Article contributed by Mark Sutherland.
If you are self-employed as a consultant or a contractor or you have a service based business then you are not doing yourself any favours if you are charging your services on an hourly rate. This is the most stressful way you can generate an income.
I have been self-employed since 1989, I learnt that selling by the hour was the craziest thing I could do, but it took me till 1999 to figure that out. I used to have those moments where I had no more appointments for the week and it was only Tuesday – I still had to find some hours to generate income. It’s crazy, absolutely crazy that we need to chase an hour to make a buck. There are much better ways to generate income than selling your services and knowledge an hour at a time. All you do for your client is make them a clock watcher.
The last time you went to see your accountant and they were charging every 6 minutes how many times did you look at your watch; the last time you went to your lawyer and they were charging you every 6 minutes how often did you look at your watch. Watching the clock makes people weary of the service they are receiving. It also makes you as the consultant or the contractor wary about how much time you are taking to do a job, am I doing too many hours, will they pay me for all of these hours.
I engaged an IT person to build some software for me several years ago and when I did this I discovered how expensive hourly rates are. I just kept getting these bills per hour upon hour upon hour of development work and there seemed to be no real reporting mechanism to prove to me that I should pay these massive hourly bills. I am sure many of you have had the same issue when it comes to hiring people to do work for you.
The reason I stopped charging hourly rates was because a friend of mine Genevieve Westcott loaned me a book called the million-dollar consultant written by Alan Weiss. The one thing I read in the book that stuck in my brain and changed my business life for ever, was never ever, ever work on an hourly rate, only work on a value proposition. Agree on the outcome your client wants and what value and expertise you can bring to that result then decide on your fee. It is now up to you to present the value and the fee and get agreement from your client. For example – you may be able to save your client $250,000 in overheads and for this you will charge them $25,000 – this would seem reasonable, as a 10-1 ratio is a great return. Your client will not be concerned about how many hours you work. They are just interested in creating a saving of $250k.
Making your business a value based business enables you to add value to your client offering. Instead of just doing one project that will take ‘x’ number of hours, you could actually deliver more to your client for an agreed fee. Value based services allow you to create efficiencies within your business. By this I mean you can create processes and systems that will allow you to deliver your work in a more effective way than just clock watching. For example you may find your hourly rate used to be $100 per hour but by offering value based services and focussing on added value you maximise your input and reduce the amount of time you spend on the job so your hourly rate might be now $150 per hour if you were measuring it in hours. This won’t bother your client because they are not watching the clock they are just enjoying your value added services for a fee they agreed to pay.
Here is an example of replacing hourly rates with value based fees.
Bob is a self-employed HR consultant who helps small businesses with their HR needs. For this, Bob charges an hourly rate for individual projects that his clients might give him. In between projects there is no income which makes it difficult for Bob to budget for both business and home financial responsibilities.
By changing his offering to value based services Bob can create a suite of services that small businesses could benefit from including, payroll, job descriptions, hiring and firing, team coaching and legal compliance amongst others. For this suite of services Bob could have a tiered system with different fees attached. Tier one for his premium service might be $1200 per month down to tier five worth $400 per month.
This is a win-win for the client and Bob. Clients can purchase the suite that suits them and pay Bob his monthly fee and let him get on with his work without concerning themselves with how many hours they will have to pay for. For the client this is a high value low cost option because to hire a full time HR person would be significantly more expensive. Bob will be better off because he has can sign up a number of clients who pay him monthly on a 12 month or longer contract. Bob is now able to manage his business and home financial responsibilities.
This is a win-win situation for the client and Bob. The client can budget for the annual fee and know that their needs can be meet. Bob can make a regular income and do the work without concerning himself about how many hours he needs to charge.
By getting fees paid on a monthly basis, it is not about how many hours you work it is about the value and results you create for the client. In my own business I haven’t charged an hourly fee since 1999. My own personal philosophy is ‘I’ve quoted you a fee you have agreed to pay; now I will do what it takes to achieve the result.
From Mark Sutherland www.peakperformanceinsight.com
