Saturday, February 06, 2021

Why Hourly Pricing in Not the Best Way to Price Your Services

I overheard some designers talking about charging hourly rates. (It's still a debate, apparently.) And the designer gave some good points as to why he still charges an hourly rate.

He made the point that having an hourly rate is:

  • Easy to track and and easy to itemize along with expenses. 
  • Workable with a scheduled payment plans. 
  • Makes visible (for designers and their clients) how time is being used and how much everything is costing. 
  • Flexible with any changes in scope. It's just a matter of adjusting hours, even though clients will need to approve going above the estimate.
  • Great for new designers just starting out. However, designers eventually will need to charge higher hourly rates as they grow faster and more experienced. 

What makes this a difficult approach? 

  • Estimates are based on time, not value to the client. Clients focused on hourly production think they are paying designers for their time. But, the truth is client's aren't paying designers for their time, but their expertise. Clients need a well-done solution, not just a low-cost result. Think about it, no one pays a person to dig a hole for 4 hours. They pay to have a hole dug well for a particular purpose. The value is not in the amount of time spent, but the skill employed to meet the goal.
  • Clients don’t understand why certain tasks require the time they really do. In clients' minds they have assumptions about the amount of time required for certain tasks. So they will try to negotiate every item. Ultimately, that's not what clients need to understand. They just need to understand their goals and what constitutes a good solution.
  • The more experienced and faster we are, the more we will have to charge hourly. If we don't, we will make much less for increased skill and speed. Which doesn't make sense. As a result, we will have to convince clients to accept new hourly rates that may have to increase significantly to cover expenses and salaries. And all because we are better at doing our jobs! This can result in clients pushing us to spend less and less time on their projects, and we will be pressured to find ways of cutting corners out of our process. 

I had some plumbing work recently done. It was a plumber I've done work with before. They gave me an estimate based on cost of materials and labor. They initially charged at least $100 just for the visit. But applied it to the overall cost of doing the job. 

They weren’t sure how long it would take. But they knew it would be less than four hours. However, because they were highly experienced, it only took them about an hour and a half. So, I was pleased because they did a thorough and excellent job. They even explained in detail what they did and why they did it the way they did. They even went above and beyond what was expected. 

I wasn’t too concerned about the hours they spent because I wasn't paying for their time. They were there to do the job right. They were prepared to take as long as needed to get the job done to my satisfaction. That’s what I cared about too. That doesn't mean that I didn't care about cost. They gave me a price estimate up front. But it wasn't based on time, but effort and materials.

Haggling over hours is not the working relationship I desired to have. I've been in that situation before with contractors. I don't value getting the costs down by cutting hours. I don't want shoddy work or using cheap materials as one contractor had done to me before. I am willing to pay a little more for a job well done. I wanted a plumber who knew what they were doing, and can do the job right. 

Charging based on hours isn't what makes designers valuable. Clients don't value how much time we spend. They value what we spend our time on. And that's on something clients can't do, but desire to have done for an ultimate goal. 

However, value is not an all or nothing proposition. We can factor in our time when we estimate our value pricing. But time doesn't determine the value. Value is determined by what it means for the client. Clients aren't paying us to work hard. They're paying us to solve their problem.  

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