Why Hourly Rates Won’t Help us in 2009

We’re heading for a recession, there’s no question about it. Now the doom and gloom is out of the way, I’ve been thinking for the past couple of weeks that I might revise the way I do business in 2009. Hourly rates are great, don’t get me wrong, but they give us no incentive to work fast do they? Someone who has no idea what they are doing could theoretically get paid double/triple what we do yet we get penalised for being quick and efficient, that’s not right.

I think a lot of it is to do with mindset for the client. I’m going to use a really girly example here, forgive me but I hope you’ll see where I’m heading. When I book to have my nails done once a month (£25.00) I think of the service and end product I am getting – which are gel nails that last and look beautiful all month, I bet loads of you men notice females in meetings with chewed nails, chipped polish etc., which is more than worth £25 (in my opinion, anyway!). I don’t think of the beauticians time to complete that service, if I thought of it like that I might start being cynical that £20.00 per hour (£5 for materials) is a lot for an hourly rate for that service.

I think in 2009 we are going to be much better placing our services as products as much as possible,  sell the end product to the client rather than telling them how many hours it’s going to take to complete and what that will cost them in your hourly rate. A more techie example, if you say to a client “Hey, I can install that CMS system, fully rebrand it, it’s going to enable you to update your website as much as you want without the need for additional charges from us for maintenance, it’s going to cost £450.00 to complete” – you’ve sold them an idea, a solution and a money saver all in one. Against saying to them, “Installation will take me 10 hours at £45.00 per hour” for example. This suddenly becomes a questionable idea, I’m sure amongst other things, they will question whether it will really take you that amount of time to complete the project, suddenly you’ve put doubt in the clients head and the project has gone, or at least been put on the backburner.

Clients are of course a great breed who want to add to their projects as they go along, so I can hear you saying as you read this “but if we fix our prices and then the client wants extras, we’re screwed”. Wrong. If you have a plumber round to fix your tap and he’s quoted you for these works, then you decide you want your shower mended, you expect to pay more. Clients should be no different and we should treat our industry no differently. I think as long as we are upfront, honest and polite, of course you can ask for more money when they are asking you to complete more work. It seems such a simple solution but one that fills many people with fear for some reason.

The other fear with fixed pricing is if something takes you longer than anticipated. I’d suggest sitting down at the proposal point and thinking of the maximum time it’s going to take you to complete the project, place a limited amount of revision sets that come part and parcel with the project and then specify a price for extra revision sets should they need them. With no hourly rates to be seen. By all means use your hourly rate as a guide for pricing though but I would refrain from writing it on the proposal itself. The following example would be for a logo design project for a client, and this is how I always lay out my proposals – you tend to find you can cater for everyones budget a little better then.

A list of what I’m going to do:
1. Corporate Identity Development

Optional Extras
2. Stationery Design
3. Extra Revision Sets

1. Corporate Identity Development. Use this paragraph to explain exactly what you are going to do and how it benefits the client, followed by how many revisions you are including in this price.
PRICE

Optional Extras:

Stationery Design. Another paragraph to explain what’s included in this package price.
PRICE

Extra Revision Sets. Another paragraph to explain what consitutes one of your revision sets.
PRICE

Place tick boxes next to the optional extras and let the client work out how much their budget can stretch to. By doing your proposals this way you will find your pricing becomes a lot more accessible to clients. They can see the benefit of what you are proposing and can clearly see the cost involved.

Daily rates would also be a great way forward, I personally would prefer this method, however there are times when you are going to need a solution for smaller projects, and that’s where I’d suggest, for 2009, we’re all going to be much better off placing our services as products as much as possible.

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  • Tom

    I think the most important thing to know before you turn your work in to ‘products’ is how long historically these things have actually taken you. If you time all your work you’re better placed to accurately measure what you need to charge as a fixed fee. This way you cover the jobs that inevitably run over. No change in the way you bill will stop some clients taking the p*** while others are a joy.

    As an example, we charge £80 to setup Google Apps for someone. If I’m doing it with a fresh domain name previously unregistered it takes about 20 minutes. Good profit. However, if the domain is existing and needs tranferring you need to get the information out of the client, help them migrate their existing email account etc. In the end it generally works out about the same as our normal hourly rate.

    The thing we still haven’t quite cracked is selling knowledge. Accountants/solicitors and the like seem to have this one cracked. The clock starts now….

  • I hate giving hourly rates, it really makes me wanna take more time to complete a task. I always try to make it project-wide, it adds value I guess.
    Besides, everytime I was asked to work by the hour, it was to fix. I hate fixing other people’s bugs, it’s such a PITA, I must say. If there are bugs, the guy who put ’em there fixes ’em, not me.

    Brilliant post there, Sarah! I should do those invoices and stuff a little better.

  • There’s some truth about this in a recession, especially as company budgets get squeezed. They can’t keep going back to their finance people asking for a bit more.

    I’ve done a few fixed price projects. A couple went extremely well, most went fine, and one went extremely badly. The main lesson I learnt was to test expectations. If you don’t know a client, start small with them, or set regular milestones of sign-off with them. You may come up with a list of deliverables and how they perceive what that deliverable is, and how you perceive what that deliverable is could be very different. May not be so different with something like stationery, but in software engineering, it can be huge.

    You’re right about revision sets. It’s much easier to have some contingency when they change their mind on something small and deliver on that change than to get into battles over what’s in the contract.

    One thing is that clients really like fixed price, and are often prepared to pay more for it (a lot more) than for open-ended day rates to build. They know what their position will be, so consider it less risky.

    The other thing that I’m starting get my head around is the idea of an ongoing support and maintenance contract in these times. So, rather than building a website for someone that they own, they rent use and updates. This is certainly more risky for the developer and of course, that would be factored in, but you could sell to someone the idea of rather than selling a site for £x,000, they pay £x00 per month for its use. Not sure yet, though…

  • I always quote a fixed price for projects; clients i have found certainly in recent years really need to know how much a project is going to cost them up front. You tend to find you get very good at speccing up the project and ensuring you don’t end up going over the projected costs too.

    If additional items get thrown into the mix by the client then i have no issue with letting them know that if they wish that extra bit doing it will cost them and will also add time onto the project. It makes the client think long and hard about wether they really need the addition as it will cost them money and (sometimes) extend the project development time.

    Obviously small amends etc tend to get done included with the original cost here and there but if they start getting excessive then it’s only fair to charge. One recent client of mine sent me 27 Revisions of the same document; obviously my patience wore thin after the first few and i ended up charging him twice the original development costs because of all the amends and additions.

    I guess it comes down to personal preference and what the market will bear; both methods of charging can work well if you plan your time well to suit.

  • I agree Sarah and the bonus for fixed price work is that as your value rises, so can your prices. That two designers may charge the same rates per hour and the client gets two different results is problem with hourly rates.

    I run an agency and we use freelancers to come in and help out when needs be. Two that I can think of charge exactly the same amount, but one of them delivers to a much higher standard and we really get our moneys worth. And, of course, he is the first one we call when we need something.

    If you keep rates at £xx per hour you can only earn so much. If you commoditize your offering, you can make more. Some you will win on and some you will lose on and after a while, you will realise which clients not to take on at initial meeting stage. In other words, the first person to realise the value of what you offer should be you.

    Nice post.

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  • Great post!
    I’ve been struggling with this recently… I think the key is NOT showing an hourly rate on your proposal, as you’ve said. I find myself “padding” my hours to make the hourly rate I want but am afraid to charge…
    I think it’s better to charge what the project is worth, regardless of hours. If, as you’ve stated, you explain the value of the process to your clients, they can’t argue with value.
    Thanks!