The single worst practice today for any non-automated industry is to offer its products and services to buyers in exchange for an hourly rate or fee.
In spite of how bad this practice is, it is often the “standard practice” cited by every company as “the way everyone does business.”
In case you’re wondering, here is the story of how hourly rates kill revenue:
- Since every hour is worth dollars, you are compelled to sell every hour.
- Being compelled to sell every hour necessarily means you can’t devote time during the work week for growth activities. (They pay off later and hours pay you today.)
- You don’t think about new offerings and about marketing to your current buyers.
- Your don’t create improvements and innovations to current offerings.
- You don’t market for retention.
- Your offerings become stale and outdated.
- When your buyers think you’re stale and outdated, they will reposition your company to the middle or bottom of the industry pack.
- Once reduced, it is extremely difficult to regain your former top position.
There is a powerful alternative for every non-automated industry: fixed fees commensurate with the value received by the buyer.
How does this work, you wonder?
- You and your buyer determine the desired outcome the buyer needs to attain from your products or services. The outcome is both quantitative and qualitative.
- You define the scope of your work in relation to this outcome.
- You clearly state what, if anything, the buyer is expected to contribute.
- You set a start and end date.
- You price the specific scope of work.
- You contribute all the inputs necessary (your time, your intellectual capital, your products and services) to achieve the outcome.
Bottom Line: you do the work and deliver the results as quickly as possible, given due diligence and excellent customer care. If you get the work done sooner rather than later, the buyer enjoys their outcome sooner rather than later. Your revenue is compensation for delivering the value.
Value is Long-lived
Hours are perishable. Once an hour is gone, you can never make money from it. Every 60 minutes is an hour of revenue lost if you haven’t been able to charge an hourly fee or rate for it.
Value has a very long life. You can generate revenue from value, whether you deliver it today, tomorrow or next week.
Value based fees also allow you—actually encourage you—to prioritize your work. Not all work is equal, yet charging by the hour forces all work to be viewed as equal.
Fixed fees allow you to prioritize work for your company and for your clients. If there is an urgent need you can attend to that and still get paid for the outcomes you deliver to other buyers later on. It is your responsibility to effectively organize your work load to meet all clients’ needs, but you have confidence when you know that your obligation is the outcome, not the input of hours.
There is supporting work every company needs in order to thrive. When you charge by the hour, these activities tend to get short shrift because it feels like they are costing you money. You may also have to charge hourly rates that seem high to buyers—an hour does not have an intrinsic value—to cover these non-revenue generating activities. When you charge a fixed fee commensurate with the buyer’s outcome, you are accurately reflecting that the whole company contributes to the outcome, either directly or indirectly.
Deep Thought for a Complex Issue
Fees and pricing is a very complex issue that requires deep thought about the whole company and its buyers. It is not a simple formula your CFO creates once and then you apply it. It is not as simple as saying “everyone does it” one way and just doing it too.
When I committed to offering my consulting and advisory expertise through value-based fees more than ten years ago, I improved the conversations, and subsequent relationships, with my clients. I have helped CPAs, law firms, and many creatives such as designers, architects, SMEs (subject matter experts). coaches and consultants, switch to value based fees, and their results have been dramatically successful.