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    • Thu Sep 25, 2008

    Hourly Thinking is a Recipe for Disaster

    If you provide a service, and you charge for your service by the hour, you’re headed for trouble. You are essentially selling a product with a limited supply. The only way to increase your business is to raise your rates. But even that will catch up with you because at some point the old apples to apples comparison with a competitor will check your growth.

    The answer is to sell a result for a fee or sell a package for a fee, much like you might sell a product. See when you sell a product, nobody says “I’m not paying you $5000, it only costs you $10 to make it.” You price it and they decide if they value it enough to buy it.

    But, that’s precisely what they say when you charge by the hour isn’t it?. “I’m not paying you $5,000 for that, it only took you 3 hours to do it.” See, the thing is, it may have only taken you three hours to produce this one result but it’s taken your 10 years of your life to get good enough to do it. Don’t think hours, don’t sell hours, don’t devalue your experience and expertise and ability to bring massive results to your customers by selling yourself short.

    Have you ever delivered an incredible, six figure kind of result for a customer only to return to the office and fire off a $500 invoice? Have you ever felt a customer back down because they didn’t believe you could actually deliver the results you promised that cheaply?

    But how do you get out of the hourly trap? I mean everyone else in your industry is stuck with it, how can you expect to defy it?

    The secret to this seemingly cavalier advice lies in putting your energy into forging one of two paths.

    1) Build a brand that speaks to a narrow market so thoroughly they are willing to pay a premium to experience it.
    2) Create and document results so completely that no one will ever blink when you tell them your fee for the result.

    When you begin to think this way it will completely change your view of the world and quite likely allow you to more fully serve your customers while enjoying making what your expertise and unique life experiences are worth.

    I had a great conversation with Alan Weiss, a consultant well known for his Million Dollar Consulting series of books and some very strong opinions on this notion of value based fees. You can click on over to listen to our chat or download the interview here.

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    Posted by: John Jantsch on Sep 25, 08 | 2:02 pm
    Category: Branding, Entrepreneur, Financial Management, Marketing Coach, Marketing Strategy | Tags: ,

    Comments
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    • John, you are right on target. Welcome to the world of the professional knowledge firm. As a senior fellow of the VeraSage Institute we have been espousing the interment of the billable hour for more than six years.

      I invite you and your readers to come take a look. We have nothing to sell (except a few books by Ron Baker). The content on the site is all free.

      We believe that in addition to being suboptimal as you describe in your post, the ABH (Almighty Billable Hour) is also unethical and immoral. Visit us at www.verasage.com.
    • Thanks for the insightful advice. It is so easy to fall into the "hourly trap" and the resources for climbing out are excellent.
    • Excellent post. The same line of thought could be extended to RFPs.
    • You hit the nail on the head, John! Working on individual projects in graphic and web design, I often quote by the hour. Without realizing it, I have recently begun putting my services together to sell more of a "packaged solution" as opposed to selling "design services". Thank you for writing this, as it reminds me to examine what my services are and how they are sold.
    • The billable hour is a useful figure for internal use, particularly when you're creating a proposal ... you have to know that you're actually earning a reasonable ROI when it comes to your time.

      But when it comes to presenting to clients? Nope, absolutely not. They don't need to know your hourly rate, and your advice here is right on the money.
    • There is nothing easier than switching from an hourly rate to a project rate. I did it years ago and it has helped immensely.

      First, it is more professional. Charging by the project requires you to write out a project brief and explain in detail all of the benefits of your services. Also, if the client adds to it there is justification for chaging more.

      Second, as explained an the article, my years of experience men I get things finished quicker than I used to. That doesn't mean I'm worth less!
    • AB
      Nice way of thinking and a good reminder - don't generate revenues based on selling your time. The article reminds me a bit of "Rich Dad, Poor Dad" principles by R.Kiyosaki (which people both critique and worship).

      Would you say that all employees are also in this model?
    • I agree with selling a result; not time. I think the challenge is changing the thinking of service providers (who sell the intangible 'product') and clients (who feel they can't grasp the service). They need to accept that it's the result that is worth the price (not the time spent, or not spent).
    • Tom
      Completely agree with your post, John. Charging for results is a path towards greater revenue and profitability for a service provider.

      If you are able to build an ROI model for prospective clients, it makes the selling process easier, it helps to differentiate your service and it focuses the discussion on the most important thing: the client's results. And of course it enables you to charge more (and rightly so!).

      Too often the tail wags the dog in the sales process. By getting the prospective client to focus on results and what the results will truly mean for the client's business, you ensure that the dog wags the tail.

      In the case that you are new to this approach, you can try a performance-based pricing model. Clients tend to love this, as it aligns the interests of all stakeholders.

      Once your brand is established sufficiently, it is easier to by-pass a performance-based model and simply charge a large amount for the even larger results you are going to produce.
    • You're absolutely right here, but...

      ...as a writer coming from a background in journalism, I've had to work hard to move from being paid by the word to being paid by the hour. Believe me, it's a big step up.

      Why? Because when writing marketing-related material as opposed to journalism, there's no correlation between time spent and words produced. I can spend eight hours on Monday writing 1500 words for one client and eight hours on Tuesday barely manageing 300 for another client, even though the time and effort is the same.
    • Another great post to get small business owners thinking along the right lines.
    • I couldn't agree with you more! I'm a jewelry designer and I don't determine the prices based on my costs. It is definitely shocking to some but my price determination is based on the principle: how much is the piece worth to my customers. As the result the mark-up varies from piece to piece.
      I'm not a fan of the hourly pay either. How can you factor in endless hours of research/work that made you help you get where you are now?
    • snesich
      Maybe. It all depends on whom you're working for and the type of services being delivered.

