Deep insight into why hourly work is dumb, dumb, dumb . . . and simpler, better ways to do things.
One of the first questions potential clients ask me when I first meet them (right after “Is your head really that round?” and “Why are you smiling like that? Cut it out. It’s creepy.”) is “What’s your hourly rate?”
And they always get just a little bit stymied when I say “Err. I don’t have one.”
Because–except for in extreme cases–I don’t work hourly, and in my not-so-humble opinion, neither should you.
Why?
Because working hourly–asking clients to pay you a set amount of money based on the amount of time it takes you to complete a task:
-Turns what you do into a simple commodity.
-Is kind of demeaning.
-Encourages dishonesty and distrust.
-Is patently unfair both to you and to the people who are paying you.
-And just don’t make no sense.
Let’s take these two at a time.
Turns what you do into a simple commodity and Is Kind of Demeaning.
The vast bulk of Bizniks are talented and tough-minded professionals who provide a valuable service. These are bright, eager entrepreneurs trying to make their way in the world and to shake off the shame and horror of working for “dah man.”
So it always shocks me when business folks new and old demean themselves anddevalue what they do by working based on time. Why? Because if you say “I’m a designer who works for $X dollars per hour” you’re basically saying that while your effort(the time you spend on the project) is worth something, the end result of what you provide (a beautiful and powerful design that will serve your client for years) has no actual value of its own.
Basically you’re saying that your time is worth something, but your product is just another cheap and easily obtainable commodity.
Which is kind of ass backwards.
Now, personally I think this has a lot to do with the suffering mentality we Americans seem so addicted to. Work is HARD. Work is TOUGH. Work is NASTY and if I’m going to spend my TIME suffering like that, I’d better be PAID for it by gum!
And in a lot of ways, regular employees are indeed selling their suffering. The kid who slaves away at McDonalds isn’t providing anything particularly valuable that couldn’t be done by anyone with a 6th grade education level. A lot of employees (excluding executives and the like) are really just there to man the wheel.
And in that case, paying hourly makes perfect sense.
But as an entrepreneur, you aren’t manning the wheel, you’re providing a result.
Which we’ll get to in a second, but for now let’s move on.
Encourages Dishonesty and Is Patently Unfair to the people who are paying you.
Ok. Disclosure time. Early on in my career, I had clients who insisted on paying me an hourly rate and I was too green to talk them out of it. Now, unfortunately I’m cursed with the ability to work really, really fast. I’m also good at what I do, so while another copywriter might take 10 hours to do this one job, I got it done in . . . err. . . 2 and did it really, really well.
And looking at the rent coming due, and looking at the fact that the client expected the job to take closer to 10 hours (and that in a lot of ways the client would value the work less if he knew it was done more quickly) I, um, lied.
Yup. I marked myself up. Or, possibly I just multiplied my hourly rate.
But either way, working at an hourly rate made it not just easy but attractive for me to be dishonest in a business dealing. I don’t like lying. It makes my head hurt. It gives me lines.
But even if you’re completely honest in your dealings, track every hour to the second and submit detailed time sheets for every gig, you’re still being unfair to your clients. Why?
Because if you’re charging hourly, you’re basically telling your clients that they’ll pay more if you @$%# it up.
If I knock a job out of the park and do it perfect the first time I’ll get hourly rate X 5 hours.
But If I mess up, do a crappy job and have to go back and do a second, third or even fourth draft I’ll get hourly rate x 10 hours (or 20 or 30.)
And suddenly my client’s budget is blown right out of the water and I’m looking around for a new beach house.
Like I said, unfair.
Which brings me to my final point. If you’re a business professional who delivers potent results, working hourly Just don’t make no sense.
Let’s try one of my wildly strange and shaky metaphors.
Imagine you just got back from the playa and your car is just CAKED in dirt. You’re driving back into the city and you see two car washes right across from each other. One car wash has a big sign that says “Get Your Car Clean: $10.”
