Charging Per Hour Is Stupid!
4 November, 2008 - General Business - 14 Comments
$70 per hour. That was my Web design rate. A typical fee for a decent Web developer. Not the highest by a long shot, but not the lowest either.
A client calls. You ask him lots of questions to determine his needs. You estimate in your head how long each task will take, then convert that to a dollar amount using your hourly rate. You present a quote, the client accepts and then you do the work.
There Lies the Problem
A job you estimated at 10 hours does in fact take 15 hours. There’s a little scope creep from the customer and the job generally takes longer than you expected.
And then a job that took you two hours ($140) makes your client $10,000 in 12 months.
Where is the Logic in Charging Per Hour?
There is no logic. Why should you charge just $140 when the value of your work is worth $10,000 every 12 months? $100,000 profit if kept for 10 years. And you charged just $140!
These may seem like crazy figures, but I’ve done work that took me just a few hours and have seen the direct impact of my work make the customer several thousand extra dollars in profit each year.
Don’t charge per hour. It’s easy, yes. But also useless.
Charge based on the value of the product or service you’re providing. If you estimate your service is going to make a client $10,000 per year, charge that client $7,000. Even if it’s only going to take a few hours.
Justify the Cost
Will a customer really pay $7,000 for what accounts for no more than half a days work? Sure, if you show them they’ll make an extra $10,000 in the next 12 months. And $10,000 a year after that. And the year after that.
Charge based on your service value. Justify the cost. And stop losing money by charging per hour.
PS. Yet again, I have to thank Brendon Sinclair and his Web Design Business Kit for helping me understand this concept. It’s a concept I’ve heard of many times, but until I read Brendon’s book I simply didn’t “get it”. Brendon, I’m trying not to give away all the secrets in your book, but sometimes your words are far too valuable to keep to myself. 
Do you charge by the hour? Have you ever charged based on your service value? Let us know in the comments!
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Posted on 4 November, 2008 by Jamie Harrop
Filed Under General Business |
14 Comments»
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Hi Jamie. Yes, I charge by the hour. This is an interesting concept you have shared here, however. You’ve planted a seed in my brain. Thanks.
Davinas last blog post..A Ghostly Life Experience
Hope it helps, Davina.
This concept only really works when the work you do is intended to do nothing but make your client money.
If you’re a freelance writer, for example, it may be difficult to assess how much money your writing is going to make the client.
But for an industry such as Web design, charging per hour simply doesn’t make sense.
I charge per project but of course I base my estimate on my hourly rate. I would say the problem with charging based on what the client will make off the site is how do you estimate what the site will make?
Nicks last blog post..Soccer Is a Vicious Sport
Hey Nick,
That’s where the needs analysis comes in to play.
When you’re asking your client all the questions you need to ask in order to give them a quote, you need to find out their profit margins.
If you find out the prospect is sending out 500 snail-mail newsletters every two weeks, you can bet on about $1 per newsletter (time, materials, postage). That’s $500 they’re spending every two weeks, or $12,000 a year.
Offer to take that newsletter from snail-mail to email. They save on postage costs and materials, and save some on time because the newsletter software helps them. Suddenly, their newsletter cost is down from $1 per mailing to 20 cents per mailing (Or $500 every two weeks to $100 every two weeks). Or $2400.
You just saved them $9,600 a year just by implementing a newsletter. And because e-newsletters are easier to signup for than snail-mail newsletters, their signup rate might increase by 20%.
At that point, you would ask them how much they make per year from an average recipient of the newsletter. Say it’s $200. And they usually get 100 new subscribers a month. An increase in 20% means they now get 20 more new subscribers a month, or $4,000 extra profit.
Hope all that makes sense. It’s all about finding their margins, finding where they can save money, and converting percentages to dollar amounts.
I think this comment is worth a post all by itself. Thanks for the inspiration.
Well if you turn it into a post, I’ll save my arguements for that post.
Nicks last blog post..Soccer Is a Vicious Sport
Absolutley take the time to figure out the value the client will get out of your work before quoting. I always say price higher than your competitor while also providing more value. Deliver more than you promise and you’ll easily justify your price.
Also if you price by the hour you are limiting your income. You and your business have inherent value that your bring to the table that no other business has, that’s your unique selling proposition.
That why for example a well-known speaker can charge more than a less well-known speaker. Even though they both are spending the same amount of time and can both speak the same nunber of words, one brings more value in the form of experience, charisma, etc that the other does not.
What would you rather have 2 $4000 projects or 10 $200 projects?
Rays last blog post..Sample Text
Excellent comment and excellent example, Ray.
Thanks for sharing your wisdom.
Jamie
Hi Jamie, I’ve never charged by the hour. I’ve always charged a fixed rate. But I’ve also known how long the project will take, so I know what hourly rate my staff will be making me.
Like you say - it depends on the value to the client. Also, it depends if the customer can easily work out what you’re hourly rate is. I once used an ineffective business coach, who didn’t charge by the hour but I knew how few hours she’d put in.
Really, I should have asked for a refund, as she added no value to my business, or my bottom line. It probably would have been better for her to refund me, as you can bet I’ll be blogging about her business in the future.
So, I would say, definitely charge on your value to the customer, rather than hourly but just make sure you’re being realistic about what that value is.
Cath Lawsons last blog post..Heroes Of Healing: Napoleon Hill
I have enjoyed reading some of your posts lately, Jamie, particularly the “Homeless Millionaire”.
The issue of how to charge for marketing & web-design is interesting, and the balance of getting a share of profit with reasonable compensation for work performed is tricky.
I think you are talking up the value a bit too much, and prefer a charge per hour of work performed, and if you have been the generator of the ideas as well as implementing them, then you can go for the share of future earnings.
Web design or SEO work is mainly technical, and usually on instruction fom the business owner.
Ownership of the inspiration or concept is fuzzy, and usually is a result of collaboration. The continued operation of the business is down to the owner, though and his continuing work and risk needs to be balanced by the major share of reward.
If you have taken all the risk, and can guarantee the income with little further work, then fair enough. An upfront fee and a future share based on profit realised, or set performance criteria might be reasonable.
Good post
People are smart…if they find you asking a load of questions about how much they’re making won’t they just under state it and get the job done for a lot less money? if instead of saying they’re making $10,000 and say $1,000 then your price is now just $700.
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Jamie,
Excellent information. I recently starting changing from hourly to by the project. This has proved to be very successful for me. The backend database work I do is has long term worth…
~ Jim
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Thanks for the post Jamie.
This has provided me some clarity, I have recently been embarking on a path of SEO and got quite good at it, since it is not rocket science and just needs to follow a logica path; however I have not done any work for any clients. This part is the daunting aspect of it all! I could show the client examples of direct work that I have done however I still would lack the confidence to approach a client in the manner you have proposed above, I feel you need to really sell yourself to achieve that kind of return.
I charge hourly for SEO services, but as I typically quote a range of hours (e.g.) 20-40 hours / month, then it doesn’t really make me worry. It really depends on the trust and relationship you have with your client though.
Cheers Jamie.
Just Sphunn your ebook - really impressed!
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I hate charging hourly - I would rather do %’s. If I do charge hourly I try to pin point exactly what was done during the time frame and show them if the model was changed to ‘per job’ they could save money in the long term. Most people though (when it comes to online) only look at the short tail.