“If you are mediocre at what you do, then keep charging by the hour”.
If you are a traditional service-based business you face unprecedented pressure to compete in modern times.
Technology can do much of what you do, for less cost.
The barrier to entry for many service based business models has lowered considerably. There are a lot more people or companies that offer the same service as you, all claiming to be, better, cheaper, faster and friendlier. The internet means you are no longer just competing locally, but nationally, even globally.
Yet, with all these threats to our very existence, the number of businesses like yours and mine that are choosing to ignore this is staggering. They stubbornly hold on to business practices that reduce them to a same old, same old supplier. Because that is how they have always done things.
These business people believe the changes do not necessarily apply to them. The accounting and legal professions have many examples. Amusingly they are both in the business of advising others. Oh the irony!
They are not alone. Others include, web designers, SEO experts, coaches, proof readers, cleaning services.
Those that do recognise this new world either don’t know what to do about it, or they agree they have to adapt, but continue to avoid it.
One of the greatest obstacles to embracing these changes is rooted in one of the most outdated financial customs of this century. That is, charging customers by the hour.
I moved away from hourly rates to a mixture of fixed and value-based pricing years ago, and it changed my life. At the end, I will reveal the two situations when charging by the hour is still suitable.
But for you die hard timesheet lovers, I am going to first give you a few reasons why billable hours are the basis of a poor business model.
Long hours – Your income is entirely dependent on how many hours you have in the day and your ability to show up for work.
No life – Charging by the hour assumes that there is no shortage of time, so you can go on working for as long as it takes, as if you have no life outside of work.
No holidays – Business people that charge by the hour are less likely to take time to go on holiday. Not only is there no money coming in, you are spending what you have.
Cannot be sick – Business people that charge by the hour, work through illness because they cannot “afford” to stop working.
Cannot grow – If you are a sole trader there is no scope for growth/expansion. If you need to make more money you have to work longer and longer hours.
Struggle to get expert help – If your rate is high enough that you can hire help, they have to be cheaper than you to be profitable. But they may take longer than you and wipe out any profit you make. Assuming they do a good job that is?
Staff cost rises – For companies with staff or team, the cost of resourcing goes up the more you sell, but the level of profitability does not increase to match. You keep adding people to keep up with demand.
Creates lose/lose deals – Hourly rates put you and your customer in competition with each other. The customer wants to pay the smallest hourly rate or get the work done in the shortest amount of time to keep costs down. You want the highest hourly rate or you will have to work longer to raise your income up.
Wrong questions asked – In negotiations you fixate on how long tasks take and the rate per hour you need to make it worth your while. Some better questions would be:
“What result does the customer need?”
“What is the best way to get that done?”
“Who is the best person to get that done?”
And then you can start to assess your price.
Inefficiency is rewarded – Charging an hourly rate encourages inefficiency but penalises speed and effectiveness. You get paid because you take longer to do something. The better you get, the less you earn.
Billing Fear – Even if you are able to charge all hours to your customers’ invoice, there is a point at which the total will be just too high for them. They will no longer feel they are getting value for money. You then risk a dispute, or losing the client altogether.
Unbillable hours – How many hours do you spend doing tasks that take up time that your client does not know or care about? The tasks you are not able to charge for because you have billing fear.
False financial security – You get your quoted rate so you feel more secure. You customer gets the rate they are prepared to pay, and also feels secure. Paradoxically you are both actually dealing with uncertainty. Neither you nor your customer can accurately budget or anticipate the income or expense, coming in or going out respectively, each month.
No innovation – The uncertainty of how money is coming in eclipses any desire to spend time improving your service because it eats into the hour or daily rate.
Perception – If you charge by the hour you are telling the world (and you) that you are a worker and not a business owner.
When charging by the hour does work
- If you are taking on a task, job or project where it requires lots of initial work that cannot be determined up front. For example you will only get access to information, data and paperwork as times goes on. An example is doing bookkeeping backlog work. The famous bag full of receipts. However this can still be priced outside of the hourly fee model.
- You are doing freelance work and you are not in charge of negotiating the price with the customer. You are at the mercy of the agency, broker or introducer. But in this case you are not acting as a business owner anyway, so the same rules do not apply.
Instead of selling or pricing based on time. Sell the benefit of your expertise, your experience and your resources in conjunction with the skills of others. You will not only claw back your time, but your income and profitability will increase. Plus you create the foundations of a business that can expand, if that is what you want.
Your time is often scarce, always precious, and completely irreplaceable. Do not give it away easily, even if you are getting money in return.