The other car wash has a sign that says “Spend two minutes in our car wash: $10.”
Which one are you likely to go to? Which one is offering you actual value.
Now personally, I’d go to the car wash that promises a result. If I went through that car wash (whether it would take 30 seconds or 5 minutes) and I came out the other side with a clean car, I’d pay my ten bucks with a smile (and if the car wasn’t clean, I’d ask them to scrub a little harder until it was.) With this model, I’ve basically got one possible set of results:
* I pay 10 dollars, my car is now clean. I’m happy.
But what if I went through the “two minutes of scrubbing” car wash? All of a sudden I’ve got three possible sets of results:
Now, obviously there’s a ton of conversation that could be had about how to price yourself, particularly if you’re in a “face to face” service profession such as massage therapy. (The only time I charge hourly is when I’m doing face to face consulting. Of course my hourly rate in that case is really high because, well, I hate meetings.)
But if you take anything away from this hourly post, it should be this: Hourly work sucks. You don’t suck. You shouldn’t have to work hourly.
Later.
Learn more about the author, Chris Haddad.
Entertaining and provocative -- what else would you expect from Chris Haddad?
I'm trying my hardest to eliminate all hourly work from my business. I believe that the dishonesty and inefficency it encourages is one of the main reasons people hate lawyers.
The vast majority of my design projects are fee-based. As soon as I begin working with a very large corporation I will go to an hourly rate - due largely to the fact that with the increased levels of approval, the endless and needless meetings, and too many individuals in the process the client is going to pay for the time they waste. I once told a large professional sports organization contact that it was a "stupidity surcharge" - and with her own frustration with her employer she understood completely. You would think that a large hourly fee would encourage the client to move the project forward - but no. When there really is no budget on a project, all it does in insure that I am getting paid exactly what my time is worth.
Long live the hourly system! Surfs or kings...which to be...oh dear, oh dear. Piece work or time based compensation? Value or cost based pricing? What will the market bear? Perception is reality. The closer to the hand that writes the check--the greater the perception of value vs cost.
An excellent programmer can easily complete a quality job 10x faster than one who struggles. Can they demand 10x the hourly rate? Sure, they can demand it. Unless the check writer compensates for value delivered, they likely will be viewed as outrageous, egotistical and irrational.
Whose services deliver more value: Medical, Legal or Technical? Who gets the big bucks? From whom do customers expect near perfection? Whose mistakes are most frequently excused or go unnoticed? Whose customers insist that "mistakes" be continuously corrected prior to payment?
Time frames impact compensation methods. Corporate budgets typically develop line items estimated using hourly rates. If a corporate customer inquires about an hourly rate, best not quibble over fees. In government contracting, hourly service rates are a must because that's the system in place. Regardless of how we wish the world to be, service providers must operate within the world as it is. If your business model insistes that you only support customers who can work on a fee basis, your talents likely will not be available to large corporate or government accounts.
I love the idea behind the article, and generally agree in principle. (Yes, I'm a lawyer. lol) For me the sticking point is how to get from reality (about 70% of my work is billed on an hourly basis) to this utopia you describe, Chris.
The simple fact is that, for some types of legal services (i.e., preparing wills and other estate planning documents, drafting simple contracts, etc.) I can, and do, flat-fee the work without a problem. However, for my litigation clients, I can't see a way around charging by the hour.
If a client comes to me, and he/she is being sued for, oh, let's say breach of contract....how do I place a flat fee value on what I can achieve for the client? The end result is not guaranteed, but the work I do in the meantime, regardless of the end result, has inherent value. I'd love to hear any suggestions about how to flat fee this type of work, but, frankly, I'm skeptical.
Still, love the article and enjoy your writing style and point of view, Chris.
entertaining. and, has some really valid points. thanks!
Marty, I can't quite figure out what you're saying or asking. Certainly I've run into big corporate clients who insist on paying hourly . . . and I've found my life to be a lot easier (and a lot more profitable) by not dealing with them.
