One of the most common debate in the agency world is should I charge by the hour or by the project. What if I told you that you could work less and make more money rather than getting more efficient and making less. That’s right. If you charge by the hour, you’re losing money. The more efficient and productive you get with your experience in producing the deliverables to the client, the less you make if you’re charging by the hour. You will also hit a ceiling of your earning potential for each employee. I will explain.
For about half of my agency life I charged by the hour, because it was easy and I did not know how to sell the value of the project to the client.
but then I started to learn how to better scope projects and get more efficient on the work we were delivering.
Let’s look at the NUMBERS!
For example, I was able to increase my effective rate by 100% to sometimes 500%. This meant that if you calculated the new hourly rate for some projects, I was making $200 – $500 / hour rather than the traditional $100/ hour.
Effective rate = amount earned in a set time frame / how many hours worked in a set time frame
Let’s think about this on a bigger scale. If you’re charging $100/hour for 40 hours a week, you would earn you $4000/ week per employee. By increasing your effective rate by 100%, you could earn an extra $4000 per week per employee. Then factor in you have 5 employees. That’s 20,000 extra a week and $80,000 / month.
Here is what I did on every project we were scoping:
- Figure out the client’s budget.
- Look back at similar projects and gauge an average time spent. You also need to know your fully burdened rate as well.
- Pad the hours by at least 25% for risk and profit.
- Does the total project cost align with the client’s budget?
- Sell the value of the result to the client.
- Look for ways to deliver quicker and more efficient, so I could make more profit.
Here are 4 other reasons on why not to bill by the hour:
- It penalizes you for your experience.
- It cripples billing potential
- Makes clients nervous to not know what it will cost.
- It encourages lower productivity.
If you would like to learn more about selling the value you deliver, check out my upcoming live training. How to Re-Invent your Business Development
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