Do you charge by the hour? Does it make it
difficult for you to price your work? A “Package” can reestablish the strength
and flexibility of hourly work and raise profits significantly.
Many people think that if one works with hourly rates,
it is not possible to establish different rates for different services. That is
supported even by experts such as VĂĄclav Lorenc: “we all start with hourly rate pricing, which has its advantages.
Nevertheless, it eventually becomes a cage (and not a golden one,
unfortunately)”.
I have to admit, that I do not share this mainstream
opinion. Instead of criticizingit, I am going to show you a simple, yet
far-reaching tool to better manage the pricing of your worked hours.
How many self-employed workers charge by the hour?
Freelance
Industry Report‘s 2012 edition indicates,
that around one third of self-employed professionals charge by the hour for
their services. Most of them arefreelancers (60%), who charge fixed prices for
projects. Even those fixed prices are calculated by the estimated gross hourly
rate and the total time estimated for the project.
This means, that most self-employed workers “sell” their time by the hour. That
makes sense because, although they provide services or solve tasks, what they charge
for is the time they spent on those activities. After all, even a freelancer´s
day has only 24 hours.
People value their time differently and these differences in their view can
vary vastly.. The
difference in the hourly rates between two fields of work, for
example business consultancy
and graphic design can reach up to hundreds of
percent.
Price packages, on the other hand, are used much less
often. Actually, only when clients use the service repeatedly, for example for
teaching languages, massages, gym sessions, tennis or piano lessons, physical
therapy, beauty parlors, etc. Besides that, and friends and family discounts,
offers are rarely tailored to the client.
“Pricephobia” and its’ manifestations
Critics are right when
they state hourly charged labour it is an adamant tool that reflects the worked
time but denies the employee the benefit of having a creative approach,
know-how sharing, author´s rights or capability of working seasonal variable
shifts.
Of course, by working by the hour, we can raise and
decrease prices independently and as we see fit. That can also create trouble as
there can be clients, to whom we charged the same hourly rate for a long time
and newer clients, to whom a different tariff applies. The rate increase for
services can mean having to raise the price of each hourly rate, which can take
a long time and is, in no way, a pleasant task.
In fact, it often happens that we choose not to
raise the price for current customers, or that we do it, but not without hesitation.
This causes the price difference between new and old clients to grow, which
entails other problems; from “pricephobia” (chronic aversion to apply prices to
labour) to the ethic matter of charging significantly different prices for
different clients for the same kind of service.
It might look like the best solution would be to
abandon hourly rates altogether and go into a system that applies prices to
projects, tasks, the kind of service, etc. Nevertheless, here are professions
(including mine), in which a hourly rate pricing model is so entrenched and accepted,
that it’s not possible to simply wipe it out and replace it. In addition, many
professionals are not even interested in doing so, since even the most
experienced freelancers are at risk of miscalculating the time to finish a
project and therefore undercharge it badly. In the end, hourly rate pricing has
both big advantages and disadvantages; the latter, against which professionals
(not exactly willingly) have been fighting for years.
One Price to rule them all
Is it bad to have a pricing system with different
hourly rates for each client? In case you neither mind having a complex pricing system nor it
bothers you that your clients could meet and compare the prices they pay, then
it is not a bad thing. However, it is a fact that both of the situations are inconvenient
and that prices should be as simple as possible, so clients know clearly how
much and for what they are paying.
It is for that reason that, a few years ago, I have
changed my system myself. I have established a single floating hourly rate, which is the same for all my clients, both
new and previously existing. I have developed this system slowly over time,
step by step, allowing me to manage the demand with more freedom and ease, which
is nearly impossible when there are multiple fixed prices in place.
In case I notice my workload is in the long term above 80% of my capacity, I slightly
increase my hourly rate. I also do this during the high season for consultancy
(spring and fall), when I usually face temporary fluctuations of up to 100%.
However, I know from personal experience, that by the beginning of summer or winter,
demand will go down again.
