Why Charging By the Hour Doesn't Make Sense - Pricing Strategy

Charging by the hour is fundamentally unethical, and I've put together this short video to explain why. So imagine the scenario where you've got 2 people who are both charging, I don't know, £20 an hour, for example, to do the same piece of work. Now, one of these people's been in business for maybe 6 months, and they're not terribly experienced. They're a bit slower at doing the job. They don't do quite as good a job as as maybe somebody who's got more experience, and on the other hand, you've got the more experienced person who's been doing it for 20+ years, and they both set about doing exactly the same task. Well, as you can imagine, the person with more experience is likely to get it done faster and to a higher quality standard than the person who's only been doing it for, say, 6 months. So let's say, for example, those people like, you know, the person who's new at this takes 10 hours, the person who's been doing it for 20 years does it in 5, and they've both been charging £20 an hour, well, all of a sudden, one person's getting £200 for that job, who's not as good at doing this task, and the better person who's more qualified is getting paid half that at £100 because they can do the job quicker. So ethically, it doesn't feel like, they shouldn't really be getting paid, you know, the person who's more experienced should technically be getting paid more than the person who is lesser experienced. And I'll give you another example. So imagine this scenario whereby, let's say for example, you want a website building for your business. So most business owners, first thing they do when they set up in business, go and get a website built. Now, you find this guy, let's call him George. George quotes you 20 hours at £50 an hour, and you agree on it. You think that that's a good deal, £1,000 for a website, great, let's go for it. And what happens? George goes away for 3 months. He's not been very good at it. He's got a ton of clients, but he's just— He's not very good. You know, he went away on holiday, he's just really slow at doing it. He comes back and he delivers your website to you. And you say, well, George, this is great, but design-wise it's not perfect. It's not what I asked for. And by the way, George, like, what sort of— how's it gonna perform from an SEO, search engine optimization perspective? And, oh, do you remember I asked about the blog and maybe putting a shopping cart on there? Well, where are those? And George goes, oh yeah, I forgot about the blog and the shopping cart. And the SEO side of things, yeah, I'll take care of that. Oh, the design, we'll have to tweak it, but I think it's gonna cost you another 10 hours, is that okay? Oh, hang on a second, you were only supposed to be paying £1,000, now all of a sudden it's £1,500 because George isn't very good at what he does. Again, that tells me that fundamentally, when people charge by the hour, it's just completely unethical. Now most people are ethical, moral, upstanding human beings, and they wouldn't just sort of jack the price up like George did. They would probably say, oh, don't worry about it, I'll do the updates. But now what you can see is that George is now forced to do an extra 10 hours worth of work that he didn't really feel that he was justified in having to do. There's gonna be some tension and some friction. There's gonna be a bit of resentment building up now between the service provider and their customer. So the whole kind of hourly rate thing is just, it's just really not very well designed in order to kind of make sure that both the service provider gets well compensated for a job well done and that the person buying that product is gonna get a decent quality product out the back end of it. Now on the other hand, if, I don't know, Dave comes along, and Dave's been building websites for 20+ years, it goes back to my original point, and Dave says, Right, I'm gonna build you this website. I'll get it back to you within 3 weeks, 'cause I know that you've just launched your business and you wanna get some clients pronto. I would suggest that once we've got it found in Google, that probably in 3 to 6 months' time, it's gonna be generating you 5 to 10 really strong leads for your consulting practice each and every week. Now, you're gonna be thinking, oh gosh, this sounds expensive, but yeah, go on, how much does it cost? Dave turns around and says, yeah, I am expensive. It's going to cost you $5K, but there's a couple of things that I want you to focus on here. One, my work is tied to results. So like I said, within 3 to 6 months, clients who I've typically worked with, or the typical results which my clients get, is that they will get 5 to 10 really strong leads for their business each and every month. Now your average client is worth X. If you get 5 to 10 leads and you convert 2 or 3 of them, you're going to be making, you know, more than enough money to justify paying me $5K for my website. Also, another thing that I'm gonna do is throw in a money-back guarantee. So if in 6 months' time we're not generating you, you know, enough leads that you're generating a decent return on investment in our websites, we'll actually give you your money back. Because it's not worth our reputation to be taking money off people unnecessarily without getting the results that we promised them. How does that sound? Now all of a sudden you've got, you know, George on the one hand, Dave on the other. George's website is £1,000, seems like a really good deal at the time. It's cheap, you know, gets you started, and away we go. On the other hand, we've got Dave's website, which is $5K, it's expensive, but he says that he's gonna get you guaranteed leads for your business, and if he doesn't, he's gonna give you your money back, which you could then go and spend with George anyway. You