Billing by the hour is bad for you - and for your clients
Hang out your own shingle. Are you familiar with the expression? It is an American colloquialism dating from the 1800’s. A shingle is a piece of wood used to cover roofs; overlapping the shingles made sure that water would run down the roof and not leak into the house (that was the theory, anyway). Back in the 1800’s the easiest way to indicate that you’re in business was to take a shingle, paint your name and profession on it, and hang it outside your door.
Hanging out your own shingle the first time
You usually go out on your own when you have a technical skill that is in demand, corporate life is just not working for you and the lure of being your own boss seems so much better than working for an idiot boss.
So you hang out your own shingle. And because you’re new at the game the easiest way to sell your skills is by the hour. Everyone does it, it’s easy and the more you work the more you earn.
But in the long run billing by the hour is really bad for you. And it’s bad for your clients too. The good news is there is a way to get out of billing by the hour that is better for you and better for your clients. And you get to earn a whole lot more.
Three reasons billing by the hour is bad for you
Bad for you 1: There’s always someone cheaper out there It doesn’t matter how low you price your services, there’s always someone out there who is going to be cheaper than you are.
The fact that you are faster, better and deliver higher quality is much less important to price-sensitive customers than price. If you have to compete on price it’s a downhill race; you will always be competing with someone who is willing to undercut you.
And the lower your prices, the more you have to work to generate the same amount of revenue. More work for less money. Not a great place to be.
Bad for you 2: You have the wrong conversations Clients hire you for your technical skills, right?
Clients hire you to get a problem solved. They may need a prettier website, better SEO rankings or more leads for their business. The point is they need a problem solved.
Clients hire you to get a problem solved.
So you rock up and present them with your graphic design skills, or SEO expertise or Facebook targeting skills and you talk to them about how your skills are the greatest. Then the conversation turns to how much you charge and you have to justify why you’re so much more expensive than the other guy they just saw (see Bad for you 1 above).
Wrong conversation. The client needs a problem solved. But you’re talking about your hourly rates. The problem may be worth a lot to the client (what’s a new patient for a dental practice really worth?) but you’re talking about why you charge $2 per hour more than the next guy.
Bad for you 3: There’s no reason for you to get smarter When you bill by the hour you get paid by the hour. So the more you work the more you get paid (until the client starts feeling you’re milking them). So your incentive (even subconsciously) is to take as long as you can reasonably justify.
There’s no reason for you to get faster or better at what you do. So you sit at the same skill level, and you wake up one day to find out there’s a new technology in town and the demand for your skills are disappearing.
Three reasons billing by the hour is bad for your clients
Bad for them 1: They’re paying for hours, not outcomes Savvy business owners should have a very clear idea of what it’s worth to them to have a problem solved. For example, if a dentist needs more patients, they should know that each patient is worth a certain amount per year. If your work delivers them 10 new patients a year, they know how much the problem is worth.
But instead they’re talking to you about the hours you’re going to put into this, and not about how many more patients they will be getting. They’ve lost the plot.
Bad for them 2: Incentives are misaligned When you’re paid by the hour your client is incentivised to get you out the door as fast as possible. And you’re incentivised to stay in there as long as you can. More money, right?
These incentives are not necessarily overt or even conscious. You don’t engage with a client to get the most out of them you possibly can.
But subconsciously the incentives on both sides are there, and they’re misaligned. It’s only when your clients incentives and your incentives are aligned that you are both driven to get the right thing done.
Bad for them 3: Scope creep When your client is paying you by the hour it is so easy to add on a “oh can you do this as well?”. On the face of it this is great, because you get to do more work and they get more value.
But this soon goes wrong. One month you’re going to present them with a bill that is way more than they expected, and the next thing you know you’re having to justify each hour you billed. Not a good place for you or for the client.
Three things you can start doing right now
So if billing by the hour is so bad for you and for your clients, how do you get out of it? Here are three things you can start doing right now.
Thing 1: Talk about business value, not hourly rates The savvy consultant will steer business owners to talk about the value of having a problem solved, rather than hourly rates.
For example, a new patient for a dentist may be worth $2,000 per year and stay with the dentist on average 5 years. So the lifetime value of a new patient is $10,000. If your superior marketing skills brings the dentist 20 new patients this year, this is worth $200,000 to them over the next 5 years. So they wouldn't mind paying you 10% of that amount to beef up their marketing, right?
This conversation is not just about business value. It is also going to incentivise you to get the job done right, and to get it done as fast as possible.
Thing 2: Specialise Generic skills deserve generic rates. Specialist skills deserve specialist rates.
Take the dentist example above. If you walk in the door saying “I’m a great marketer and I will get you more leads for your business” you’re competing with every other marketer out there. But if you walk in the door and say “I specialise in getting more patients for dentists” you’re in a different league. A more valuable league and certainly a more expensive one too.
Thing 3: Productise Productise your services, that is. Rather than charging by the hour, turn your services into “products” your clients can buy. They can choose between small, medium and large or bronze, silver or gold — but they have a choice.
Back to the dentist. Rather than trying to sell them 100 hours of labour, you’re offering them an entry-level, standard and deluxe package. The packages are not distinguished by the number of hours that go into them, but the features and benefits — and the increasing likelihood of landing those 20 new patients per year.
And you get to charge more (you’re a specialist, right?) and you’re incentivised to get the job done as fast as possible. Less work, more money — gotta love it.
Get out of billing by the hour
It may be a good way to start your business, get your feet wet and hone your skills. But even in the short term this is really bad for you and for your clients.
If you would like to know more about how to productise your services, check out this DIY guide here. You can download part 1 for free.