Valerie, you raise some good points. I tend to find that legal pros and computer programmers are the most resistant to moving to fee-based work. The real key is to do the necessary mental shift into realizing that you're selling VALUE not hours.
Yikes! 5.7! Somebody must have really hated this article!
You will get a 10 from me, that was a great article.
Good article, and great advice for getting away from making your work a commodity.
Obviously, this is not for all professions.
For many creative service firms, these points will help you elevate the quality of your work and your clients.
Agreed! I don't work on an hourly basis and don't quote an hourly fee. I like to pay that way, too - know what I'm paying/getting upfront.
Even when clients hire me for a single hour or series of hours, I bundle the fee with extras so they get a package.
Ironically, doctors are paid on a piecework basis, based on procedures. So they have an incentive to over-prescribe and over-treat.
I agree that this model might not work for every profession. I think it really depends on your "product." (I put "product" in quotes because the product is really services.) For creative work, pay should be about the final result rather than the work process.
Creatives who charge by the hour are really selling themselves short—I know I was a sucker for the hourly fee for a long time. After switching from hourly to flat-fees, I no longer fear sending an invoice worrying whether the client will be upset with the final cost. With a flat-fee set up front, we both know what to expect when it comes time to pay. I still track my time on every project to make sure my estimates are accurate but I don't spend the whole project wondering if I am spending too much time and client money to get the project "just right."
Great article -- definitely a "10". I just wrote a proposal for a very large software company, and they demand an hourly rate.
So that means that there is a major "pain and suffering" surcharge built in already. And, when they start asking for additional services within the bid, I call a halt and ask for a change order.
I've learned from painful experience that scope creep with these guys is just part of project. And where with other clients I'd happily do some additional work to wow them, in this case I have to bill extra just to make sure we don't add hundreds of extra hours of wasted meetings and revisions.
As you said, those multiple layers are the problems. Everybody with a window office wants to put his/her sticky little fingers on each revision, make some changes, and give an opinion. And it adds to my time.
Chris - Thanks for your insight on the difference between the value of our time and the value of the product/result created by our effort (time x resources x experience). The two are different, and I hadn't quite seen it that way before. I will definitely play around with charging for results rather than solely my time and see what the effects are.
Great article! It can be hard when a client wants to know exactly what you would charge as soon as they need your services. I have never had someone approach me with an hourly rate question and I agree that I would be highly offended if they did.
I'd like to see a part two to this that helps me implement this into my business. Most of my customers are pre-programmed to equate trading time for money. I have a fixed fee for my design services but I break it down into hourly so it's easier for my customers to get their head around. I also use a sliding scale depending on how difficult I think it's going to be to please the customer. e.g. is the design being approved by one person or by a committee.
Great article Chris!
This is one of the biggest challenges I face in my website development business. It is especially challenging to do a fixed bid for a project when the client only provides you with a general outline of the application they are paying you to develop.
My solution to date has been to create an outline of the project scope, and use this to estimate my hours. This way I am able to ballpark a total cost figure to the client, while not screwing myself with a fixed bid (because it's practically a guarantee that there will be changes / updates to the scope during development).
Not perfect, I know, but this seems to be the best way to control the costs of the project in the clients' eyes, and gives them a good sense of value for their buck.
well, please tell me how you do it. I give bids based on hours x rate, and always clients drag jobs on and on for a fixed bid. then I end up making about $5 an hour and get pretty bummed out. I also get clients complaining if I charge anywhere near what I want to . I'd love some ideas how to get off that hamster wheel.
I struggle with getting fair pay on jobs too. You should read the article on creating a Unique Selling Proposition by Stacy Karacostas. You have to figure out what makes you special and then determine what that matters to your customer. That difference will be the reason that they pay you more and respect you more too!
For the creatives out there struggling with making a living, I suggest the How magazine webinar series "Growing your design business from your desktop." The segment on pricing was revolutionary for me though I learned a lot from every segment. One of the presenters is a Biznik member and she really knows her stuff. Check out details at http://www.howdesign.com/webinars
I am also going to post a tip about this for those who may have missed this article because pricing is such a hot topic. I think this webinar will help a lot of people.
