My previous business was also a branding firm. I ran the firm for 14 years before selling to my partner late last year. We landed several billion-dollar brands and a spot on the Inc. 5000 during my time with the company. Even with this success, pricing was still a mystery over a decade into the business. We found ourselves asking…
Are we charging too much?
Are we charging enough?
Should we charge hourly?
Should we do project-based pricing?
Should we have fixed pricing?
Should we focus on retainers?
Should our pricing scale with the size of the client?
These are all legitimate questions everyone struggles to answer. The one thing I can tell you from first-hand experience is that hourly pricing is not the answer. I’ll give you 5 good reasons.
1. Surprises are never good on an invoice
Project-based pricing has a beginning and end. These projects typically have much clearer scopes and goals. You know what the client wants and can work to deliver a fantastic end result.
The client knows exactly what will be delivered and how much it will cost. There are no surprises when you send the invoice.
Hourly pricing projects often end with the client questioning the bill. They’re surprised at the grand total and variation from your estimate (even though they changed the scope).
Friction around the bill never translates into a positive relationship. In fact, it usually means a sour ending to a potentially fruitful client.
2. You’re turning yourself into a commodity
People naturally associate the idea of paying hourly with low level expertise. You wouldn’t pay a CEO, CTO, CMO, or any other C position hourly.
The only people paid hourly in an organization are the lowest level employees (the people who are most replaceable).
I’m not saying anything negative about someone who works for an hourly wage. I’m simply indicating that’s not how you want your clients perceiving you.
Your client inevitably starts treating you as an order taker rather than an expert. When this happens, they’ll shop around for the cheapest hourly rate that can take their orders and do a serviceable job.
3. Clients are paying you for results, not your time
I hire an architect because I want a badass house, not because I want 20 hours of his time.
You can only charge so much per hour. Even if you’re the best in the game, there is a ceiling on how high you can go with your fee. This is because people are thinking about how much they’re paying you per hour instead of the end result.
Project-based pricing flips this around so that the client is focused on the fantastic result they’re going to have. They aren’t fixated on what you’re making per hour and how much time you’re spending. All they care about is having that ridiculously sweet house that’s the envy of all their rich friends.
- Project pricing lets the client know how much it costs to get their result. Or, what’s in it for them.
- Hourly pricing lets the client know how much you think your time is worth. Or, what’s in it for you.
You’ll always win if you make it about delivering results for the client. Your marketing, sales, referrals, and profitability will all improve if you genuinely focus on client results.
4. People associate hourly billing with attorneys
Don’t laugh. I’m serious.
No offense to any lawyers reading this right now, but nobody likes paying you.
There isn’t another profession that is more synonymous with hourly billing. Don’t get me wrong, lawyers provide an absolutely vital role in our lives. This doesn’t change the fact that nobody likes paying them.
Attorneys charge for every phone call, email, or even when they think about you while they’re on the pot. Hence the nickname bloodsuckers.
Do you really want to be compared to a bloodsucker?
The hourly model always leaves your clients questioning whether you really spent that much time working on their project. You also build a contentious relationship where the client is wondering if they’re being charged for this email, call, or meeting over beers.
You never want a client hesitant to call you.
Relationships trump capabilities and you will experience far more churn and far fewer referrals if you don’t work to build quality relationships with clients.
If you can turn a client into a friend, you’ll have a client for life. Billing hourly is a formidable barrier to building these genuine relationships with clients.
5. You own your job, not a business
If you’re an individual or small team, charging by the hour just means you own your job. You aren’t working to build a business that has value. You can’t scale the business or ever hope to sell it for a decent return.
Even if you have a team of people working for you that all charge hourly, there is little value to potential acquirers as all they’re doing is buying employees.
On the other hand, you can systematize project-based pricing for higher margins and begin building value in your business.
Trading time for money just doesn’t pay as well as delivering results for money. People will always pay more for results.
Potential acquirers will also pay far more for a systematized business with a niche that doesn’t depend on a single person or hourly pricing. A purchaser wants to see a product that can be replicated by anyone with the proper training.
I know selling your business may seem like a crazy idea at the moment. You may think that you’re never going to sell, or that nobody would want to buy your business.
That’s probably true (right now), but you can change this with some planning and action.
Every entrepreneur should build with the end in mind. How do you want the story to end? Are you building something to pass on to your kids? Will you sell to an employee? Will you find an outside buyer?
Knowing the destination allows you to chart a course. If you want to sell for several million dollars, you’ll need to build a business with value, not just a job you own.
Hourly pricing won’t get you millions of dollars. Nobody will pay that much for an employee. Keep that in mind as you quote your next project.
Changing how you charge can dramatically increase the value of your business.
Clients want clarity and results. Unicorn clients (good ones) are willing to pay for those results. Project-based pricing allows you to focus the client on the result they’re paying to receive.
Hourly billing creates friction with clients. Your clients are focused on how much they’re paying you per hour and how many hours you’re spending instead of the fantastic end result. They’re worried that every interaction is costing them money so they are hesitant to communicate. This lack of communication makes building a relationship extremely difficult.
If you don’t have a relationship with the client, you’re just a commodity. Commodities are shopped on price and that’s a race to the bottom.
Nobody wins a race to the bottom.
Shift your mindset to be focused on the end result. Shape your message, process, and pricing around results instead of how many hours you’re going to work.
Everyone benefits when you get results.
I help small to mid-size companies unite their brand, business, and marketing strategy in a one week process that sparks sustainable growth. My passion is helping companies that work with clients where I can combine my personal entrepreneurial experience with my wealth of brand and marketing experience. If you want to get off the hamster wheel and grow, let’s see if I’m a good fit to help.By Andrew Holliday