McKinsey & Company was one of the first companies in consulting that embraced value-based pricing and this was driven by Marvin Bower, who was credited with helping establish the firm as one of the top in the world. While the firm is much more complex, it still embraces value-based pricing in almost everything it does.
Here is an excerpt from one of Elizabeth Haas Edersheim's books on Marvin Bower, on why they embraced the model:
We started out in 1939 billing on a per-diem basis. That was common among accountants and other consulting firms. You'd just multiply the number of days by the rate and that's the bill. In about 1941, I said, "This is ridiculous and we've got to change it. You cannot measure value by hours. Lawyers don't and we shouldn't. [At least that was the case in those years.] If we run up hours that aren't valuable, we shouldn't charge them." And so we had quite a struggle among our partners to change fees to either a fixed lump sum decided in advance or a monthly fee with no per diems and an estimate of how long it takes. Lump sums ... was a risky way because we couldn't tell what the problems were, but after a struggle in the firm we got away from per-diem rates. Some partners were afraid that clients wouldn't go for it... And it turned out to be an unfounded fear.
On how the important thing is believing in the work you do
This is a matter of the courage of the consultant, the partner and his confidence in the value, and his confidence in himself. This came from the law. Now the law has slipped back to by the hour, not by the day, but when I was practicing law in Jones, Day my mentor, Mr. Ginn, would say, "Now, you've been doing quite a lot of work on Industrial Rayon, and here are the hours. These hours come out to $80,000 dollars, with annual billing. How much would you bill them?" Then I'd say, "Well, we worked on this and we worked on that," I said, "I think those are pretty valuable pieces of work for them and I don't see how time can measure it." He said, "You're right on target now. Just tell me, what figure you would put up?" I said, "I'd put up $90,000." He said, "You're wrong. It's going to be $100,000." He sent out the bill, $100,000 dollars annual fee for legal services. Then he said, "If they come... and argue about that," he'd say, "You just take a pen and scratch out that bottom figure and put in what you think is fair, and we will accept it within reason. If you were to put down $25,000, we'd say we'll never serve you again, but if you put down something that you think is fair in your opinion, we'll accept it and no questions asked because we want our clients to be satisfied with their charges, to believe that we're giving them value." And he didn't have many arguments.
The author, Elizabeth Haas Edersheim writes about how Bower thought about this:
The combination of value-based billing and expense control proved to be successful and provided the firm's members a reasonable income without elevating the quest for revenue over freedom and independence. As Marvin has often noted, while obviously the firm must have the economics required to keep it running, there is a harsh downside to pursuing revenue goals and accepting assignments where a professional management consulting firm (or any professional firm, for that matter) cannot deliver value-namely, the destruction of the firm's reputation to the detriment of future generations of employees, and possibly, the firm's longevity.
David Ogilvy, a founder of the advertising firm Ogilvy & Mather, remembers learning this lesson: "Marvin Bower ... believes that every company should have a written set of principles and purposes. So I drafted mine and sent them to Marvin for comment. On the first page I had listed seven purposes, starting with 'earn an increased profit every year.' Marvin gave me holy hell. He said that any service business that gave higher priority to profits than to serving its clients deserved to fail. So I relegated profit to seventh place on my list."
I think this works similarly for freelancers. If you are aiming at the fees, you will likely succeed, often at the cost of independence, doing the work you want to do, and your motivation. A shift to value-based pricing helps you play the long game. Sometimes this can be frustrating as you may struggle to land clients. But once you shift to this new approach at least you know which game you are playing.