A common conundrum for virtual assistants, coaches, consultants and other online entrepreneurs is the hourly versus per project (or “flat fee”) pricing scheme.
The default strategy seems to be bill by the hour.
But I think it should be the other way around so in effect, we’re looking to bill for perceived value rather than for hours on the clock. Here’s why.
As an employee you are selling your skills and expertise.
You’re also selling your time. You may not punch a clock but the expectation is that you “show up” for a set number of hours each day you’re scheduled to work. Some days you might produce maximum output per hour; others, well, not so much.
As an entrepreneur who provides services, however, you are not so much selling your time as you are selling a benefit. (Your clients, for the most part, don’t need to see you working at your desk, or say under the hood of their car, in order for the perceived value to transpire, do they?) Yet we’re stuck in this idea that time is money.
That people are paying us for our time spent to create the service that in turn imparts value to the client.
It’s a bit convoluted when you really think about it. Because the client is not paying for your time at all.
They are paying for the report you researched and authored. They are paying for the repair that enabled their car to pull out of the shop.
The fact that it took you x hours to create that result is only relevant insofar that you can put something on the invoice that the client can quickly grasp: hours and minutes.
Because we’re all short on time.
But I argue we’re even shorter on results. One can always manage his time better. But getting the results we want is far more complex.
Especially if we don’t possess the know-how or patience (and yes, the time) to acquire it. When was the last time you forked over good bucks for a business service and thought to yourself “Gee, I’m glad I bought those hours from Jane.” What you actually said to yourself was “Gee, I’m glad Jane knows what she’s doing. She gets me. And I love the results.”
Time is limited. Time is finite. There are only 24 hours in day. There is a limit to how many of you–or how many subs–can pump out x hours of billable work in a day or a week or a month.
By having the client think not in terms of “paying for hours” but instead “paying for a benefit” then the perceived ceiling on price tends to disappear.
Hey, when was the last time you asked yourself how many hours of work went into that new pair of jeans you paid way too much for? Doesn’t matter, does it? You only cared about how great they made your butt look.
You may have had an upper price limit in mind before you went shopping, sure. But you can be sure you paid a LOT more than some hourly rate for their production.
Unless you’re billing very high dollars per hour, I tend to recommend a blended pricing strategy. When there are many unknown tasks and to-dos, charging by the hour makes sense.
However, when you are delivering something with a high degree of specificity, something easily quantifiable, or something with a definite beginning and end (in both yours and the client’s mind!), then a project or per diem rate can be much more profitable.
An important caveat: one thing that will burn you on project rates every single time is scope creep. It happens when a project runs too long or becomes more involved than what you initially predicted. This generally indicates a need for more attention to accurate project planning. That’s not a bad thing though, because it can force you–albeit sometimes painfully–to nail down some solid operating procedures and policies. This helps to contain otherwise unwieldy projects (and clients).
So, while I’m not black and white on the hourly versus per diem debate, my general rule of thumb for pricing:
- Lots of unknowns mean an hourly rate attached to an estimate of hours required to do the job. And charge handsomely for your time if you know the quality of your output is head and shoulders above the rest.
- Well defined parameters around straight forward and generally small projects (or projects that can be easily segmented into small, definable tasks) mean a flat fee or per diem rate. As soon as things go outside of project scope, the clock turns on and the client pays an additional hourly fee.
In the end, I always take some losses here and there with flat fee pricing. But it’s definitely more than a wash. Project rates are more profitable when done right.
The trick is to get comfortable with (1) charging appropriately when you do bill by the hour and (2) pricing for perceived value and not simply building your project rate around numbers of hours x hourly rate.
If you have thoughts on this subject I’d love to hear from you.