Pricing strategies: Hourly rates? No thanks!

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Most independent professionals use hourly rates as a pricing strategy. Yet charging for your services this way can lead to mediocre business success.

In my experience, most people don’t spend enough time thinking strategically about what pricing strategies they should use.

Typically, soloists who sell services establish hourly rates. They use a process called “reverse competition” to determine what their rate should be. This involves taking a look at what your geographical competitors are charging, and deciding where in the range you want to fit on the spectrum of hourly rates.

Inevitably, we choose a rate somewhere in the middle, so we can say that we’re not the most expensive, but neither are we the cheapest!

With this approach we are showing absolutely no differentiation from any other company – just sticking ourselves straight down the middle. In other words, we compete with everyone! Not a very prudent marketing decision.

So pricing simply using an hourly rate that sits in the middle of the spectrum is, in my view, a wasted opportunity to create a point of difference.

Getting Away from the Hourly Rate Mentality

Before you do business with a new customer, you hold all the leverage in the relationship. After the services have been performed, the customer possesses the leverage. The lesson is that you want to set your prices when you possess the leverage - before the engagement begins.

The minute you quote an hourly rate, you put a fixed limit on your earning potential. It’s hard to increase an hourly rate once it has been set. The most successful service providers charge for the job as a whole, and then don’t specify exactly how many hours it will take to complete the job.

Customers are value conscious, not price conscious. They look to do business with people they feel give them more than they are paying for. So your goal is to make sure your customer perceives the full value of the service, not simply the price component. Your services need to be packaged up and sold as a valuable bundle, rather than as a multiple of hours which only reflects the time value of money.

Let’s say you needed a consultant to analyse the effectiveness of your intranet site, and make some recommendations about modifying the navigation structure. Which would you feel more encouraged to purchase?

Cost of analysing site and recommending new structure:

Estimate 20 hours work @ $150 per hour = $3000

Phase 1: Analysis of Existing Intranet Site: $7800.

Price includes:

8 hours of interviews with high end users
analysis of site map
analysis of internal complaints and suggestions
detailed report outlining strengths and weaknesses of the current functionality
identification of potential cost savings through structure modification

Phase 2: Recommendation for Improving the Proposed Structure: $6400

Price includes:

Focus groups with users to identify preferred structure options
Repeated testing of proposed structure with a wide variety of users
Refining preferred structure based on user feedback
Detailed report on recommended navigation changes, including rationale for each decision

Price is a Fickle Indicator

There is absolutely nothing positive about competing on price, unless you specifically position yourself as a low-cost provider. No matter what you charge, there is always someone, somewhere, willing to perform the work for less money.

Wise solo consultants also know that if they price their services at the low end of the market, customers do not take their advice seriously. On the other hand, if you charge rates on the upper end of the spectrum, the customer will hang on every word you say and has a higher probability of implementing your suggestions.

So do yourself a favour. Start to think of how you can price and package your services in ways that don’t correspond to hourly rates. It’s all about value you provide, and the perception of value in your customers’ mind.

Megan has produced a follow-up article on this fascinating topic. Read it here. - Ed

Megan Tough runs Complete Potential, a company that helps businesses solve their strategy and people problems. She loves being a solopreneur, and when she doesn't have her nose to the grindstone, is fulfilling her other passion of fitness and health.

15 comments | Add your own 1 2 3 | Next» View all»

I think what you say makes a lot of sense, and is something all of us Solos have to come to grips with. Thank you for reminding us. Karen from Springwood
Well put. This is an absolutely critical approach to pricing - not only to each solopreneur themselves but in terms of the whole industry. We must charge by value - not price. What's more, you'll find that once you get used to it, the pricing discussion becomes the start of the job - a true consultation and the start of a strong relationship David Brewster from Brunswick, Victoria
A great article. Trying to remember this is not easy & when you are either solo or micro you don't have the team to bounce ideas off & remind you. Thanks for confirming our ideas. Janene from Tamworth
Thanks for all your comments.
It's not hard to see why so many consulting soloists get stuck in this trap, and it's one of the first things to look at that can really impact performance and profits. I'd be interested to hear from anyone who's had trouble breaking out of the hourly rate trap. We could share some ideas with you that have worked in other environments. Megan Tough from Sydney
In reply to Megan's comment ... I think a basic price per job is good, but not the ultimate. For example, I have a few clients with whom I began a project, then it gets extended over and over. I start with a certain figure, then say anything over that is per hour and is billed monthly on extended jobs for work done that month. Otherwise it would have been a waste doing the job at all as you can become resentful of going so much over the allotted time because of client changes.
The longest project I ever had was a 12 page brochure that began 3 years earlier. I billed monthly for the hours spent on it each month. It was constantly changed by the client. It all worked out fine eventually and I didn't resent working on it. But I would have if it had been a one off price. Karen from Springwood
That's a good point you raise, Karen, and it's probably worthy of a follow-up article. Content is planned about six weeks in advance, so you won't see anything for a while. However we will discuss it with Megan and our other contributors and see who'd like to explore the issues you raise. Thanks for your input. Sam Leader from Sydney, Australia

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