In his latest post on setting up on your own, Polemic Digital founder Barry Adams tackles one of the biggest questions for service businesses: Should you charge clients an hourly rate, or a fixed sum? You can read part one of Barry’s experiences of starting his own business here, part two is here, the third part is here, and part four is here.
Years of working in agencies have taught me that many businesses have an aversion to the concept of ‘billable hours’. Maybe it stems from an association with expensive lawyers or big name business consultants that cost some people’s monthly salaries in hourly fees, but it’s become painfully apparent to me that the moment hourly rates are mentioned during a sales process, the prospect more often than not turns sour.
It could be that ‘billable hours’ as an idea have become synonymous with overcharging and under-delivering. I suspect, however, that by quoting an hourly rate, it puts the value of a service provider’s work in to stark contrast with what a prospect expects a person to actually earn.
When you quote a fee of, say, £75 an hour, the prospect is likely to do some sums in their heads and conclude that this translates to a monthly salary in excess of 12 grand, based on a 40-hour workweek. Of course the service provider quoting that hourly rate is most definitely not making that amount of money.
Looking at the composition of that £75 hourly rate, what prospects often forget is that it accounts for much more than just the service provider’s time and effort. For example, the cost of an hour of an agency employee’s time includes both that employee’s salary and all the overheads that go in to running an agency, from its office building to its computers, its software and tools to corporate nights out, its MD’s salary to the cost of their account managers and receptionists.
And, importantly, it also covers the cost of the time when that employee is not working on client projects. From my own experience in agencies, as much as 40-50% of any staffer’s time can be taken up with non-paid work, either for internal projects or unpaid client work.
The economics of agencies
There is of course a reason service providers, such as marketing agencies or freelancers, have to focus on hourly rates as a cost mechanism. In agencies, it really is about ensuring people are working as many of their productive hours as possible on paid client projects, to ensure enough revenue comes in to pay for everything else that goes on in an agency. So it makes perfect sense for agencies to focus their cost structures on hours worked for a client.
Nonetheless, when that hourly rate comes up in a sales meeting, it’s hard to escape that negative association. The prospect will ask themselves, either consciously or subconsciously, whether your time as a service provider is really worth that amount of money every hour.
There is a way to avoid this association, however, one that I’ve been using with considerable success since I started out on my own. It’s a very simply thing: don’t mention hourly rates at all.
Productising a service
When I quote for a job, be it something like a one-off Search Engine Optimisation website audit or ongoing SEO work, I simply provide a cost for the total job. I don’t mention hourly rates at all, unless a prospect specifically asks for it.
It’s not quite as straightforward as that. A cost alone, without any further detail or nuance, isn’t going to win a prospect over either. I find that it’s important to position the job properly in my proposal documents as well as how I describe it in meetings, focused on showcasing the service as a product.
Such a product-focused positioning means that the service needs to have some of the characteristics of a product: it needs to have a fixed cost and it needs to have predictable outcomes.
For SEO site audits, for example, the output is the final audit report containing all discovered SEO issues on the website and their proposed solutions. For ongoing SEO, the output can be described as a set number of articles written every month.
Whatever it is, it’s important to focus on the reliability of the outcomes. “This is what you get for your money, guaranteed.” As marketing service providers we can’t guarantee improved revenue for clients, but we can guarantee the measurable outcomes of our work, such as the amount of articles published or a report with improvement recommendations.
By positioning a service as a product with a quantifiable output, I find the sales process to be much smoother. In the end the costs I quote to prospects are identical, but there is no association with the unpleasantness of billable hours. The client pays for a product, and that is what they receive. As a result my conversion rate from prospect to client has improved dramatically compared to my agency days; around three quarters of my proposals become a paid client project.
Contrary to conventional wisdom
This sort of ‘productisation’ of a service goes against the instincts of many agencies, which have gotten used to providing detailed breakdowns of exactly where their time is being spent on. For years the prevailing wisdom has been that every hour charged needs to be accounted for, especially when your clients are in the public sector. I find, however, that such breakdowns of costs are counter-productive. Instead of the agency being fully transparent and accountable, such hourly cost breakdowns enforce the view that the agency is expensive and not adding sufficient value.
Yet I feel that it would benefit agencies, as well as freelancers, to step away from hourly rates and instead try to productise their services. Internally they can – and should – stay focused on billable hours, as it’s the economic currency of agency environments, but externally they should strive to present their offering as individual products, with fixed costs and fixed outcomes.
I also believe this makes it easier to keep projects within scope. By focusing on those fixed outcomes, you can more easily reign in a client’s demands when they exceed the original project remit. Such discussions are made much smoother when the deliverables have been agreed beforehand as part of a product-oriented sales process.
It might be difficult to step away from the billable hours paradigm, but if you’re a service provider working with hourly rates it’s worth a try. You might be surprised at the results.