Why hourly pricing hurts your business
Have you ever had someone do a job for you that maybe took them 10 minutes, but then you got a bill for $1,000? If we break it down, that’s an hourly rate of $6,000 — pretty steep as far as hourly pricing goes.
But what you’re paying for is not the 10 minutes of time that it took for that person to complete the job. What you’re really paying for is the ten years of learning, training, refining, iterating and experience that person has done to be in the position to be able to complete that job in 10 minutes.
Alternatively, you could look at it this way:
- Doing the 10 minute job: $10
- Knowing how to do the job in 10 minutes: $990
As Sean McCabe so eloquently puts it:
The time to do the work […] did not represent the value of the solution that was provided. Sure, [the worker] worked for (10 minutes), studying the problem, but it was her expertise acquired over years that enabled her to solve it in so short a time.
The important message to take in here is not how much time the worker has spent perfecting her craft. The fact that she spent so many years perfecting her craft means she’s able to provide more value.
Hiring a web designer who’s spent 30 years designing website means you’re likely to get some of the best web design there is — and that’s where the value lies.
Once you’re comfortable communicating this message with your clients, the issue of pricing is replaced by the consideration of how much value your work provides.
Why does it matter how I charge?
The way you price and position your work can largely influence your clients perception of the price. There’s been a lot of scholarly articles written about the psychology of pricing, and whether we like it or not, it’s a real thing that’s worth considering when pricing your work.
Let’s say you’re an experienced writer. A client asks you to write a 300 word blog post. You charge an hourly rate of $50 and the post takes you 60 minutes to complete, making your total $50. As an hourly rate, $50 isn’t bad.
But if a client offered you $50 to write a 300 word blog post — would you do it?
Or, consider the fact that the same project priced the same amount but positioned differently, can result in very different reactions. For example let’s say you’re tasked with creating a wedding invitation which the client is willing to pay $200 for. She assumes it will take you 4 hours to produce and sees $50 as a good hourly rate. However, you know that it will only take you 1 hour to produce. Let’s compare the follow two positioning statements:
- The wedding invitation will cost $200
- The wedding invitation will take 1 hour to produce and cost $200.
How do you think they’ll react to each statement? My guess is that they’ll be much more likely to accept the first statement and may question the second.
Ultimately, each statement requires the same amount of labour from you = 1 hour. However the difference in price positioning can have a huge influence on your client’s perception.
It shouldn’t matter to the client how long it takes. What should matter to them is that they receive the best possible value, no matter how long it takes. The time it takes is your responsibility. Not theirs.
The down sides of charging per hour
So, why is charging per hour hurting you? Sure, it may feel easier to land a client project if you talk in low numbers (consider a proposal that states ’40 hours of work at $50 per hour’, compared to stating the ‘total price of $2,000’ — the same final figure). But do you really want to position yourself to your client as a cheap expense?
Here’s some of the downsides of charging per hour:
1. It devalues you over time
As you grow as a freelancer you’re constantly learning new things that contribute towards your skill set and expertise. This means that over time, you improve. You become faster and more efficient at your work.
Charging hourly means that overtime you’ll actually be penalising yourself as your become more efficient. You’ll start getting the same job done in less time, meaning you’ll earn less.
To mitigate this, you could raise your rates each time you feel necessary. However, you’d have to be raising your rates either pretty consistently or largely each time to make it sustainable. Good luck getting your recurring clients to agree to a higher price only one month after the previous project.
Assuming quality of work is equal, being faster and more efficient at your skill should be worth more, not less.
2. It causes you extra administration & overhead
If you’ve agreed on a per-hourly rate the client will likely expect to see how many hours were spent on the project in the invoice. Because of this, you’ll have to spend time tracking and logging your hours — or guessing your hours when you forget to track them.
Time spent on tracking and logging hours is a waste of time. Your time is far better spent on actually generating value for the client — by working on the project.
Worrying about how you’re spending every hour, minute or second on a project could also be distracting. You’re likely to feel pressured to complete things within a set amount of time so as to not go ‘over budget’, meaning it could lead you to rush if you’ve underestimated the time it will take.
Hourly pricing requires you to be familiar and confident up front with how long the project will take. While we like to think we know how long a project will take, this can only be assumed. Locking yourself into a set amount of hours isn’t very flexible. If things end up taking longer than you thought, you might find it difficult explaining those extra hours and line items to your client. Things could get pretty awkward.
3. It positions you and your work as an expense — not an investment
Your relationship with your client and their perception of you is vital to the success of a project. A client who treats you like an expense is lying to you and themselves. The client knows that you can provide them with some kind of value, that’s why they hired you to get the job done in the first place.
Consider our blog post example from earlier. The blog post you write may bring in more leads for the client, which could lead to more sign ups, which ultimately could lead to more sales.
Let’s say your blog post brings in an extra $2,000 of sales the month following its publish. That’s a pretty cheap expense for the client if they only paid you your hourly rate of $50.
Billing clients by the hour means the client will view and treat your services as a timed expense — a line item that shows up in the books that was ‘spent’, not invested.
Because of this clients may not give you the time nor attention needed in order for you to successfully complete the project, or provide them with enough value.
We’ve established that hourly pricing is detrimental to your career and business. It penalizes you for becoming better and more efficient at your skill, causes you to spend more time doing administration and positions your work as an expense.
How then should we be pricing our projects? We’ll touch on that in our next post. Subscribe here and we’ll let you know when it’s been published.