The hourly billing model is dying. To be honest, I won’t have anything nice to say at its funeral either.
The hourly billing model is based on an out-dated idea that people value the time it takes you to create something. But let’s be honest, they don’t; and this may surprise you, but they never have. Can you imagine someone suggesting that a BMW 2 Series should cost the same as a Honda Civic simply because the time to create them is about the same? [Full disclosure I have no idea how long it takes to make either car.]
The point is, people value results, quality, information, etc. not hours. You are the expert in your field. People hire a bookkeeper because they want help understanding their numbers, they want solid information and advice. A marketing expert is hired to bring in more clients. An electrician to install new outlets. Your clients don’t care if you planned the job to take 10 hours when it takes you 15. They didn’t hire you to keep you busy for 10 hours, they had a problem and you promised a solution.
One issue with hourly billing, is that it just measures the passing of time. However, hours aren’t all the same. I have a very large coffee cup that I fill up multiple times per day. You don’t want me working on your files without at least one of these large cups. I once tried quitting cold turkey and the life drained out of me and I quite honestly lost the will the live. At that time, I was working with time sheets. I don’t remember which client my time sheet said I was working on, but I assure you those weren’t very productive hours.
Imagine a more serious life event, like the passing of a loved one, a serious argument with your spouse, bankruptcy looming. It isn’t a recipe for quality work. So, telling your client the job is taking longer than expected, shouldn’t be their problem. Chances are they never specified the timeline to begin with. They presented a problem, you suggested a solution, and if you didn’t provide enough time, that is on you. YOU are the expert.
On the flip side, imagine you had a solution that could put an extra $100,000 in a client’s pocket. The solution that you see clearly because of your expertise in your field that no one else sees. However, in this case it would only take you 30 minutes to give this information to the client. Assuming your charge out rate is $200/hour, is this information really only worth $100 to the client? You’re leaving serious money on the table in this scenario.
In addition, if one person charges $200/hour and another charges $50/hour, you may mistakenly believe the $50/hour person is cheaper. Quality aside, this isn’t necessarily the case. One hour at $200/hour is cheaper than 10 hours at $50. The hourly rate is meaningless. The value to the client is in the completed job. Whether the job is worth $200 or $500 is independent to the hours worked (at least in the client’s mind).
There is no incentive to become more efficient when you are charging hourly. The only way to make more money when charging hourly is to work longer hours or charge more per hour. I’m sure longer hours isn’t what you as an owner, or your significant other signed up for when you started your business.
There must be a better way.
So, what is the alternative? Value pricing.
The following key factors are important in determining the value of the project:
You need to be clear about the scope of the project, keeping in mind your client’s wants and needs, while considering how long the project will take to achieve the end goal. The price shouldn’t only be based on the time it takes, although you do need to consider your cost, and time may be a factor in this. Your quote shouldn’t be a fixed price just based on hours.
By presenting the client with more than one option (I like three), you give them the opportunity to select a more economical solution if they are price sensitive. You also give them the option to get even more than they hoped, if they aren’t as price sensitive as you feared. The key though, is that you give them the power to select one of the options you present, rather than trying to decide between you and someone else.
It takes time to get this right and it isn’t easy. However, hourly billing is so terrible, that even if you are great at it, it still sucks for everyone involved. It is much better to be bad at value pricing, than great at hourly. Try, fail, and get better. You’ll thank me in the long run.
It wouldn’t be fair to throw this out there and pretend like there aren’t any downsides to value pricing. The reason people stick with hourly billing is the fear of the unknown. In construction, you often hear you don’t know what you’ll find until after the walls are opened up. I know I’ve agreed to renovate some bookkeeping files at a fixed price only to discover a trail of destruction left behind by the previous bookkeeper.
Sometimes you may not be able to give an exact price because you can’t know what is behind the wall until you start. In that case, you just have to make this crystal clear to the client. As soon as you are able to know the additional work, update the contract and carry on.
Most of the time though, this is just an excuse for laziness. You’re the expert, you know better than anyone else what it will take. I now charge an upfront fee to do a thorough review of a client’s books before I tell them the investment required to renovate their books or for implementing recurring bookkeeping. After the review I’ve seen the good, the bad, and the ugly. So if I under charge at that point, I have no one to blame but myself. I’m taking the risk for this as well, which is also of value to the client and is factored into the quote.
If you’re interested in finding out how this could work in your business, we’d love to discuss this more with you. Please feel free to reach out to us at firstname.lastname@example.org for more information.