When I first started my consulting practice 30+ years ago, I began quoting my fees on an hourly basis because I didn’t know any better. Before that, I had been a COO in a public company that used coaches and consultants who charged by the hour. So, when I struck out on my own, I thought that was the best way to invoice clients for my work. Those coaches and consultants were wrong back then, and so was I. Since then, I’ve learned a lot about setting my fees, some of which I’d like to share with you here…
Charging clients by the hour for services makes us look like employees and not the professionals we are. Our beloved baristas get paid by the hour. So do most factory workers and retail employees. One reason I started my consultancy was so I didn’t have to be an employee and live with all the baggage that comes with that type of relationship… like having to be in the same old stuffy office every day of the week! In my experience, employees are treated one way by their bosses and high-value professionals in another. You can probably guess how that works out. You are a highly educated professional, so why charge for your time as if you were an hourly worker?
Charging hourly fees limits our annual income. I call it the Law of the Income Lid. We’ve all probably seen the worksheets that seek to quantify the number of available workdays in a year and hours in a day multiplied by an hourly rate less our expenses. That’s fine if we are writing an annual plan for our business and want to estimate projected profitability. But, that should not impact what or how we bill our clients. Since we can only realistically bill about half of all available hours in a month, selling that a limited number of hours at a fixed price limits our income potential. Worse yet, charging by the hour leaves us open to what buyers like to do… ask for a discount. If we quote hourly rates we have nowhere to go but down when that happens. Instead, if we charge by the project, we can reduce the scope of the job if the client wants to spend less. If we charge by the project and get it done faster and easier (See Three Little Words We Should NEVER Say to Clients) because of our expertise, then we have just increased our average income for that time spent! … Works for me!
Hourly fee type work ignores the value of our contribution to the client. If I am coaching a fledgling professional who has yet to start their business, that has a certain economic value. If I am working a highly placed executive in a Fortune 500 company, the potential economic value of what I can add to their bottom line is exponentially greater. Therefore, I base my fees on what that value is that I provide to the client. Hourly fees tend to be a reflection of how we see our own value to the client. Value-based project fees reflect the value the client sees as a result of our working together. If can I move a new entrepreneur’s business $10,000 a year, that is worth something, but if I can move a significant division of a large corporation $100,000 a year, isn’t that worth ten times more? I can’t charge them both the same fee per hour and make a living. This applies to all of us… consultants, coaches, engineers, designers, accountants… it doesn’t matter. Hourly based fees devalue what we do as professionals.