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4 Reasons Why Hourly Rates Might Be Hurting Your Business

Hourly rates or project fees? Sooner or later every consultant must solve the pricing problem.

However I believe this is a secondary issue. More important than price is the ability to project value – something that clients cannot find anywhere else. A unique value proposition is key in justifying your price.

Nevertheless there are 4 reasons why hourly rates might hurt your business:

  • They make clients nervous: Hourly rates cause clients to focus on the price tag while project fees reflect the value received. Consider this scenario – a dentist charges $1000 for a root-canal – a two hour job. What if he told you that the price is $500 an hour? The next logical question would be, “How long will it take?” Even if he tells you that it’ll take two hours, at that point your mind has already rejected that price tag! However a $1000 quote is acceptable because it reflects the value of the procedure performed. A client will find it hard to argue with that.
  • There’s no incentive on your part to be more efficient because you’ll be paid for the total hours that you work anyway (hopefully).  So if a project takes you three hours to complete you may not feel the urgency to complete it within that time frame – after all you’ll make more money for taking your time. Of course no-one makes this decision deliberately. But it might influence your delivery time if you’re working on multiple projects simultaneously. You may be forced to put one project ‘on hold’ while you work on another ‘more important’ one. This reflects a lack of efficiency and proper planning. In the long run it will hurt your reputation. When clients realize that your turn-around time is not competitive, they will turn elsewhere to get the job done.
  • You short-change yourself as you become more experienced: Suppose it took five hours to create a company logo when you first started out. After one year on the job your learning curve has improved and your skills have increased. Now it takes you an hour to create the same logo (or a better one). Your price should reflect the knowledge and efficiency you have acquired in the past year. But charging an hourly rate will not reflect that expertise. You will actually make less money than when you first started out.
  • Hourly rates are more difficult to increase: Because of the conceptual baggage that comes with hourly rates (refer to first point above), it is much more difficult to justify an increase in hourly fees. Clients are more willing to accept a reasonable increase in overall project fees because it doesn’t appear to be as significant as an increase in hourly fees. In the dentist’s example above, a 20% increase in price is easier to communicate as $1200 rather than $600 an hour.

I’m sure there are other reasons why hourly rates are less appealing.  I personally hate to prepare weekly time-sheets to show clients exactly how I’m spending my time. What do you think? Have hourly rates hurt (or helped) your business?

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