Chris and I have talked about this one a lot. Chris sells a result, and thus should have result-based pricing. It also doesn't take him that long to deliver those results.
I have found in my business (writing books) that saying to a client, "hey, you will need to pay us in the mid six-figures over two years and at the end you'll have a manuscript" doesn't work as well as saying, "hey, we'll bill you monthly, showing hourly work done, and by the time we've finished, you will have paid us in the mid-six-figure range."
When you're delivering a long-term product to a client, hourly can help that client to feel like you're working, even when you're not delivering results. If I send a bill to a client monthly for $10k as a retainer, but I haven't sent that client even email one, that client may feel gypped. If I send a client a bill for $10k with accomplishments listed (aka billed hourly), that client will be more likely to have a good feeling about what I've done.
that having been said, when I take on design projects (results based), I charge a project fee, rather than an hourly rate. I'm fast, and I'm good.
Whew.
Glad to see all the conversation . . .and all the great points and challenges that folks are having in getting paid fairly for their work.
In my own case, getting rid of hourly work and only working by the project was a major component in helping me crack the "six figure code" and start making a real living doing what I love.
Let me take a look at my calendar and maybe I'll put together an event for folks here at office nomads for people who want to learn how to put together value based proposals.
Strangely enough, I just turned a client down for work because they insisted on thinking hourly. It's just not worth the time or the effort.
Good article, Chris. Doing computer service, I charge hourly because everyone else does.
When things go horribly wrong, as they sometimes do, I often feel terrible about making the customer pay an hourly rate for an extended period of time. But, because I do 99% of the work at their place, I dont feel I can do otherwise. Local shops are able to do multiple services at the same time so they can spread out the time and the cost, and so can charge flat fees, but I dont feel that I can because I am sitting in front of the customer who is waiting for something to happen.
All of that said, I am considering a flat fee for small services, or non-repair packages.
What do you think, Chris, of a combination of the two?
As a designer, I prefer to bid by project. Break it down into phases. Hourly for me does not really suit that type of work.
On occasion I will do a "time box". For instance a 1 month time-boxed project, Scope roughly defined and project is time boxed. Weekly review meetings direct the project and define requirements as they go.
Most of my client want to know what they are paying from the beginning. We meet periodically to make sure the milestone are met. Unless there are changes to the scope of the project we stick to the bid. If there are changes the whole bid can adjust.
Project bid as opposed to hourly, also make sure the designer is guaranteed an amount, even if the job is finished quickly.
Peter,
I think doing a "computer insurance" sort of method could work really well for your business. Charge a relatively low retainer fee each month and that covers x amount of repairs.
I think Kevin Selkowitz might already do something like this, and it seems to work pretty well.
My problem with the idea of "insurance" is that once fixed(well), a Windows box is not likely to break down again soon.
Also, there is an increasing number of people who can direct the average sufferer to "just enough" information to fix things themselves that they may not call me.
I'll ask Kevin what he does, but I dont know if it would work for my business which is, for now, primarily residential.
I am a designer, so I charge by the project no by theh hr. I write a proposal with the scope of the project and the rate. They know how much is going to be up-front. I bring a lot of value to my client's branding, marketing and promotional efforts. For example, a logo is going to be use in many materials and it's going to give my clients an image. My experience and talent are worth more than an hr rate. Hey even my cleaning lady charges by the project!
I do have an hr rate, in case the client ask for it or if they ask for to many revisions.
Good article, thanks!
Interesting article, and sounds like it would be helpful to many professions. However, for my field of residential remodel architecture I have found that hourly billing works best and is used by most architects and designers I have met doing this kind of work.
If I goof something up, delete a drawing, etc., I don't bill the client for that time... it just lowers my hourly rate.
