I have no trouble with people who charge hourly. I just want to make that clear at the outset. And if this practice has worked well for you, then I’m delighted for you and I wish you all the best. There are clearly some business models that work very well on an hourly rate. So I’m not suggesting, by my title or by this topic, that they don’t exist or that they can’t be lucrative.
Hourly with a Constant Push
I’ve heard people say that they have a fixed hourly rate and when they notice they’ve not turned any business away (presumably because their rates were too high), they raise their rates. I can see how that could work. Especially because you’re charging for a scarce resource – you. Your knowledge. Your experience. And since there’s only so much you to go around, it makes sense to keep pushing the rate up in direct response to market forces.
Fixed Hourly Rate
I know others who just set a flat rate based on their own perception of their own worth. And I can see how that could work. They recognize that they’re not a $200/hr developer, but rather a $50/hr developer, and so that’s their rate. Whatever they do, regardless of task, is at that rate.
Fixed Hourly Rate by Task Type
I know others who break out different rates based on the task. And I can see how that could work. After all, coding and testing could be done by different people with different levels of experience. And each task would have it’s own rate – one for development, another for testing, a third for design, and a forth for project management.
I can totally see how each of these could work. I just don’t do them.
The Problem of Scarce Resource
The first problem I have with these approaches is that there is an inherent limit to the total revenue you can pull from the market because there is a limited number of hours in a day, week, month and year. Sure, you could grow, but at a cost. And eventually you can’t scale because the more you grow, the more overhead in management you experience, which has a cost that frankly no one ever wants to pay. It’s part of the cost of doing business. So your operational profit margin will shrink over time. And that’s if you’re lucky enough to grow. If not, you’ll just grow the amount of hours you work. Goodbye work-life balance.
The Problem of Knowledge
The second problem I have with these approaches is that people easily get anchored with a price. Customers who were quoted $50/hr are unlikely to believe that you have increased your worth by $25/hr in 6 months, but it’s possible to do (by training or tools). Your knowledge will increase faster than people will get unanchored, and that will result in one thing: new rates will only be for new customers (and you’ll start hating your old customers).
The Problem of Overhead
The third problem I have with these approaches is that they don’t take into account some fixed admin costs that you’re likely to develop over time. I’m not talking about life insurance or health benefits – but both are worth noting. I’m a full time employee for a company, so my consulting is on the side. I don’t have to worry about those additional costs, thankfully. But I do have admin costs. I pay for hosting. And most importantly, I pay for frameworks. I pay for Genesis. I pay for Catalyst. I pay for Gravity Forms. I pay for Elegant Themes. I pay for WooThemes. I’ve paid for tons of WooCommerce extensions. These are all tools that I have at my disposal so that I can get something done in minutes or hours instead of days or weeks.
The Problem of Incentive
I like the people I partner with (my clients) to deliver value. I like their projects. I want them to succeed. Nothing miscommunicates more than an hourly rate when it comes to that – making it my fourth problem with hourly rates. With an hourly rate, the incentive is to make things last longer – taking my clients hostage. Yes, they’re reliant on me (and me them), but I don’t want to create a dynamic that so poorly articulates what a win-win is for both of us. They’ll always assume I’m trying to make more money. I’ll always assume they’re trying to take money out of my tech fund (and that’s not a good thing!).
The Problem of Value
The last problem I have with these approaches is that they don’t rest on the thing that both of us want the most – the best value. When I go to a tax specialist, I don’t pay him for the forms he fills in. I don’t pay him for the minutes he spends looking over my files. I pay him to make sure I’m paying the right amount of taxes and that I won’t get hit later with some penalty because of my dividend checks, capital gains, and stuff like that that I don’t understand so well. I want value. I want him to keep my costs down and me out of jail. He wants to be paid for the expertise he’s developed over time. As long as we can agree on a value, we’ll both win.
Now, here’s the thing. The value I have for no fines and staying out of jail is very different from the value that Bill Gates has for the very same thing. Why? Because his fines would be way higher, and the cost of him being locked up way higher. He has more on the line. So he has a greater value. Which means he should pay his tax guy more than I pay mine.
Me & WordPress
I’m not a programmer much anymore. I’m not much of a designer. My plugins aren’t complicated, and the websites I work on aren’t incredible works of beauty. Those aren’t areas where I specialize. (Note: If that’s what you’re looking for, I’m friends with tons of folks who are incredible.) But I design products. And I manage people – software people – specifically. And I know how to leverage WordPress to not only build those products, but also how to use it to help you launch and monetize those products. Plus raising money. Plus hiring and training high performing teams. Plus managing remote staff. I have a pretty good track record of all that.
And that’s the value I bring to organizations that need that kind of help. They pay what I charge because I can help them anticipate better. They pay what I charge because I can help them accelerate faster.
