Billing by the hour may not be sexy but it works. It has kept my family fed for 15 years and it’s the easiest place to start.
We recently had a good discussion on pricing strategies in Land a Project NOW!. Someone posted a link to a podcast featuring Jonathan Stark. Jonathan is the author of Hourly Billing is Nuts. I guess I don’t need to tell you that he doesn’t think hourly billing is sexy. You won’t find a lot of people in the media talking about how great hourly billing is. I mean, that’s so McDonald’s, right? Hourly billing has become a shameful secret in some circles.
Hourly Billing is the Best Place to Start
My job is to clear roadblocks to revenue and I want you making money as soon as possible. The fastest path to putting a check in the bank is billing by the hour. I am not suggesting that someone is going to hire you based on an hourly rate and no other discussion. You should expect to give some estimates for expected deliverables. Many times, you’ll need to write a proposal. For help on writing proposals see Proposals are Hard!
The problem with hourly billing is that you eventually hit a ceiling. Once you are fully booked, the only way to make more money is to work more hours or raise your rate. But I will tell you that being stuck at multiple six figures, while having the freedom and flexibility to live life on my terms, has not been all bad. In fact, it’s been pretty darn good.
Other Pricing Strategies
An infinite number of pricing strategies can be invented, but other common methods include daily, weekly, monthly, retainer, fixed bid, not to exceed, performance bonus and value based.
Daily
Daily is similar to hourly but covers a whole day. This is for consultants who spend full days with a client. Daily billing is common for certain expert resources who may fly in for special days of meetings and won’t do additional hours of work.
Weekly, Monthly, Retainer
Weekly and monthly pricing may be for a certain number of hours per week or month. Some people refer to this as a retainer. I sometimes have clients who want a steady 15 hours a week for some period of time. This is more appropriate for operational type work than discrete projects.
Fixed Bid
A fixed bid project is a fixed fee for delivering the required results. In certain industries, this is the norm. You will probably come across it during your consulting career. *** PROCEED WITH CAUTION *** You need to be very careful doing fixed bid work. These projects can provide some good financial upside if you are very experienced and/or your service lends itself to a cookie cutter approach. Otherwise, do your very best job of figuring out how many hours the project will take, then add 40%. For some strange reason, projects always seem to run over by 40%. If you’re not careful, you can find yourself working for less than minimum wage.
Not to Exceed
A “not to exceed” clause says that if the project will take longer than the estimated hours for unexpected reasons or scope changes, then you will revisit the budget and timeline. I also tell the client that “not to exceed” pricing means that if the project takes less time than estimated, then they pay less. This way the cost/benefit swings both ways.
Performance Bonus
A performance bonus is additional compensation for reaching certain predetermined goals or milestones. Examples are receiving a $10,000 bonus for getting a product ready to ship 3 weeks ahead of schedule or working on a social media campaign that drove sales for a specific product more than 20% above plan. You can capture some upside if you understand the client’s hot buttons.
Value Based Pricing
Value based pricing is the practice of setting the price of a product or service at its perceived value to the customer. Let’s be honest, the primary goal in consulting is to make more than your hourly rate.
Here’s a simple example. If your only toilet is clogged on Saturday night when you are hosting your sister and her entire family for the week-end, you will jump at the chance to pay $300 for a plumber to come out ASAP. If you live alone with two bathrooms and only one toilet is clogged, you can wait for the Wednesday special at $50.
In this example, it’s easy for the plumber to know when he can charge more. In the context of consulting, it can be much more difficult to understand the value to the customer. You have to dig deep to understand what the project will require. You must clearly understand both the problem and solution to propose value-based pricing. Some value-based pricing models recommend that you first sell a discovery phase to outline the rest of the project in detail. These activities may lengthen the sales cycle and make it more difficult to close deals.
The goal is to do a project that will be worth much more than your hourly rate to the customer. But what if the project takes many more hours than you projected? The risk is yours. You must still deliver the work.
You must also consider your value proposition as a consultant. I do superhero work. The company has a huge crisis and I come in to save the day. They know they have a big problem, but they don’t know exactly what needs to be done. That’s why they call me. But it looks something like this. Let’s say a car got stuck on the railroad tracks and the train hits it. EMTs arrive on scene. I am the trauma doctor running the case back at the hospital. EMTs radio in. They tell me they have a heartbeat, but the patient isn’t breathing. No visible blood or lacerations but obviously there’s a problem since he isn’t breathing. They’re bagging him for transport and arriving in 2-3 minutes. As the head trauma doc, I know I have a serious problem because he’s not breathing on his own, but until I open him up, I won’t know exactly what I need to do. Value based pricing simply isn’t feasible for most of my work.
Value based pricing is an advanced pricing strategy. We really should all aspire to this. But, I will tell you, I may never get there. You may not either. And guess what? That’s okay.
Combination Methods
Your pricing strategy can combine any of the above methods. Or you can make up something entirely different. Be mindful of the risk you take on and consider the difficulty of managing a complex structure.
Always Track Your Hours
I am adamant that you must always track your hours. Jonathan Stark makes a cavalier statement about not tracking his hours any more in Hourly Billing is Nuts. This is reckless. Like it or not, regardless of how you are pricing, you are selling your hours. Once an hour goes by, you can never sell it again. You must always know how many hours you spend on a project. How else will you know whether you made $5 an hour or $1000 an hour? It’s important to be clear for pricing future work. He claims he has a gut feel for it after so many years. That may be true, but few of us have enough experience for that. Here’s the thing. I was an overweight child. When I was 15, I weighed 40 pounds more than I do right now. That’s a lot for a 15-year-old. I decided to lose that weight and worked hard to keep it off. I weighed and counted the calories of everything I ate for the next 20 years. It took 20 years of counting every calorie I ate until I had a gut feel for eating appropriately.
There will be times when your pricing strategy is off and you make less than you hoped. Do not bury your head in the sand by not tracking the hours. Track the hours and learn from your mistakes. Goodness knows I’ve made every mistake in the book over 15 years of consulting.
Let’s Have a Pricing Party
Pricing strategy discussions are fun. They spark a lot of passion, so they are lively affairs. Any time you want to round up a group to do a Zoom session on pricing, I am in. We can record it and post it in the Build Your 6-Figure Consulting Business Community for everyone to enjoy.