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You should NEVER charge an hourly rate
If you’ve been freelancing or consulting, chances are, you charge an hourly freelance rate. But what if you want to earn more?
You’ve got financial and life goals, and earning more offers one of the best ways to reach your goals. Maybe you want to:
- earn enough to quit your lousy day job and freelance/consult full-time, or
- pay off those nagging student loans and credit cards, or
- buy that sporty red Ferrari (or Honda) you’ve had your eye on, or
- afford a trip to Europe.
But at your current hourly freelance rate, you’d have to work 80 hours a week for the next year(s) to afford any of those things. That is, if you could even find that much billable work.
But do you really want to work that much? Me neither.
And what if you want more freedom, flexibility, or free time?
Your day job is probably enough of a treadmill rat race already. Working more would be moving in the opposite direction.
The alternative to your treadmill of an hourly freelance rate
So, do you really want to work all the time? Not me. I’d rather work less and earn more.
What if I told you there was a way you could actually earn more and work less? Yes, I know, it sounds too good to be true. You’ve heard that pitch before on late-night infomercials about flipping real-estate. No money down, get-rich-quick, sipping mai tais poolside. Well, that’s not what I’m talking about.
What I’m talking about requires hard work, but maybe more important, it requires a mindset shift.
I’ve been consulting since 2007, and for much of that time, charged hourly. But over the past 2 years, I’ve experimented with ways to earn more–without having to work more–and what I’ve found has been both surprising and exciting.
For example, I’ve been able to boost my effective rate by 70%, 100%, sometimes even 600% (yes, that’s no typo). By effective freelance rate, I mean the amount I earn divided by how many hours I work. So, if you currently charge $100/hour, wouldn’t you rather earn $170/hour, or $200/hour, or $600/hour?
Sticking with that example, if you charge $100/hour and bill 20 hours a week (earning $2,000/week), boosting your effective freelance rate by 50% would mean you’d earn $3,000 for working the same amount of time.
Think about how earning an extra $1,000 a week would change your life.
For 99% of us, an extra $1,000 a week would be a huge change. You could actually quit that day job, pay off those debts, afford to take time off, or maybe even achieve some of the other dreams you’ve been putting off until “someday.”
What’s wrong with charging hourly?
Before I get into the details of how to boost your freelance rate like this, I want to highlight a couple other big problems with charging an hourly rate that you may not have considered. You already know that charging hourly puts a ceiling on how much you can earn, but there’s something else you probably haven’t considered.
Billing hourly actually gives you incentive to work LESS efficiently. Since you’re being paid not for the outcome but for your time, you’ll end up taking more time to do the work. And that’s a disservice to your clients–the same clients for whom you’re supposed to be safeguarding their best interests.
Sure, you THINK you work efficiently. But I guarantee you’ll be far more productive if you get paid the same amount no matter if it takes you 2 hours or 10 hours to achieve an outcome.
The other problem with charging a hourly freelance rate is that you get into a nickle-and-dime mindset, where you want to bill for every minute you work on something for a client. And charging for every single thing can get annoying to clients. Besides, building a profitable freelance business is built on giving your clients results–not billing in .1 or .25 hour increments.
First, think differently to charge differently
OK, let’s get down to brass tacks, and talk about how this is possible.
I mentioned that this requires a big shift in your mindset. And, yes, billing hourly is how almost everyone does it.
But if you’re doing what everyone else is doing, you’re never going to be able to create the kinds of breakthroughs that make huge changes in your life. After all, if you do what everyone else is doing, you’ll end up with what everyone else is getting–which is just another day, week, month, year, decade on the treadmill. It’s time to step off.
The first step off the treadmill is to realize there are alternative ways to price your services. The most common are:
- flat fee, also known as per-project fee
- daily, weekly, and monthly rate
- performance-based compensation
I tend to favor per-project pricing which is based on the value the client receives for my services. (Performance-based compensation–such as revenue sharing–can be very lucrative, but it requires high trust with your client, and intimate knowledge of and access to their financial data).
So, with per-project pricing, when I scope out a project, I also determine the full extent of the value the client gets, and then quantify that value. Here’s a simple example: if you can help the client make a small change–maybe by increasing website traffic, or increasing their conversion rate, or increasing their pricing–which increases their average revenue per client by, say, $50/month, you can quantify the annual value like this:
- $50/customer * 100 customers * 12 months = $60,000 revenue
Now that you have a rough calculation of the value, you can peg your pricing to that value. Generally, you’ll want to use a 1:10+ ratio of price to value. So in this example, a price of $6,000 will make it a pretty easy decision for the client: if they pay you $6,000, they’ll receive $60,000. If you gave me $10, and I gave you $100 back, would you take that deal? Of course!
Daily, weekly, and monthly rates–sometimes called retainers–also work well, especially, again, if you can tie the value received to your price.
Easy in theory, harder in practice
The trick to succeeding with non-hourly pricing is to identify and quantify the value your client will get.
This isn’t always easy. Often, it can be difficult to know how to identify all the potential value your client will get from your services–especially if you don’t directly increase revenue. Do your services make clients more efficient? Do you give them easier access to data? Can you make it more likely that your clients will meet deadlines?
And after you’ve identified all the potential areas of value, how do you quantify them? For example, how do you put a dollar value on reducing anxiety for a business owner?
What’s the upside?
Yes, charging an hourly freelance rate is easy. You don’t have to think about what value the client will get–and which is often tricky to determine. So why would you want to stop charging hourly?
For starters, here are a couple advantages:
- Non-hourly pricing incentivizes you to work very efficiently to maximize your effective hourly rate (your revenue / your time). You’ll be amazed at how much more you can get done in the same amount of time.
- Non-hourly pricing highlights the complete value the client will receive–which makes them conscious of how much they’re getting. As a result, it becomes easier to charge more, and the client still feels like they’ve gotten a great deal. This isn’t about pulling a fast one just to charge more–it’s about providing amazing value to your clients.
What’s more, non-hourly pricing allows you to significantly increase your revenue–not just increase incrementally. I’m not talking about incremental 5% annual rate increases. I’m talking about increasing your effective rate by 50%, 80%, 100%, or more. Yes, I know that sounds outrageous, but I’ve created those kinds of increases in my own consulting practice and for the students who’ve taken my courses.
So yes, it may sound outrageous. The alternative is to stick with what you’ve always done, what everyone else is doing, and what you’ve always gotten. If you’re ready to step off the treadmill, make the switch and stop charging hourly rates!
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