price based on the solution. This fixed price allows us to focus on delivering the best result without you worrying about the clock ticking.” Mature clients prefer price certainty over hourly micromanagement.
Charging by the hour is a comfortable trap. It feels safe, but it puts a hard ceiling on your agency’s growth and profitability.
By shifting to Value-Based Pricing, you align your incentives with your client’s goals. You get rewarded for being fast, smart, and effective.
It requires courage and a new sales approach, but it is the only way to break free from the commodity rat race.
Use devtimate to calculate your costs, so you can confidently price on value.