Moreover, I have no problem bringing prices down,
as it happened recently during the 2008 EU crisis, when I changed my basic rate
from 200 to 60 € per hour. All my regular customers greatly appreciated, that I
supported them and that I decreased the prices along with the market. I could
have relied on my savings and waited until the crisis was over, but I did not
and that was an invaluable professional experience.
In case you work with a single hourly price, you
should make sure those prices are perfectly synchronized with the long-term
workload and, therefore, also with your management and organization of
time in general.
The hourly rate doesn´t work though, if you are
afraid to work with it correctly. If you miss the right moment, time and demand
will push you against the wall and you will be left solely with a tiny space to
attempt any gradual price increase. An extreme solution could be a “leap” in
prices, which would be hard to explain to your clients. So, if you decide to
work with uniform hourly rate, it is only fine as long as you can predict and
adjust it to your demand. If not, it will all become the same trap as it was
with the “one price for each client” system.
7 super-package discounts
n hourly rate defined just above 80% of the
workload is absolutely perfect for small jobs or occasional, shorter consultations.
That is because they correspond well to the requirement level of the new job. However,
I would possibly not have lasted very long using them, unless I started
offering my long-term clients the “Super-packages” for 30 or 50 consulting
hours (including the project management costs) As in the case of floating
hourly rates, the package prices depend on time and many other factors.
For example, a package with 50 and 30 hours with the
basic price of 1000 € per hour would look like this:
50 hours with a 35% discount of 32.500 € + taxes
(50 h = 50.000 € – 35 % = 32.500 €, which is 650 €/h)
30 hours with a 19% discount of 24.300 € + taxes
(30 h = 30.000 € – 19 % = 24.300 €, which is 810 €/hr)
Attention:
This price offer is not transferable and is valid until 31/09/2014. Payment to
be done in advance and it does not expire.
The package is actually a combination of 7 textbook
discounts in one price:
1.
Quantitative — 30 or 50 hours of consultancy in one single package.
2.
Deposit — Paid in advance (no need to go after debtors and no pending
payments).
3.
Fidelity — Old clients have preferential conditions.
4.
Seasonal — Out of season, I am able to offer a bigger discount (so I can
compensate for the low demand).
5.
Incitement — Offer is valid for a limited time only (encouragement for the undecided).
6.
Individual — I adjust the offer according to the required service.
7.
Premium — includes special benefits and a preferential treatment towards
the client
Of course, discounts are
justified by specific advantages, which vary according to
each case. For some, these benefits will amount up to 30%, for others, only
15%.
If you disagree with
charging 1000 € in advance, even out of season, or making a special price for a
satisfied client so that you continue your business relationship without any
interruptions, even if it means you don’t get paid a lot, then price packages
are not for you. They’re not for everyone.
For me, the price packages allowed me to reduce
prices and considerably increase my sales, keeping the same level of profit
thanks to the elimination of administrative work and risk of income
fluctuations. (I still allow my clients to pay by the hour, according to standard
rates).
Furthermore, super packages also solve the ethical issue
of having different prices for different clients, since each calculation is unique. The same client can have
different discounts through time with the new calculations being based on but
not bound by the previous ones.. This means, that in case I am operating on
100% of my capacity in the middle of high season, then I will give this client
a slightly lower discount and hopefully, that will be understandable.
Using price packages to relate to clients, is a lot
more flexible than with single requests. That is another reason why I do not
offer price packages to everyone and I do not offer them from the beginning. After
a while though, and once I understand better what the client needs, how
demanding the client is, etc., do the super packages greatly widen the leeway
for prices, which professionals that work with fixed hourly rates can not.
Packages allow us to sell a greater work volume, achieve higher efficiency and
therefore, have more profit.
How to prepare the ideal price package for your
clients? That I will tell you in the next article.
About the author:
Robert Vlach is a Czech enterprising consultant, lecturer as well as an
author and an editor-in-chief of the portal navolnenoze.cz (být na volne noze
translates as "to be on a free foot",
meaning to be a freelancer), the Czech Republic´s
leading platform for freelancers to meet, share
information and advertise.
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