Do you bill your services by the hour?
Although it's common practice, hourly billing is not the best way to charge for your services when it comes to maximising profitability.
As a professional services provider, it's worth moving away from hourly billing in almost all cases – especially when it comes to your core service offerings that bring in the most revenue.
Here are some of the key reasons billing services by the hour is bad for your business...
- It caps your income. You are limited by the number of working hours available in a given time period so it significantly reduces your earning potential.
- There's an hourly rate ceiling. People will only pay so much for a person’s hourly rate and won't accept rates that go beyond a certain point (especially relevant if you are a solopreneur).
- It puts you in the wrong frame of mind. When you charge for your time, you are getting rewarded for the inputs as opposed to the actual results you deliver for your client. This is a mistake because getting results is what clients truly value, not the time spent on a project.
- You get penalised for completing projects quickly. I.e. the faster you deliver your service, the less you get paid. This actually incentivises you to work slowly and is a mistake because delivering results for clients at speed increases the value of the service instead of decreasing it.
- Clients can get a nasty surprise at the end of a project when they receive the bill. If you just set the clock running and work for as long as it takes, this can lead to disputes that can be easily avoided.
But what's the alternative to hourly billing?
As opposed to considering yourself as a contractor or freelancer (which can be compared to an outsourced employee), view yourself as a business that delivers a set outcome for clients.
The real goal is to use your expertise to create leverage and separate your ability to earn money from the time you spend on each project.
So consider the end result you deliver for clients and how you could go about charging it at a fixed price and quoting upfront. By pricing your service on a fixed basis, you can charge significantly higher fees because the outcome and business benefits you provide will be clear.
Additionally, fixed pricing helps to avoid client disputes because they know exactly what they are getting for their money and there's no risk of a project going over budget. One caveat is that you must have a clearly defined project scope so you don’t end up spending too much time delivering the project and eat into your profit margin.
Action point
If you currently bill projects by the hour, your action point for today is to think about how your core service can be packaged into a clearly defined project with a fixed price and outcome for clients.
