Charging For Time is a Bad Idea

The long-running standard in working with many consultant/agency-based professionals is to charge by the hour. Web designers, lawyers, PR firms, marketing agencies – they all normally ding you with a certain min. fee for a project, then an hourly rate on top of that.

Which is stupid.

Charging By the Hour is a Bad IdeaCharging for time doesn’t care about the customer. Charging for time is centered on how the person doing the service will come out.

But no client ever goes into a project thinking, “You know, what I really need is about 20 hours from a great designer,” or “If we could bump our marketing firm up to 35 hours a week, then that would take care of everything.” No, clients are looking for results, and the service provider is only a means to that end.

When people charge by the hour, the client automatically reacts in two ways:

  1. “I wonder how much time it’s going to take to accomplish what I’m shooting for.” The catch here is that the client has no idea – that’s why she’s looking for someone to do it for her. So this leads to endless questions which only make the service provider squirm and hem and haw and nobody’s left comfortable.
  2. “I wonder if this guy is going to take his time getting this stuff done so he can earn more.” Whether it’s warranted or not, this thought always, ALWAYS enters into the mind of the client when you charge for time. Which is natural, because the very nature of the consultant’s compensation is based on time spent working on it. More time = more money.

Both reactions above are seeds that you really don’t want to have planted when starting a new relationship with a client. They’re starting out with doubts and second thoughts, and you’re starting out with a client that’s not completely sold out to the way you’re going to do things. In addition, you know most of your competition is also charging by the hour, which means a) you don’t stick out in this area, and b) there will always be someone cheaper, which is attractive to clients when they’re being charged by the hour.

If you know the way you charge a customer makes them uncomfortable, and if you know your pricing model makes you just another hourly consultant in a dime-a-dozen world, why don’t you change it?

Start charging by the hour. Better yet, charge by results. Your clients (the guys who pay you) will love you for it.

10 responses to “Charging For Time is a Bad Idea

  1. Sometimes you get a real deal when you’re charged by the hour. These are the cases where the value you receive is well beyond how long it takes. For example, if you were charged by the hour for something like a logo, it might take only a few hours to create something you like but it might be used on millions of your product.

    A lawyer might be cheap by the hour if you win a multi-million dollar settlement.

  2. I think the key phrase, Brett, is “when starting a new relationship with a client.” We have a very large client that we have worked with for many years that asks us to charge by the hour because they have overcome the two points listed above (the know what to expect – because they used to provide the service in-house and they trust us not to squander the time).

    Steve also made an important comment. He used the word “might” in both of his examples. “Might” is just too speculative a word for most new relationships (that is why we say “I do” to begin marriage instead of “I might”).

    Most of our new clients do not want us to work by the hour because the risk is shifted back on them, which adds friction. Many of our new clients want to “taste” what we have to offer as long as it fits within their pre-defiend budget. Once someone has tried your valuable offerings and trust is established, they might then be willing to risk more on your “might” and have you work by the hour.

  3. Steve and Bill – both great points.

    Granted, you can get a great deal sometimes out of the hourly rate. It definitely takes time for your client to get into the comfort zone of what you can produce over a given amount of time before they like the idea of paying for hours.

    However, why not just quote them a set price for a project, in which you’ve accounted for your time?

    In addition, couldn’t a ‘pay by results’ compensation actually pay off more for the service provider in the long run, and yet still be a good deal for the client cuz you know you’re getting something in return for it?

    I deal more with smaller businesses, so I guess I’m more exposed to the hesitancies of new relationships.

  4. well it’s easier for the consultant to get screwed if they aren’t charging by the hour…endless meetings and phone calls can easily sap up a consultants time which cuts into their pay.

    also, hourly rates can force clients to move quicker on things that they have to provide a consultant. knowing that they are “on the clock” is good motivation for them to provide the consultant with what they need.

    it works both ways. a consultant who works on multiple projects for multiple companies needs to make sure they are getting paid for every hour they work.

  5. But can’t you plan for the meetings and phone calls and include that in your pricing?

    Your point on making the client move faster does make some sense. The problem I have with charging for time is that you have to be working to make money, whereas a results-driven compensation works even when you’re not. Granted, you have to put in a set amount of time to get the results, but there comes a time when most of your work is done and the “machine” you’ve built just keep rolling.

  6. Great Post & thanks for sharing.
    Times alway not enough for me

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