Pricing By The Hour? You're Wrecking Your Business

Budgeting & Forecasting

Pricing By The Hour? Youre Wrecking Your Business

A friend of mine told me that she was “really getting on top of her charge out fees” this year. She proudly told me what her annual income target was. I asked if that allowed for full overhead recovery, car and travel costs, travel time, office expenses, telephone, computer, tablet, entertainment, sickness etc and was it inclusive or exclusive of superannuation.

After an embarrassing pause I realised her real income was in fact around 60% at best of the gross income projected and for a person of her qualifications, skill, experience and ability to deliver first class work it was ridiculously low!

Single person consultancies tend to bill by the hour and even larger groups calculate a charge out rate based around hours employed. This methodology works best where the supplier is in a strong position and the buyer has little or no idea as to the real time involved – let’s look at Corporate Law firms as an example of those who benefit from this.

Clients are also ignorant of how a consultant calculates a fee; “A thousand a day? ****** me they earn a fortune, how can they be worth that?” well more as to why that $1,000 is really less than $500 later on.

And that scenario completely misses the point.

When we buy a loaf of bread or a cake we don’t ask the baker how many hours were invested in its production before agreeing on a price, but we do look for subtle evidence of quality etc. and that is the crux of pricing by value not by cost.

Pricing by Value Not by Cost

Take this into your mind and really think it through because it could just change your life!
Pricing is one of life’s great balancing acts but it’s also about confidence. Never boast about how good you are or criticise your competition. You don’t need to, simply demonstrate quiet professionalism and your pricing will say everything about the value and quality of your service.

Spell your price out with confidence and pride. Speak value, shout quality, whisper differentiation, demonstrate results and the price simply doesn’t matter.

Pricing by cost means that you determine how much a job will cost you and add a mark-up, however, this means that your client pays for your efficiency (or lack thereof) you turn yourself from a valuable resource into a commodity.

As Blair Enns, author of Win Without Pitching says: “Bury the billable hour.” Every client would rather talk about the value delivered than the hours provided.

Quantifying Value:

There are two simple ways for a consultant to provide value to a client. Either improve revenues, or reduce costs. In order to determine which of these your consultancy will provide (and implicitly price by value) you need to get to know and understand your client’s business, their market position and some basic facts about their customer value. Two simple and common measures are:

  • The lifetime value (LTV) of customers for your client
  • The client’s cost of customer acquisition (COCA)

It is vital that you understand the LTV & COCS  of your clients target customers because it ensures that their marketing spend is a commensurate amount to acquire that customer.

For example, a bespoke jeweller could presumably invest in a much higher COCA than a costume jewellery retailer. The LTV becomes increasingly important if your client is contemplating a future exit strategy.

Asking these questions and obtaining this data will help you determine how much value, in the form of revenue and positioning the quality of your work will contribute and thus the fee you charge.

Of course asking these questions of your client differentiates you and the detailed approach underlines your value proposition.

Finally irrespective of your business being a one person show or a 100 person show do not allow yourself to be judged on or compared to $(x) per hour. Why? Because less than 70% of your hours worked in any day are going to be billable, 10% to 20% of your time will be spent solving problems and another 10% to 20% will be spent thinking of or pitching for new business.

A thousand dollars a day sounds a lot. To the greedy client or just an unthinking client it is $365,000 a year whereas in reality it is half that at best and that’s before you make a profit.

As a self-employed consultant in the service industry you work long hours, you interrupt your family life, you worry at nights and weekends and you deliver a great product and service.

Wake up to this and let your fee reflect the quality and value of your work. Most SME professionals I see are really working for very little financial reward indeed and telling yourself it’s just until you get established is WRONG. You are established and that is why you can offer such quality and value in your work.

If your pricing is wrong, your business is stuffed! In 5 years’ time 85% of SME’s started in 2014 will have failed – poor pricing will play a large part in their downfall.

Neil Steggall

Partner at Wardour Capital Partners

Neil is the CEO of Wardour Capital Partners, leading emerging growth & mid tier advisors. He is also a Non Executive Director of Family Planning Australia and The Australia Asia Business Alliance. Neil is an experienced director & corporate mentor and has chaired or served on numerous board committees including finance & audit, governance, compliance, strategy, acquisition, remuneration & ethics.

Comments (3)
Nikki Gilhome

Nikki Gilhome at Chilligin Pty Ltd

You are so right and it just takes that first confident step. In my on line retailing business it is different but delivering quality at an affordable price is still a very high priority. Today I am in North West China, westerners are still rare and blonde Australian women even more so, yet I am here to buy the very best product for my customers and through that generate strong and sustaining margins. I feel lost and lonely this far from home and husband but it is essential for me to be different, to deliver the best quality products I possibly can within my price range and to hold my margins and grow the business.

Stephen Parker

Stephen Parker

Powerful message - spot on! More companies could save themselves by taking this on board than just about any other reticle. I had almost gone under before I finally realised the truth of this principle. I wish I had read this two years earlier.

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