Why Hourly Pricing Is Stupid

Avatar Jim Macdonald
October 11, 2014
This nagging issue has been on my mind lately, as we deal with moving into a new, larger, pricier, and, of course, cooler space.  It’s not the moving that’s bothering me, or even the ‘pricier’ part – that’s a simple matter of location and square footage.  What I’ve been wrestling with is contractor pricing.  Why would a plumber, HVAC guy, or electrician want to charge me by the hour?

Think about it.  That immediately puts me at odds with the contractor because he wants to be paid for his time (and could arguably go slowly so he gets more money) and I want him to go as fast as possible so that it will cost me less.  Right off the bat, we are in a bad relationship.  As it turns out, we ended up choosing contractors who all price by the job, not by the hour.  Will we pay more?  Maybe.  Will we have a better chance at a lasting relationship with the contractor?  Definitely.

So I started thinking about how this plays out in our industry.  After all, we are contractors, just like the guy installing my toilet.  I like to think that after almost twenty years in this business that I am better at it than the day I started.  If on day one I would have decided to charge $100 per hour for my time, and I performed in a manner that was worth it to my clients, then I would be off to a great start.  Now 20 years later, it may be feasible for me to charge more, perhaps $150 per hour, and still be within an acceptable industry standard.  Am I only 50% better at my job than I was 20 years ago?  I’m definitely faster, so If I can do something that used to take me an hour ($100) in a half hour ($75), am I insane for agreeing to make less money for the same work, which, by the way, will be done better?

So now you can probably see more clearly what I am getting at.  What I really want to do is figure out exactly what my client wants and how much value they put on that finished product.  I certainly want to cover my costs, but my costs don’t drive my prices.  That’s working backwards.

Let’s say a client wants our company to create a complete rebranding campaign for them, including a variety of elements like a new logo, printed materials, a website, social media templates, search engine marketing strategies, etc.  That client’s new branding initiative will create a projected growth of millions for their company.  Why would I figure out all the hours involved and simply multiply it by a random number to determine our fee?  If the campaign will produce millions, I want to determine the importance of what we are doing, and the value we bring to the process.

I know what you’re thinking…  That’s hard to do.  Damn right.  It takes experimentation, some practice, and even some screwing up to get it right.  However, once you get in the zone you will make more money and have happier clients than you ever did before.  Remember, you are providing a service that the client sees as highly valuable.  It’s your job to figure out where that value lies.
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