I figured out early on in my business growth that hourly fees are not my friend. Hourly rates tie your services to your hours, something that can be itemized. But your value goes well beyond just those hours.
This is why you have to get away from charging hourly. Recently, I came to understand that hourly fees aren’t just bad for you. They place you and your client at odds.
Here’s the podcast episode:
Or if you’d rather watch the video:
And here’s the transcript:
Hi, I’m Ruthie owner of Defy The Status Quo, and you’re listening to an episode of The Defiant Business Podcast, your daily 10-minute shot of business knowledge. You don’t have a lot of time and I’m not going to waste it.
We’re just going to dive right in, because today’s topic is one that’s a huge point of contention in freelancing and business forums all around the world at anytime of the day: hourly fees, why they’re bad for you and why they’re bad for your client.
Hourly Fees Are Not Your Friend
Why Hourly Fees Are Bad for Service Providers
In my freelance writing and content-writing career so far, I learned pretty early on that hourly fees were not my friend. So the first part of this episode is going to focus on why hourly fees are bad for you.
They’re really bad for freelancers, small business owners, consultants, and any type of service provider. And the reason why is because you’re turning your time into a product. As a service provider, your time is your inventory. You don’t want to put a price tag on your time.
The reason why is because not all of your hours have the same value and project rate. I’ve seen this on a lot of forums. Your project rate shouldn’t be how many hours you think you’re going to do. Your internal hourly rate is what the project rate is. So if you have absolutely nowhere else to start, this is a great place to do so.
Especially if you’re working on a new project, you’re like, “Hey, so I think a project will take x many hours and I’d like to make this much per hour. This is going to be my project rate”.
But you really need to dig in deeper to the value that you’re offering. And you’re like “Ruthie, I don’t know how to calculate the value of what it is I’m offering” Okay. That’s because you need to get clear on the return on investment that your customer or client can expect to see.
That includes looking at things like KPIs, key performance indicators, that measure your success. So again, keep in mind, I’m in content marketing, which means that I can’t prove the ROI sometimes until 6, or 12, or even many more months into the future. So you have to focus on the near future KPIs that you can use to help show your clients the value of their investment.
Show those near time KPI results gives you time to educate your client on the long-term KPIs as well.
For example, let’s say I was the person who wrote a white paper for your business, which takes 20 to 30 hours to do over six to eight weeks. By outsourcing it, you actually completed the project. Internal company politics didn’t derail it. An employee didn’t lose interest. This project didn’t go to the back-burner because your client work increased when you delegated a white paper to someone.
I was able to help your employees become more productive. How many hours did we save there? Right. I was able to keep this project on track. So even just in the near term, I was able to generate direct cost savings for my client by being the person that took on that project.
And then you talk about things like the customer experience. So when I work with my clients, we communicate a lot, not excessively so. Part of them outsourcing to me is that I am a trusted partner in their organization. They can count on regular updates.
We will schedule regular phone calls to discuss project progress, but they know that there’s not a lot of hand-holding here. Not only am I taking the project off of their hands, I’m taking the stress too. And that’s not a transfer of stress, because I don’t accept unnecessary stress. However, by taking on the project, we’ve helped eliminate some of their stress, and that’s pretty hard to put a value on. But marketing professionals, sales professionals, business professionals can feel it, and they understand.
So understand the value that you bring to the table. I know that it’s hard, but just because it’s hard doesn’t mean that you shouldn’t do it. You’re leaving money on the table by not understanding your own value to your clients. And this isn’t something that you can do and have the sort of successful business that I imagine you’re hoping to bring into your life.
Punished For Improving
As you get faster, you make less money; you’re punished for improving. Think about it. Yeah, you’re punished for improving.
Let’s say you’re a consultant of some kind. If you offer any type of reoccurring work for them, then you’re going to become more familiar. And if you charge hourly, you’re going to get faster, which means you won’t be charging for as many hours.
Somebody who’s less experienced than you will take longer to do something. They could potentially end up getting paid more than you. Your speed should not be something that ends up punishing you. That’s another reason to stay away from hourly rates.
That’s why I’m saying, even if you just take your internal hourly rate times the number of hours you think it’ll take you, that is better than actually charging an hourly rate to your clients.
Hourly rates also encourage clients to pick apart what it is that you’re doing. They want you to account for all of these hours. “This is way more than I thought it was going to take. Why did this happen?”
Those are also things to consider when you’re setting up your project. That’s why you have to account for things like client interaction and project management because you’re not just going tohit the time button.
People don’t always account for emails. How much time do you spend in Gmail or your webmail client? Probably a little too much.
Are there going to be any regular meetings?
Are there going to be any events that you need to attend?
How much research do you have to do?
Do you normally charge for research? The answer is: you should be if you don’t.
Why Hourly Rates Are Bad for Your Clients, Too
Why are hourly rates bad for your clients, though? Hourly rates are bad for your clients because it immediately puts you and your clients in a moral/ethical dilemma.
So, I recently read Million Dollar Consulting by Alan Weiss. One thing that he explained that really resonated with me: You are suddenly at opposition with your client because what’s in your best interest is not in your client’s best interests. And that is not how you want to start out a business relationship.
What this means is that the longer you take on a project, you get paid more, but the less time you spend on a project, the client spends less. So it’s to their advantage, if you take less time. It’s to your advantage, if you take more time. You are immediately butting heads at the outset of a project, whether you know it or not.
Also with hourly time, the client knows that they’re going to spend more the longer you spend on something. I largely do not prefer hourly work unless there’s a cap. If something has to be hourly, put a cap on it, because you don’t want to be charged for an excessive number of hours.
I prefer project rates when I outsource certain work, or when I create teams for my clients. If we’re subcontracting or creating teams, I still do project rates with them. I’d rather just be able to account for that money, let it go and get what it is I need from this teammate, subcontractor, or contractor that I’m outsourcing too.
Hourly Fees Do Not Account for Value
So, hourly fees are bad for you and they’re bad for your client for a variety of reasons. Hourly fees are not going to be the way that you successfully scale your business, because hourly fees do not account for the value that you’re delivering to your customers.
Not to mention hourly fees also limit how high you can go. When you look at something like a blog post, let’s say I charge $1,000 for a thousand word blog post and it takes me three hours to write it. If I say my hourly rate is $100 an hour and it takes me three hours to write it, then I would have to charge $300 by my hourly rate.
But I charge $1,000 based on the difficulty of the topic, the sophisticated nature of the writing, and the audience for which it’s being written. There’s a lot of factors here. So I wouldn’t charge $1,000 if it was a blog post on gardening.
It depends on the topic and industry, audience, sophistication level, and the amount of research and things that’ll have to be done. Not because I don’t know, as I typically stick to industries that I’m familiar with, but because we have to be sophisticated and have sources.
So, that’s been an episode of The Defiant Business Podcast. I look forward to seeing you again soon.