Hourly rates and your business
Many small businesses struggle with a pricing model, particularly in the service industry, highlighting the reality that there are so many hours in a week that any individual can bill, and therefore a limit to earnings immediately placed on any business.
For this very reason, Mike McDerment and Donald Cowper of FreshBooks and co-authors of “Break the Time Barrier: How to unlock your true earning potential” suggest not only in their book but below that moving away from an hourly rate can actually increase revenue. In their words, they offer the following five methods of transitioning away from an hourly rate:
1. Focus on value, not hours
The first step is understanding the difference between churning out billable hours and delivering value to clients. As a freelancer, you’re not just a collection of hours; you bring an array of creativity, wisdom, talent, and skills that you’ve accumulated over the years. You bring far more value to a client than just punching in and punching out on the clock.
2. Probe for serious pain points
During the exploratory phase, probe your client on their current problems or pain points. Too many service providers focus on small problems, but clients aren’t motivated to solve those, so dig for the serious issues.
Are sales trending downward? Are new competitors emerging? If the client has goals or revenue targets, those create problems too, because if they aren’t met, the client will experience a loss.
Bottomline: clients value solving large problems and they’ll pay for that value. If you don’t identify where your client really needs help, you risk developing something that won’t have a lot of impact and consequently won’t be worth much to the client.
3. Position your services as an investment, not an expense
No one likes expenses, so they try to keep them as low as possible. That’s why so many contractors experience downward pressure on their prices. But an investment is a different story altogether.
To position your service as an investment, connect it to solving the client’s pain or helping them achieve a key objective. For example, if you’re a web designer, instead of building a better looking website, design a site that acts as a marketing and selling engine to help your client hit revenue targets. If you offer to build a site that could generate an additional $100,000 of profit annually, your client would be open to making a $20,000 investment. If you used the traditional hourly pricing model to figure out your fee, you might only end up charging $2,000 to $2,500.
4. Don’t present your pricing upfront
Most initial conversations begin with a client asking about rates and a freelancer obliging with a response, without either side fully grasping the impact or scope of the project. When you present your pricing upfront, you make price the distinguishing factor, not your ability to deliver results. This encourages the client to compare your rate to someone else’s (and having the most competitive rate doesn’t always work in your favor).
If you want to be judged on your abilities, resist the temptation to give a quote before you and your client agree on what they want to achieve.
5. Offer clients more than one option
If you offer just one package or price, the client has two options: accept it or not. Instead, offer a proposal that reads like a menu, with multiple options that have distinct prices. Each choice should address business needs and goals, with solutions at various depths and price tags. Many freelancers are surprised by how frequently clients choose their topline package. In addition, should a client want to pay less, there’s no haggling. They just choose to have less delivered.