They pay what I charge because we agree on the value of what I’m bringing to the table and how important it is to them (whatever their context may be).
And that’s why I don’t charge hourly for WordPress (or any other kind of ) work.
As always Chris I love your insight in this sort of thing. I operate as a web developer for a few of my customers where I charge an hourly rate. It’s almost a fixed rate per month sometimes unless there are some overages but I tend to do the same work every month for them so the pricing is pretty much the same. They have that expectation going in and so did I. For some other clients it’s different, I charge them per task, I’m happy, they are happy and as long as I didn’t pigeon hole myself I’m fine. That all comes from experience and being able to price out what task you are doing for a customer. Thanks again for an awesome post.
Great post. We charge per project and not on an houry basis. The way I explain things to my clients is simple, as a business owner it’s only fair that they know what to budget for a project. (Conversey, it help me as a business owner budget my receivables.) we are very good at estimated our time and putting things together and nailing down an exact scope of what we are contracted to do. Our contracts state, if something’s falls out of scope, we will issue a change order that’s task based and then we bill accordingly.
We’ve found that everyone is quite receive to this process. Thanks for yourr post, see you ate a WordCam soon.
Very good article. Your points were clearly made and they made sense. I’m used to using a hourly model because I used to get burned on fixed rates with projects taking too long.
Now, I’m kind of using a hybrid of the fixed price/hourly rate. I’ll quote a project at a price based on amount of hours available. They agree to this being the minimum charge. This way, if I ever go over, the payment is justified, and if I spend less time, it’s extra profit.
The key is trust though, I’m not the type of sales guy that sells BS (There’s a lot of those) so this model works well for me. =)
Chris, very thoughtful argument. I’m with SureFireWebServ in that I do a hybrid fixed price/hourly approach. I’ve never broken out different hourly rates for tasks for the reasons you mention – regardless of whether I’m designing, coding, or consulting, I’m bringing my entire skill set to the table to use on a customer’s behalf. In the end, it is about building a relationship of trust and delivering value to a client, regardless of what/how you charge.
Chris, you make some great points about value-based pricing, but how do you balance the measurement of your value with the perceived value by the client?
Your client wants you to do something you’ve never done before. To you, this project costs $60,000 because it requires a lot of learning from you and your team and may require bringing in a skilled contractor that has experience doing something similar to this project. Your client says, great, let’s get started! Then, without any scope creep, you start to eat into your profit margin by $1,000, $10,000, $20,000. Suddenly, you’re not even breaking even on the project because you had no idea how to price this project out.
This is the only problem I have with value-based pricing. Sure, it’s a great way to set a fixed cost, but you could potentially make $50,000 or lose $50,000. I personally don’t like to lose money and I don’t like to take on projects that make very little profit unless they have a high level of fulfillment for our team. Don’t get me wrong, I’m all for taking on challenging projects, but I also like to get paid well for completely crushing it on those types of projects too.
In my opinion, I like a combination of value pricing plus hourly. We essentially quote out the estimated cost of the project based on the scope and how long it’s going to take our team. Then we actually bill a percentage of the project fee up front to cover final billing from the end of the project. Once we’ve done that, we track time against the project and charge the client one standard hourly rate. This works well for us because the client has motivation to avoid wasting our time spent on the project. If they know you’re logging time against the project, they’re typically quicker to get back with you and more sensitive to the fact that they’re going to get charged $2000 in overages if they screw something up on their end. If we didn’t do this, mistakes by the client can become costly for our company, and that’s dumb.
We’re still motivated to complete projects within the budget we’ve defined for the project but it allows us to better manage client expectations by providing things that are measurable, like how long it took for a certain feature or how much time our PM spent with the client on training.
chriswallace Great Points. I know a lot of people like a hybrid model because of the fear that their profits will disappear when they get on projects where they don’t know enough. I’ve replied to your great comments in my latest article:
http://chrislema.com/three-strategies-for-wordpress-project-quoting-to-protect-you/
What are your thoughts on weekly rates? I have found that a flat weekly rate allows me to provide a client with dedicated support and time, they can ask for tweaks and changes and not worry about running up the bill. I find that it also limits the amount of post-work support that clients tend to ask for.
Definitely a great topic and one continually discussed among service based businesses. Chris Wallace brings up some great points – been there before. And who wants to lose money?
I learned how to sell by the project and by value a long time ago. It has always been more profitable for me over any kind of hourly fee arrangement. I have lost money, broke even, and then made insane profits on deals. It takes time and experience to learn the art of pricing.
I think one of the best things that helps you to avoid getting in over your head is to be great at fewer skills than by trying to offer every service under the sun. When you really focus on and develop your craft, you learn how to be more efficient and how to minimize costs, while increasing your profits.
Anyhow, this is a great post and a topic that always needs discussion! Thanks Chris.