I do give all my clients a pretty accurate estimate of how many hours their project will take, based on a written scope. But there are many factors out of my control that can change that - usually adding hours/cost to the estimate.
In the past 9 years of running my business, I have only used project/fee based twice, when the client demanded it. I actually made out good on those projects, but could have easily "lost my shorts" if the design took a change during the process. Nearly all my clients prefer the hourly billing method once I explain why I bill that way. They pay for what they get. The residential remodel design process can take many twists and turns getting to that final design - I could do two schemes or twelve before a client likes it. Some like to investigate all options, others have a budget to meet. Often, the scope changes midstream, and it would be a pain and waste of my time to have to continually re-calculate a design fee based on a changing scope.
I disagree that it encourages dishonesty - I am an honest business owner and don't believe my billing style has anything to do with whether or not I am ripping off my clients. Often, my clients have never worked with an architect or designer and have no idea what is involved or how long it takes - I could just as easily take advantage of that using a fee based billing as an hourly system.
New construction projects are a different animal, and often designers will use a % of construction cost to set their fee (6-12% for residential). But for the remodel market, hourly is the way to go.
I love your article, Chris.
I like reading that you charge for product when you produce a product, and for hours when the hours are time that a client wants you spend with them, focusing on their stuff. You are helping them be efficient with time (a shared commodity) on both occasions.
I think that charging for a product encourages everyone to envision the Value of the product. This puts the client in the same boat as us: thinking honestly about intention, outcome, and value.
Value is: moving a client forward, removing a cost/problem/bottleneck, increasing revenue, making life easier or more pleasant, etc. OR, in other words,
the Value of a product is the Effort it will save the client. I like how Ruth described Effort (time x resources x experience)...
This is THE bestest explanation of the differencing between hourly and job rates!
I meet people in many walks of life (I'm in the beauty and fashion world) and I have never been able to explain it properly when the issue came up! I shall quote you with credit!!!
With Eyes to the Future... Dawn
Chris, I think this is a fantastic article and it has inspired some great discussion. And Jasmine, thank you for plugging our "What Should I Charge" webinar at http://www.howdesign.com/webinars/webinarpricing.asp
I'm so glad you found it helpful!
I agree with Chris that when you charge by the hour, you may be cheating yourself. As many of you said, over time, you get better at what you do--sometimes a lot better. But if you charge by the hour, the better you get, the less time you spend and the less money you make. Pricing by the project, although more challenging, is better for you in the long run.
I deal with many creative professionals who wonder if they're charging enough. And they probably aren't. I remind my clients that they are not selling their time; they are selling their brain, their attention and their creative imagination- and that has a value that can be difficult to quantify!
More on that here: http://biznik.com/learn/articles/fees-pricing/what-exactly-are-you-selling
As far as hourly rates- you need to know what yours is. It's one of the building blocks of your price, but you should never reveal that hourly rate in a proposal or in conversations with your client. When figuring out what to charge, there are many factors! You need to factor in your desired salary, overhead and profit. I could go on for pages about this topic (at the risk of promoting myself, I'll just mention that I actually do in my new book, The Designer's Guide to Marketing & Pricing, co-authored with my partner, Peleg Top).
It deals with the nuts & bolts of running a creative design business, and I think it's particularly helpful for anyone who asks, "Am I charging enough."
Chris, thanks again for a great article.
I was reading this and realized that this is how many people in the music business charge, i.e. session musicians in the pop/rock genre typically charge per song or song/group rate, depending on their union. Producers typically charge based on an agreed upon fee per album, project, etc. Even in the film/video business there's a fee based on budget per project, not hourly necessarily. It always seems to work out. However, recording engineers rarely work this way because they get screwed over by musicians way too much! They could end up working on a project longer than anticipated, therefore keeping other clients waiting. The incentive for the client to stay on track is by showing how much money they are wasting.
It really depends on your job, who your clients are, and if there is an expected outcome relying on you to produce.
