Pricing strategies: Hourly rates? No thanks!
Most independent professionals use hourly rates as a pricing strategy. Yet charging for your services this way can lead to mediocre business success.
In my experience, most people don’t spend enough time thinking strategically about what pricing strategies they should use.
Typically, contractors or soloists who sell services establish hourly rates. They use a process called “reverse competition” to determine what their rate should be. This involves taking a look at what your geographical competitors are charging, and deciding where in the range you want to fit on the spectrum of hourly rates.
Inevitably, we choose a rate somewhere in the middle, so we can say that we’re not the most expensive, but neither are we the cheapest!
With this approach we are showing absolutely no differentiation from any other company – just sticking ourselves straight down the middle. In other words, we compete with everyone! Not a very prudent marketing decision.
So pricing simply using an hourly rate that sits in the middle of the spectrum is, in my view, a wasted opportunity to create a point of difference.
Getting Away from the Hourly Rate Mentality
Before you do business with a new customer, you hold all the leverage in the relationship. After the services have been performed, the customer possesses the leverage. The lesson is that you want to set your prices when you possess the leverage - before the engagement begins.
The minute you quote an hourly rate, you put a fixed limit on your earning potential. It’s hard to increase an hourly rate once it has been set. The most successful service providers charge for the job as a whole, and then don’t specify exactly how many hours it will take to complete the job.
Customers are value conscious, not price conscious. They look to do business with people they feel give them more than they are paying for. So your goal is to make sure your customer perceives the full value of the service, not simply the price component. Your services need to be packaged up and sold as a valuable bundle, rather than as a multiple of hours which only reflects the time value of money.
Let’s say you needed a consultant to analyse the effectiveness of your intranet site, and make some recommendations about modifying the navigation structure. Which would you feel more encouraged to purchase?
Cost of analysing site and recommending new structure:
Estimate 20 hours work @ $150 per hour = $3000
Phase 1: Analysis of Existing Intranet Site: $7800.
- 8 hours of interviews with high end users
- analysis of site map
- analysis of internal complaints and suggestions
- detailed report outlining strengths and weaknesses of the current functionality
- identification of potential cost savings through structure modification
Phase 2: Recommendation for Improving the Proposed Structure: $6400
- Focus groups with users to identify preferred structure options
- Repeated testing of proposed structure with a wide variety of users
- Refining preferred structure based on user feedback
- Detailed report on recommended navigation changes, including rationale for each decision
Price is a Fickle Indicator
There is absolutely nothing positive about competing on price, unless you specifically position yourself as a low-cost provider. No matter what you charge, there is always someone, somewhere, willing to perform the work for less money.
Wise solo consultants and contractors also know that if they price their services at the low end of the market, customers do not take their advice seriously. On the other hand, if you charge rates on the upper end of the spectrum, the customer will hang on every word you say and has a higher probability of implementing your suggestions.
So do yourself a favour. Start to think of how you can price and package your services in ways that don’t correspond to hourly rates. It’s all about value you provide, and the perception of value in your customers’ mind.
Megan has produced a follow-up article on this fascinating topic. Read it here.
Megan Tough runs Complete Potential, a company that helps businesses solve their strategy and people problems. She loves being a solopreneur, and when she doesn't have her nose to the grindstone, is fulfilling her other passion of fitness and health. This article first appeared on www.flyingsolo.com.au, Australia's online community for solo business owners.