Charging by the hour is the devil. It should be banned.
I think it’s the biggest thing that kills off innovation and creativity in small business.
Most business owners would agree that they want their business to be innovative, high quality businesses. Especially in the highly skilled knowledge work area.
You didn’t get into business to be mediocre… right?
There’s not many businesses around who have the attitude of “nah mate, we’re here to be mediocre and average… we make sure our customers get a pretty cheap and average experience”.
That’s exactly what you’re programming into your culture if you charge by the hour.
It’s a recipe for disaster
The slower you go, the longer you take, the more you get paid. It’s a recipe for mediocrity. A recipe for average. A recipe that stifles innovation.
Think about it for a second. Initially, you may think charging by the hour is smart… after all, “it depends how long the job takes”…. RIGHT?
Let’s look at a simple example - a cleaning company. They clean your house and charge $30/hr. They clean kitchens, bathrooms, vacuum, the whole works. A typical house clean takes 3 hours a week - $90 per clean.
But then it all goes pear shaped
Guess what happens when they start getting better at cleaning your place… they get FASTER at getting the job done. They still do it just as well, but they learn little tricks that means the job gets done faster.
As a result, the job is done in 2.5 hours. Same job, less effort, less time.
… but the kicker is - THEY EARN LESS MONEY.
They did the exact same job, in fact, they did it better - because they did it faster. Yet they get paid LESS money.
If this was YOUR business, you just incentivised yourself (or your staff) to NOT innovate. To NOT do things better or faster. Each time you make an improvement… you get paid LESS.
Why would any sane person do that?
They’d sit there, watching the clock, stretching out the job to hit the end of the hour.
I don’t know about you, but I hate that.
I don’t care if it takes you 1 or 3 hours to clean my house. Just do the job right and move on. I’ll pay you the same amount whether it takes 1 or 3 hours.
In fact, i’ll probably pay MORE if it only takes an hour. Thats 2 hrs less of cleaners in my house getting in my way.
Let’s look at a more leveraged example:
Take your tax accountant as an example. Let’s say you pay $1000 to get your taxes done. It might take the accountant 10 hours to prepare your return - $100/hr. One day, an automated computer system comes in that slurps up all the data from your bank and can spit out your return in under 10 minutes. Then they’d deal with some corner cases, reducing their work from 10 hrs to 2.
Based on charging per hour, the accountant would then need to charge $200 for that same return. They’d be cutting off their own nose to implement a system like that.
Sure, they could bring in MORE clients to fill the gap… or…
They could start charging based on VALUE.
Do you really care how long the mechanic is working on your car to get it serviced?
All you care is that it’s going to cost $1200 and you can pick it up Thursday.
Do you really want your dentist to take LONGER to do your fillings because he’s being paid by the hour? NO!
You want him to get the job done ASAP so you can get out of the chair and move on with your life.
The more “knowledge” you bring to your business… the worse this effect becomes. I see it time and time again with small businesses who are struggling to charge appropriately because they continue to sell their HOURS and not their VALUE - which is to say, their expertise.
In my very first business I was doing on-site IT computer repairs. I started out charging by the hour. I had to do a LOT of re-installing of windows, as computers parts would fail, or wayward teenagers installed viruses on the computers.
After doing a TON of re-installs, which took 3-5 hours depending on the computer, I realised it was CRAZY for me to sit in the client’s home waiting for software to load up. So I started charging a fixed fee for a reinstall. I’d take the computer away and let it churn while I did other things.
The client didn’t need to know if it took 2hrs, or 5hrs, or however long it took.
All they needed to know was it was $300 and it was DONE. They would either say YES, or NO. There was no “umm what if it takes more than 5 hours, or what if it takes 2 hrs", or haggling over the inclusions. The package was set and they could make their choice.
(PS: Don’t ask me to fix your computer for $300….)
Your business should be the same. Set it up such that the client doesn’t need to know how much time YOU spend on the job to make the decision.
They don’t even care.
In fact, the more affluent the buyer, the less they care about how much work YOU do. What they care about is the job being done right, and on time.
All your clients care about is that it’s going to cost them $X and they will get whatever the outcome is.
Once you have your pricing setup that way, you’ll actually incentivise yourself (and your business) to innovate, be creative, come up with smart solutions - because it won’t destroy your revenue.
I’m talking about:
Once you stop doing your own head in thinking about how much time you spent delivering a service, you can actually focus on delivering it… in excellence, rather than tracking time and figuring out how much to invoice.
You’ll also be able to actually market and sell WAY better too… but that’s for another article.