do, it's a very difficult decision when you're buying a product or service, but what you really need to be focused on is what results and outcomes is that service provider gonna get for you when you invest your money with them? What contracts and agreements do they have in place? In order to make sure that whatever results they're promising, they're happy to back that up with? Are they so confident in their ability to deliver what they're promising that they may even offer you a money-back guarantee? Now, I know that most people are afraid of offering money-back guarantees on the basis that they're worried about having to refund that money. And that, again, you know, I look at this ethically and morally. If somebody's not willing to put a money-back guarantee on the service which they offer, there's potentially a problem there. Because if they don't, it demonstrates to me that they don't have confidence, or every, like, 100% confidence in their ability to deliver great results. Now, I know that obviously with a lot of products and services there's moving parts, there's, you know, it involves the client maybe having to get involved and do some things as well, but that can form part of the agreement. So we'll stick with the website analogy. It's not necessarily the best one, we'll stick with the website analogy. Imagine this scenario, for example, whereby You know, the web designer has said to you, well, actually, on this date you need to provide some content, on this date you need to sign it off, on this date we've gotta have the domain purchased, et cetera, et cetera. But you as the client don't deliver that, well, now all of a sudden the accountability is on your shoulders. The service provider can't deliver those results if you don't do your part as well. So that contract between service provider and their client is also really, really important to get right and absolutely nail it down. But ultimately, you can see here why hourly rate charging is fundamentally unethical. And like I said, you know, most business owners are ethical. I could— some of those scenarios which I gave were a bit far-fetched, and maybe they, they won't come to fruition or they don't happen. I've been in business for 20 years. I've seen many different examples of people getting pricing wrong. To offer a flip side to the argument of charging by the hour or charging by the day is to get much more heavily focused on outcomes and results. And generally speaking, you need to become a master at working out the return on investment that your clients are gonna get when they invest in you. And if you can't do that calculation on, you know, the back of an envelope, and demonstrate very quickly to your clients what return on investment they get, I would go back to the drawing board, look at your product, look at your service, and work out what sort of results you've got for your clients in the past. And that should be the ROI which you're gonna promise to your future clients and prospects. Try and find interesting and unique ways to stop charging for hourly rate work and move away from that, because it's gonna serve you much better if you were charging based on outcomes and results. The other thing which I've seen as well is that a lot of people who are charging hourly rate on their work haven't factored in 2 very important other additional costs into their business. So, first and foremost, the first one is the practical costs involved with running a business, you know, day-to-day stuff like paying an accountant, renting your office, paying for subscription for software and things like that, and all the day-to-day costs that accumulate through your business, because that increases, should increase your hourly rate by probably double in many cases that I've seen in the past. The second way or thing that people overlook when they're charging hourly rate is the intellectual property that you built up. You know, for example, have you paid for a degree-level course in order to train up to be able to to deliver the product or service which you currently deliver? Have you invested, like, in coaches and mentors and courses and various different trainings, equipment, and various other things like that, that all obviously add value to the work which you do for your clients? So by the time you take into consideration all of the costs and all of the intellectual property that have built up and accrued within your business, the calculation which I work out with my clients shows that if they're charging hourly rate, they actually need to be charging somewhere in the region of 2 to 3 times what they're currently charging for their hourly rate, in order to also include or compensate for the cost base in their business and IP. So, there's just a few ideas there for you to kind of mull over and think about, and if you're charging hourly rate and you want to take another look at your offer, by all means, drop me a comment below this video. I'd be more than happy to chat through some creative ideas about how we can kind of rearticulate your value and maybe fix your offer if you feel that maybe it's slightly broken. By any means, if you, if you feel that actually hourly and day rate are justified, drop those into the comments as well. I'm always open to hearing different viewpoints from people. You know, at a very simplistic level, like hourly rate is just a nice simple calculation. I think it will take me 10 hours times by £50, away we go. But hopefully I've explained and outlined some of the pitfalls in, in doing so. My name's Robin Waite. I hope you've enjoyed this video. If you have, don't forget to hit the like button. And maybe even subscribe to the channel. We've got plenty more videos coming, uh, talking about all things pricing, uh, talking about your offer, marketing and sales, getting your business off the ground and growing it and scaling it.