~Bridget
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Watch my music video that touches on children’s issues and imagination
I'm a copywriter and I provide an hourly estimate. I invoice on billable hours unless they go over the estimate. If the project takes longer than I estimated, the client pays the estimated price.
I've been doing this for over two years and it works well for me. No arguments over why I charge $XXX per page. The client knows at the onset of the project the most he/she will need to pay. I sleep well at night knowing that I don't overcharge my clients and they know that I'm not overcharging them just because I can.
However, I haven't always used an hourly pricing model. I've been in this business for 8 years. I have done per page, per word and per project pricing. None works for me. One page may be a paragraph, another may be 10. Per word, you can't always skillfully cover the topic within the number of words allotted and per project it's an uphill battle to get clients to see the value they get for their dollar.
I don't feel I'm cheating myself. My hourly rate is competitive with others in my field and when it is questioned, I point the prospect to the statistic, my portfolio, and my references. If they don't want to work with me after that, then they just aren't the clients I want to add to my roster of clients.
I like your ideas, but I do believe that everyone has to find the model that works best for them... by hour, by project, or a mixture of both.
Hi Linda,
I'd never suggest any kind of writer price their work by the word or by the page. And I'm willing to bet that you could easily double your income or more with some built up credibility and solid project-based pricing.
Later
I thought this was a great article, I have always believed in this and never articulated it. But I have worked this way for a very long time, even if some of my contracts for projects were written in hourly formats, I always looked at a project from beginning to end, and placed a value that I could live with, then added a small percentage to that total, because I inevitably will be conservative in my proposals, and I don't always account for the small obstacles that come up. So the small "padding" helps with those unforeseen issues that will require more of my time and talent. I then will break it down for the client in hourly rates if they need this for their own records. Many government jobs require proposals written in hourly rates, as it is a way for them to document for audit purposes. This is something I don't mind doing, as I don't think about myself as working per hour, just accomodating the organization that I am working for at the time.
Just a brief description of how others in the world think of this: In my experiences in Italy, where you don't necessarily have a set cost to many services and products, you pay what you believe it is worth to you. This is a very complex system and you really must know the society and have lived there quite a long time to be able to engage in these type of transactions. But once you get the hang of it, it is very rewarding, and you are rarely not compensated more than fairly for your work or service. This is more often in smaller towns than in the bigger cities of Milan, Rome, etc.,
This is a novel concept but in the mega model of the business world and its varying micro models...well, you just can't generalize. It simply varies from trade to trade and industry to industry. In one of my businesses, 13th year of it, I offer many services and each job has it's own personality, so to speak. I can generally guestimate a time. Yet, rather than being screwed with laying down a flat fee...I'd rather make sure I get the hourly rate. I'm a Professional Organizer who doesn't always go estimate a job before I do it. I ask questions and then go do the job. As a Realtor, my other gig, I work like a dog for people and sometimes never make a dime. Or I work like a dog for someone for a month or more and receive a nice chunk of cash. Being efficient and effective it the key to make that decision on flat rate or hourly. Really, it seems to depend on what it is you are doing to arrive at that conclusion. Either way, you should know what you're doing enough to have a rough to defined idea of the time it will take and then decide from there what is the best way for you and the client to profit from it.
So Chris, if I hired you to do any copywriting (which I wouldn't because I'm a writer myself), would you still write something to the likes of "Just don’t make no sense."? hahaha!! Good article with hefty ideas, even if you did actually write that grammatical jest.
This is an interesting concept, although somewhat counter-intuitive on the initial read based upon my chosen profession and related experience. That being said, I am interested in benefitting from your wisdom on this subject first hand, which I will do in tomorrow evening's workshop.
Your article's candor and humor are much appreciated.
I agree in principle with your point and I generally can gauge a project's value better with a flat project rate, however, I strongly endorse what Jeff Fisher said. In an org with way too many approval levels, hourly rate on smaller projects (which inevitably turn up—and why turn them away) can either inspire those on a tight budget to move things along, or compensate you for the agony of too much non-constructive input.
