Why You Should Charge Flat Project Rates
There are two modes of billing you have probably used or considered using as a freelancer: Billing by the hour, or billing with flat project rates. There are other options, such as billing by the day, the week, or setting up recurring monthly retainer arrangements.
It’s my opinion that you should most definitely not be billing for your time, and instead, focus on outcomes, not inputs. Here’s why:
Hourly Billing Is Harmful To You And Your Clients
When you set up a relationship based on hourly billing, you set up conflicting financial incentives between you and the client. The way to maximize your revenue is to work as many hours as possible. The way for the client to reduce their costs is for you to work as few hours as possible. Every step in planning out work for the project is going to be combative.
I was asked to speak on a panel to aspiring freelancers at the University of Georgia’s School of Journalism. With me on the panel was a young writer who had recently graduated was asked what her unique competitive advantage was. She said that in addition to having a great skill at simplifying complex topics, she was able to deliver her work quickly. By doing so, she was able to do work at a higher quality and a lower price, which clients loved.
At first blush, this might not seem like a problem. Clients love her, and she can get plenty of work. So what’s the problem?
This business model is fundamentally flawed and unsustainable; that’s what.
Of course, clients like higher quality at a lower price. A client’s ideal would be to get the best quality in the world for free. However, when you provide more value, you should be getting paid more, not less. All things being equal, which is more valuable: A piece of software delivered two weeks from the day, or a piece of software delivered tomorrow?
To be successful, you need to put yourself in a position where you and the client can find win-win situations. Hourly billing takes away your ability to do so.
Hourly Billing Leads to Lower Quality Work
I’m going to borrow a story from my friend Jonathan Stark, a mobile strategy consultant:
Hourly billing discourages you from becoming more efficient. On one of my first value based projects, I found myself shopping around for plug-ins that might help me complete the project faster. I found one that did just what I needed. It was $700 – which was more than I had even spent on a piece of software – but it saved weeks of development time which directly benefited both my client and me. Had I been billing by the hour, it wouldn’t have even occurred to me to look for a plug-in solution.
When you charge by the hour, you have zero incentive to look for more efficient solutions. In fact, it could even harm your bottom line. Let’s say in this example the alternative was to bill $5,000 worth of time instead of buying the $700 plugin. Let’s examine your options:
- Buy the $700 plugin, charge the client for materials, make no profit sans hours billed for implementation and integration of the plugin, and the client gets the work delivered more quickly.
- Buy the $700 plugin, mark up the materials for $1400, small profit for you, and the client gets the work more quickly.
- Buy the $700 plugin, charge your client $5,000 and say it was implementation time. Best profit for you, but involves being less than honest with your client.
- Don’t buy the $700 plugin, and implement your custom solution for $5,000. Money in your pocket, but the overall worst outcome for your client.
Every single one of these options is harmful to your business, harmful to your client’s business, or both.
In addition to this, hourly billing will lead you to default to a “yes man” attitude when it comes to the client. If a client requests a feature or a set of revisions, it means more work for you, which means more revenue. You are inclined to take on the work even if it is not going to be helpful to the project. There is plenty of additions to software that only add bloat and complexity, with zero value. Writing more code could end up being a case where you provide negative value to the client.
If you are in a situation where you cost the client twice, both in the outcome and your bill, then the client would be smart to fire you, regardless of the quality of your work or customer service. You’ve created a lose-lose situation.
Hourly Billing Harms Your Bottom Line
Here’s a short example of how removing time from the equation allowed me to increase revenue. When I was still billing hourly.
At the time, I was charging clients $100/hour for work. I had purchased an annual license from WooThemes, which gave me a set of WordPress themes I could use on unlimited sites for the year, so I came up with a service offering to put this work:
I offered to set up a web host, install the domain, and import any content they had into a fresh WordPress install. The fee was $799, and I would knock the site out in 1 business day. Additional packages included SSL + Stripe integration for $199.
I sold a few of these offerings and realized that once I had a process in place, I could knock out a site in an average of 4 hours. My effective hourly rate was around $200 – $250 / hour.
Do you think “basic WordPress setup services: $200/hour” would sell?
Ultimately, billing by the hour limits the amount of revenue you can generate. It reduces the number of higher margin opportunities you can take on, as there are only so many hours in the day.
By fixing the price, you are taking on an additional risk; by reading this book, you are significantly reducing that risk. You’re the technician, and probably should be taking on the risk.
”But I Promise I’ll Be Good!”
At it’s worst, hourly billing gives you a financial incentive to take your time, and even sandbag on your work. Maybe something could get done in 2 hours, but you end up taking 3 or 4.
Of course, you wouldn’t do that, or any of the other bad behavior mentioned above, would you? If you sandbag on clients, build useless features, and choose inefficient, ineffective solutions, why would people continue to work with you? It would be career suicide. You are a professional, and you’ll always act in good faith with your clients, right?
That may be true, but as a freelancer, you are building your own business. Why would you build a business that makes you choose between doing the right thing and making money? Why build a business that fundamentally encourages bad behavior, contentious relationships, and lower quality products?