Ditching hourly billing rates will allow you to move away from being a commodity and an expense and into a value-based, results oriented, sought after expert. It's easy to find someone cheaper on hourly rates, but it's hard to justify getting someone cheaper who is getting you your monies worth and then some!
Pretty much everyone starts out using hourly billing rates. Why? Because that's what everyone else does and it's the easiest billing strategy to use. Time for money. Whether you're freelancing, working a job or even have your own consulting firm: hourly billing is still in the rat race since you're still trading dollars for hours.
As you can see, I'm biased against hourly billing rates. It's not that I think it's bad, it certainly has it's purpose, though to move business forward there are better and more efficient ways to charge clients.
First, let's look at why and where hourly billing is good:
- It's a quick and easy way to bill some itty bitty low value things.
- It's a good way to start when you have little experience.
- It's the standard way in most industries.
- Good for short term relationships.
Easy to understand and comprehend.
Very small projects where it's near impossible to attach a value ($).
- Small add-on work to a larger project.
- You're just starting out in the industry and need some projects, these beginner project work well with hourly rates.
- When you really want a project but you cannot pin down a value based goal.
- Projects / industries where clients only accept hourly rates and nothing else.
But there's the rub, for me at least. I'm not interested in small, low value, and quick projects. I'm interested in the larger, value packed (ROI inducing) and longer-term projects where we really can make a difference and do some good.
Why you should ditch hourly rate billing
While hourly rates have their purpose, when you're trying to really grow your business and not be a commodity there are four better options: project based billing, flat fee, value based and retainer contracts.
Hourly rates put you in a commodity position as well as make it difficult to make any significant changes to your pricing. A freelancer friend had a good contract with a large firm for some web work, though he was serious under charging. Once he had enough experience and connections he tried to raise his hourly rates by about 15%. That large firm cut his contract quickly since it was their policy to never allow freelancers/contractors to increase their rates by 1-2% per year.
When you bill hourly, it's very easy for the client to a) be looking at the clock wanting you to finish faster so they pay you less and b) be looking at their wallet and P&L statement wondering how to decrease costs. This means they'll be on the look out for someone to do your job for cheaper.
You might have also noticed, that I did not include on-going projects in that list. You might think that if you're doing something like web administrator work that isn't consistent it's best to do an hourly rate.
If you work 10 hours you get paid for 10 hours. But what if your client has no work for you? You're SOL with no income. Remember, we're a business here. And as a business we need steady cash flow. Instead of hourly rates why not offer a monthly retainer contract where you do up to X amount of work and services (while not being 100% strict on the timing)? That way you're guaranteed money and the client still gets the work they'd need.
Hourly billing is a conflict of interest!
Your responsibility to the client is to get the job done as quickly and properly as possible. Your responsibility to you and your business is to make as much money as possible. Those two needs are in conflict. The longer you work, the more money you get! YEY! But the longer and longer you work the more money the client has to spend the less likely they are to keep you around if you keep taking so much time.
That's where flat rates and value based pricing is for. You set a price you're comfortable with and that your client sees is worth their money, and you get to work. Then it's your responsibility, as it should be, to complete the work within the agreed upon terms.
But what if something changes? you ask … then you can amend the contract or setup a bigger contract. If something changes where the project needs to go on for much longer and it's something you sort of can predict: you can setup the contract in a retainer form. You'll work with them for 3 months for X amount total. If after 3 months they wish to continue you'll both revisit the project, the needs, scope and the value given and renew the contract if appropriate.
If you're still using hourly rates, I highly recommend you revisit your business model and see how you can change it to include flat rates, retainers or value based fees. It'll give you more money, have your clients liking the results more and be less stressful.