For the self-employed service-based entrepreneur – whether a freelancer, a consultant or someone running a larger business – hourly rates are one of the most common ways of charging.
And when starting out, perhaps they can be a useful starting point…
You're guaranteed to be compensated for the hours you work, and at a rate that you have decided you are happy with.
And this can be particularly useful if the client's scope keeps creeping up, or if a project takes you longer than expected.
But in reality – that's about as far as the positives go. Particularly once you've been operating for a little while.
The problems with charging by the hour
1. The ceiling
The most obvious problem with charging for your time, is that time is a LIMITED resource.
Ergo, you will only EVER be able to earn as much as there are hours available to you.
Charge £50 an hour, and in a 40-hour week your maximum earning potential is £2,000. Except it isn't … because you only earn £50 per billable hour. And all the time you spend on admin, and marketing, and pitching … isn't billable.
And that's before you even think about sick days, holidays … time off for a doctors appointment…
So suddenly your maximum weekly earning potential is more like £1,000.
Of course, you can increase your rate. Charge £150 per hour and your 40-hour starting point offers you a £6,000 potential. But you're still constrained by the maximum number of hours available to you.
And perhaps you don't want to be working 40-hour weeks. Perhaps that's why you went self-employed in the first place?
You want to be able to earn MORE by working LESS…
2. Time doesn't reflect your ability
As we humans get better at something, we tend to do it quicker.
I can confidently say I can paint a room far quicker – and far better – than I could the first time I ever tried.
A full-time painter-decorator, however, is going to be able to do it even better, AND faster, than me.
So should they be paid less, because it will take them half the time?
Of course not. Because you're paying to have a job done well, not a job done quickly.
If you're producing a piece of work in just an hour or two, and billing for that short amount of time, you're almost certainly vastly undercharging. Because it almost certainly took you many years of practice and experience to be able to do it that that well, that fast.
And yet, if you're charging by the hour, with your increased experience, your earning potential has decreased.
Sure, you've probably put your rates up along the way. But I'd dare say not enough … as you've most likely been subconsciously constrained by your previous hourly rate.
3. You have no incentive to be fast.
Billing by the hour is in fact disincentivising you to GET faster … or to BE more efficient.
If a job only takes you an hour, you only get an hour's pay … whereas if you take two or three hours to complete that job, you can invoice for a higher amount.
Let's say you've put aside 30 hours to work on a project, and it ultimately only takes you 25 … you've just lost 5 hours of pay. And as you've blocked that time, you've perhaps turned down other work that could have filled those extra 5 hours. Double loss.
You've lost any incentive to work faster, to hone your skills and find ways of completing your work to the same (or higher!) standard, in a shorter amount of time.
Which ultimately means a disservice to your clients … and a disservice to yourself.
4. Charge-by-the-minute mindset
One of the worst problems with hourly billing is it forces you into a mindset of charging by the minute.
If you're billing them for your time, you really need to charge for every little thing you do for that client…
The main project / job itself? No problem, of course.
But the ad hoc phonecalls, lengthy emails, unexpected revisions, a quick this, a little that … it all eats into your time, and it can add up.
So you charge for it – which can annoy your clients.
Or you just let it go – which eats into your earnings…
The Alternative to Hourly Pricing
Take the focus away from the clock, and charge for the project … for the outcome … for the SOLUTION.
Your client needs a logo? They don't care how many hours it will take you, they care about the end result.
So charge them a flat price: one that takes into account all your experience, your knowledge, and your skill. And which, at the end of it, will provide them with the exact result that they needed.
How do you know what fixed price to charge?
1. Vaguely consider the time you'll need.
Ok, so you do need to consider the time to some extent. You need to ensure that you are charging enough that sufficiently compensates you for the time you'll need to complete the project.
And if you then do it even faster than you expected? GREAT! You have even more time to take on other projects and earn even more … or you have more time for yourself. Win win!
What you're not going to be, is penalised for doing it more quickly. You won't end up earning less on the job than you expected … and you're not going to be left with dead hours that you're unable to bill for.
2. Understand your client's budget
Every potential client will have a different budget in mind, and there is nothing wrong with adapting to them.
Different companies have different resources, and being flexible with your pricing means that you can work with the fledgling not-for-profit start up that you love, as well as the established multinational, providing them with the solution that they NEED from you, at the price THEY are happy to pay.
3. Focus on the value
Understand the value that your solution provides, and charge relative to that. Your skill and knowledge may mean it is a simple job that takes you half an hour, but if that simple job saves your client £5,000, it is a VALUABLE solution you are offering…
And one worth considerably more than half of an hourly rate.
The Benefits of NOT charging by the Hour
Your client knows the price upfront. They're happy with the cost, they know what they'll be getting, the expertise you'll be bringing, and the VALUE it will be bringing to them. They know you will be delivering the solution they need, and there will be no surprises when the invoice comes…
You know the price upfront. You're happy with the cost, you know what you'll be earning for the solution you can provide. And you're incentivised to keep getting faster at your service … to find ways of honing your skills, and providing that solution in even less time…
Which means you'll have MORE time to take on MORE projects, enabling you to double … triple … quadruple your income, whilst working those same hours.
Happy bank balance.
If you want to learn how to stop charging an hourly rate and get paid for your value, register here for my FREE 5 Day Challenge.