You convey your worth and value in more ways than pricing alone. Project pricing is usually best, but sometimes, hourly is appropriate compensation.
Chris... Great article. Definitely a "10" in my humble opinion. Course I'm from the old sales school that taught us that "nobody wants to own a power drill, they just want a hole" so that's WHAT we should sell them. Creating the Value always comes before Closing the Sale. Keep rockin. I love your style. ...Howard
Something to think about. Thanks. When I do graphic design for someone, I'm often in the same boat.... I can do a great job really quickly but then not get paid that much -or- I can charge the client for what the end result is worth. The latter does sound more appealing to me and more fair for all involved. It implies, though, a detailed knowledge of the market, i.e., what a given result is worth. Thanks again. Rick www.LoneEagleDigital.com
Chris...You mentioned any service that is face-to-face would be difficult to qualify itself as value-based versus hourly-based. Running with your example of a massage therapist... this type of service provider is providing a feel-good service (which warrants hourly-based) AND could also offer a time-based value, beyond the hour they are with the client. Whatever that is, it's up to the massage therapist to market.
I suggest these type of providers market their practice as "results-based" - if they are really in it for the results.
I didn't even realize that this is what I'm already helping mental health practitioners do…you just described it perfectly with your car wash metaphor. There is a demand to reinvent the practice for this exact reason and I'm proud to be a part of it.
Jessie Upp, M.S.
Thriving on producing results for families.
Chris - I saw your comment that programmers are some of the most resistant to value-based pricing instead of hourly pricing.
I must be the exception. (Hurray!) I've been using value pricing for my software development work for the last 4 years, and I think it is great.
Before I went independent, I worked for a consulting firm that charged hourly. Projects never got done early or well under budget. And it felt dirty to me - why should the customer pay more because I was particularly slow to code something?
Now, I don't have to waste time tracking my hours (unless I want to for estimation verification.) And it forces me to work efficiently - I use code generators and other tools to try to squeeze out more productivity. That never happened at the consulting firm.
It is okay by me if other programmers keep charging hourly - I think it just makes my business stand out! (But I feel sorry for their customers!)
Woohoo! Finally, somebody on the tech side who sees the light!
Great article! This topic is always flowing through my mind. As a tradesman, how do I bid a job? My goal is customer satisfaction. But I have to be successful at the same time and keep making that large mortgage payment. Sure, bidding a job can be done two ways: by time and materials (thats hourly) or as a complete job. I prefer bidding as a complete job. This sets expectations and cost up front to my customers. It also holds me accountable regardless of the circumstances. And it allows me to make of it what I will. Just as Chris had said. That is what makes me successful and motivates me to be the best I can. Get the job done more efficiently and I have earned myself a higher dollar per hour wage. Now that helps the confidence of any business owner. Way to get the juices flowing Chris!
This is one of the on-going issues for most small businesses. Sometimes the profession drives the billing approach. I came from the corporate world where hourly, daily and monthly rates were common for professional services. We also bids for projects, but even here all activities outside the scope of the project were billed hourly. In real estate it is based on a commission when the sale is completed. So the amount you make is subject to the market, sometimes you make a lot and sometime you don’t. I think flexibility is important to some clients. I offer the standard commission based services, but tell me what you want and lets work together to find a fee that works for us both. Not all clients or projects are the same.
What a well-crafted and succinct summing-up of something I find myself trying to explain to people all the time. Thank you.
Now I can just shut up and point them to this article. That's some seriously good explaining.
Also, for all those people wondering about rate-setting, two good resources who are both on Biznik:
Mark Silver of Heart of Business has fantastic material on this, as well as a great "consult your heart for the price" style meditation that I totally thought was not going to work and bowled me over.
Mikelann Valterra of the Woman's Earning Institute has a rate-setting toolkit, good especially for women who are serial under-chargers.
Chris, you are right on the money. I work in the non profit sector and I always quote based on the value of the work, and never by the hour.