      My clients strongly prefer fixed costs for clearly defined services, delivered on time. No one likes surprises. And there is nothing more "surprising" and anger provoking, than an invoice that appears very high for value that isn't readily understandable.

      However, there are times when the services needed aren't clear cut; we've been approached by companies that don't want or need a "product", i.e. producing and managing a Users Conference or major Sales Meeting. Rather, they might hire us to evaluate and analyze their integrated marketing campaign and make recommendations on how to make it more effective. In that case, an hourly rate makes much more sense and is best for both the client and the service provider.
    • There are 2 sides of this story

      1. the anti-tim ferriss-- Your working by the hour instead of having the hours work for you. There's only so much you can make

      2. Since your service is in short supply and hopefully in high demand--this means rising prices.

      My take--your right--business is about leveraging your time the best you can!
    • John Jantsch
      @Steve - sounds like hourly thinking to me. You've missed the point - why take work that you don't know how to do and fall back into hourly thinking? Part of the point of this post deals with what you charge, the other half is what you sell.
    • You're right of course. That is why I started developing membership sites (aka interactive learning environments) that charge a recurring monthly fee. I tried selling ebooks online which is more scalable but that was missing the social networking and sense of community aspect that people come to expect with sites like Facebook and MySpace.

      Some industries make it difficult to charge for results - like IT consulting but you can put those skills online and change the business model (teaching, coaching, etc).
    • I fail to see how my business can do this in most instances. There are certainly services that I can do this with but the majority of my business isn't that simple. Please allow me to explain.

      I run a computer networking & support business. I don't see how I can tell a client "It will cost so-much to fix this network issue" when I don't even know what the problem is. If I go in and tell them that, I may lose my shirt on it. Or I may quote them $400 for 10 minutes of work. The issue is that often the fix takes just minutes but the troubleshooting may take hours. Could somebody please explain to me how I can reasonably do this in my business?
    • I get the point loud and clear and I coach my clients along these lines all the time. I'm moving my practise in this direction as my own practise grows. However, I still find it difficult to address the following points:
      -how do you bring your existing hourly clients along with you?
      -do you serve the clients in your home community that cannot afford your higher rates at an hourly rate or do you just do the work probono?
      -while you're waiting for the high dollar clients, how do you pay the bills.

      Thanks for the post. It's an important topic!

      Angie
      Following me on twitter! @aaswartz
    • Finally, to be brand and charge for what you actually desired. since many companies are following hourly rates, IMHO hourly rates would be more convenient to clients as well as companies, It may happen some critical situations where both parties need to compromise and they can left each other with smiley faces. IMHO, one who really doing well he has his portfolio to show and from that the charge he can decide and buyer need to be ready for high quality product whether it's one time project fee or hourly rates.
    • This is one of the hardest concepts for our clients to grasp. Even through they are already successful, there is a feeling that they can’t turn away a potential customer who is not willing to pay what the product or service is worth. So we suggest another way to think about this: in fact, we say, you have to ask yourself: “Are you actually competent to satisfy the needs of a client who only has a limited budget?” For example, people shop at Wal-Mart for a wide range of products and very low prices. Wal-Mart has a highly-disciplines system that allows it to stock stores very cheaply, so it can offer low prices and still make a profit. If Lord and Taylor, or Holt Renfrew, or Saks decided to offer cut-price goods without that system, how satisfied would their customers be, and how long do you think they would stay in business?
    • John, great post. Charging hourly is so hard to get right as when people look at what we do they think that it takes 10 minutes when in actual fact it takes hours. Offering a solution makes sense, I assume its like packaging a service as a product as a product is tangible. Maintenance is a pain, expecially for a small change that takes 10 minutes to do, 20 minutes to contact the client to make sure that they are happy with it, 10 minutes to invoice but they only want to pay for the 10 minutes it took you to do it. Thanks again.
    • I agree that there is a limit on charging for time as there are only a certain number of hours in a month. I find that of the 173 hours a month (21.67 days x 8 hours) I can only bill for about 100 due to all the other things that our team get up to.

      We will discuss this as the concept makes sense we will just have to figure out how to implement it. Thanks John
    • This is really good advice. A lot of people in the SEO industry do projects by the hour and its hard to steer people away from it when they've already heard it.
    • John,

      We currently have a blog coaching product-services model with a niche that nobody is servicing. We have tested our target market and they are beginning to clamor for more information.

      We do not want to get into the hourly trap but we do not have a track record in blog coaching even though we are both bloggers with experience and success.

      Consequently we do not have the brand recognition yet nor do we have the results as we are just beginning. Although we are garnering trust and a following, we have yet to deliver this product-service so we have no testimonials.

      What do you think we should consider as a fee for our services if our industry is based on hourly rates?

      dean
    • I attended the webinar with Alan Weiss and it really changed my thinking about how I value myself. And how to value what I can do correctly.

      I can recommend Million Dollar Consulting Highly.
      If you take just one distinction from it and apply it to your business, it will pay for itself many times over.
    • michael
      John,
      We produce radio commercials.
      We used to charge hourly and found ourself in the same situation. We have been converting clients over to flat fee. Now we have another situation that really seems rediculous. We have ended up with a zillion different flat prices (i.e. some negotiated down, some premium price, some who balk at older lower prices...there is no real standard in our industry - some buy our service/product for $250, some for $1000...some create package deals 5 for $1000 or 5 for $5000 - There are some guys out there low balling at $30, $50, or $100 each - but have been trying to covert all to premium flat prices without a lot of luck). I know this question seems juvenile...but how can you forecast, and watch margins, etc. when you don't have a clue of how much you might sell and at what price? Our CEO says that it's just what "each client will bare". Roller coaster P&L's are driving me crazy. Any thoughts?
    • michael
      oops..that would be what clients will "bear"...no naked clients here :)
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