Five Reasons Pricing Based On Time Is Bad For Your Consultancy

Published: 04 Dec - 2020 by Ben Rendle

RIGHT NOW, YOU MAY BE MISSING OUT ON ADDITIONAL PROFIT AND DELAYING THE GROWTH OF YOUR CONSULTANCY WITHOUT EVEN KNOWING IT. LEARN HOW TO MAKE SURE THIS DOESN’T HAPPEN.

 

Many HR Consultants charge for their services based on time because as an industry, that is how it has always been done. And this stops them from generating the profits they deserve.

Believing in historic convention is a common mistake. But it is far from the only one. HR Consultants often do not understand how to price, which makes them fall into many costly traps.

When setting your pricing, time spent is only part of the equation. So, by using time as a basis for your charges you can hamper the growth of your firm. So, here are 5 of the biggest reasons why using time-based charging is bad for your business:

 

#1 Hourly rates are unfair to the client

Clients hate not knowing the price up front.

With hourly billing, the client won’t find out the price until the work is completed and a bill is presented. And despite them knowing a bill is on its way the cost always comes as a surprise. There is no price certainty for the client.

This results unrest for the client. and leads to a higher frequency in queries to the value of your bills. And possibly negotiations as clients try to reduce the cost post event.

On recurring jobs an hourly rate also discourages cost sensitive clients from picking up the phone if they have a new issue. They think they are “on the clock”. Whilst they may think this will save them cost, it is likely to cost them more in the medium term if they allow an issue to escalate.

Clients being charged by the hour will also be driven for the job to be completed as quickly as possible. Putting you as the expert and the client at odds with each other as rightly you will seek to provide a complete and thorough service.

 

#2 Slows the growth of your consultancy

There are only 168 hours in a week.

Now if we assume you get the recommended 8 hours a night of sleep, that’s 56 hours over a week. You now have a maximum of 112 hours. But what about eating, exercise, relaxing, spending time with a partner or children, taking care of bodily functions. These all add up, and don’t take account of time spent doing your own admin which of course isn’t chargeable.

By charging based on time you unwittingly place a ceiling on your earning potential as available time is finite.

Of course, you can combat this by taking on staff to add to your capacity. But in reality this often leads to the business owner taking a drop in earnings as the new team member learns their role. And the firm onboards more clients to utilise the new time capacity.

The result is usually that you, the business owner ends up working long, tiring hours to maintain an income and grow the business. This is often a direct opposite of the reason you set up your business in the first place.

 

#3 Punish you for your experience

You are an expert in your field. You spent years studying to qualify. Then more years gaining practical experience before starting your business. You then spend hours each year keeping your knowledge up to date.

After investing all that time into your skills and career you deserve to be justly rewarded when providing those skills to clients. However, with all that hard-earnt knowledge and experience you will evidently know ways to be more efficient and to do a job more quickly.

But when you charge by the hour doing a job more quickly yields you less money. The client is not complaining as it costs them less for the job which ultimately has the same value to them. The only party losing out is you.

 

#4 Easily compared to your competitors

Hourly rates are easily compared…

Whether that be to your competitors or to the hourly rate of your clients’ staff. As soon as you communicate an hourly rate your client will subconsciously make a comparison to determine whether they think your charge is reasonable to them.

They will often come to the decision that your rate is expensive. This is because they often compare your rate against the hourly rates of their staff who quite often are earning minimum wage.

Charging by the hour not only makes you comparable, but also make it easy for competitors to under cut you. This leads to a race to the bottom in pricing which isn’t good for you or the industry as a whole.

 

#5 No link to the value of your services

Your services are valuable! If they were not you wouldn’t be in business.

But to be blunt there is no value in hourly rates. Nobody wants to buy an hour of your time.

To your client it is the end result that matters. It is this that your client is willing to pay for, and what holds the inherent value in your offer.

The value you provide is a massive positive for your client. Yet hourly rates are not valued. This leads the client to subconsciously place less value on your services, seeing you as a commodity.

This often leads to a client looking to barter to reduce your rate in order to achieve what they perceive to be better value.

 

Get Value from your pricing

Pricing is not a one-way transaction. It is part of a value exchange; you provide value of knowledge and expertise and in return the client provides a comparable value in money.

Therefore, it is important that your pricing is linked to the value provided and not to an arbitrary amount of time. In order to ensure the balance of value is viewed equally at both sides of the table.

How you price your offer is a key step not only in determining the profitability of your firm. But also, in how you communicate your value to prospective clients. It allows you to weed out those prospects that do not value what you do.

Contrary to what many people assume, running a firm is about so much more than money. If your clients do not value your services, they’re simply not worth your while.

Your pricing is never complete. It will always need to be adjusted. but making a conscious effort to move from time based charging will stand you in good stead to move your business forward.

 

P.S. Whenever you’re ready, here are 3 ways that I can help you to increase your value to clients, realise higher prices and achieve greater profitability.

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