So my clients love it, but it puts pressure on me to price the job correctly, and I must work efficiently to make sure that I achieve the imbedded hourly rate I want to get. But in the end everyone wins.
Chris, I definetly buy into your viewpoint. It does seem that compensation is basically negotiated. If someone takes an hourly job that is their choice. And, I guess as long as they stay in the position their choice remains evident. Others, like yourself or say, an artist, may be able to produce fantastic results in their work and thus command a higher value. So, creativity, energy, etc. may very well command compensation much higher than the typical hourly. Go for it. (If things get tight you can always flip burgers, ha)
I agree with this to a point. I'm a multimedia artist and I used to work hourly exclusively. I now do both flat rate work and hourly work depending on the client. If I'm doing something for an individual or a company that I know and trust their judgement/taste, they get a flat rate. If I'm working with a company that exercises the dreaded "design by committee" approval system... then definitely hourly. The benefit of working hourly is that it forces the client to get organized and be more efficient with their decisions. This keeps them from suggesting a bunch of insignificant changes just to "see what it looks like".
I learned that project-based fees were the way to go early in my freelance career. Why should I be paid less just because I work extremely fast? My bills don't become less just because I pay them sooner rather than later, right? I have one minor difference...I limit the projects to two revision rounds for that flat fee. After that, the client pays hourly. I do this to because some clients can really take advantage and seem to never stop with the changes just to "see what it looks like," as Justin said. I believe my clients appreciate having a project-based fee since it keeps them from being surprised when the project is finished and they get the final invoice.
Hey, I am kinda behind the times in reviewing this article, but I always enjoy the various view points of pricing.
I agree with so many points in the article, about time vs value. And it seems to be so dependent on the client and their knowledge of, and their perception of the value they have for what they are wanting.
Our business is web development along with other marketing collateral. And strangely enough, the largest percentage of "value concern" voiced by clients comes from the pricing of websites. Now, not even taking into consideration a huge difference in changing sentence structure on a website, or changing a sentence on 1000 brochures that have already been printed - the value/price of a website to the client just doesn't seem to be in alignment. So, does the client throw out the brochures with a sentence they no longer like or do they just keep giving out the brochure until they are gone? But the value to change and update a website in an instant versus the basically unusable (or should be unusable) brochures seems to have no value in practical terms to some clients.
So we price in the best of both worlds. After a very intense consultation with the client we put together a customized proposal outlining the services for the fixed price. Then anything that changes, anything beyond the original scope of the project will be charged at an hourly rate.
This seems to help with the perceived value to price ratio with some clients. They can feel good about the package they are getting, and then they know just how much it could cost beyond the original package if new or additional options are wanted.
This has worked well for us for many years. And we don't have to feel guilty if a project goes smoothly and is done in record time - the client is pleasantly surprised. Then rarely, if it takes us longer than anticipated or we hit a glitch we don't feel like we have to charge more for that extra time, because the client is still getting what they paid for. It all works out, and everyone feels good about the finished project.
Chris,
I know I'm a little late reading this article but since I just joined Biznik I have a free pass, right?
Thank you for this wonderful article. I wish that I read it a couple years back when we started our business and made the hourly mistake.
I'm curious - we've been finding that charging by the full or half day is working well - what are your thoughts on the full and half day? Do you just charge by a full day always?
~Lindy Boustedt
Testify, brother!
Chris wrote: "Let me take a look at my calendar and maybe I'll put together an event for folks here at office nomads for people who want to learn how to put together value based proposals."
If this happens, consider me rsvp'ed.
As a Personal Assistant I bill by the hour and could use some coaching when considering my services through a valued-based lens.
I have only really considering retainers as an additional option.
Thanks for the great article and all the insightful comments.
Best, Erin || Your Personal Assistant
Hi Lindsay,
I think charging for a full or half day is fine for consulting type arrangements (especially if you're on site.) Still, you want to assign a high VALUE to that full or half day. Remember, if you're spending a full day on one client, you're giving up the chance to make money with other clients.
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