Are you sick of tracking time for your own work? Are you sick of constantly reminding your team to track time with an app like Harvest for pricing purposes?
You probably recognize that tracking time itself is a stand-alone task that eats away valuable work hours. You are also aware that trading time for money isn't a sustainable business model, and you want to stop this vicious cycle.
But... (I know there's always a *but*) you aren't sure how to go about making the change?
I also started out by selling my services on an hourly rate basis. It’s OK. We all need to start from somewhere. Although it was nerve-wracking in the beginning, I made the switch, even with existing clients, from charging hourly to value-based (a.k.a. expertise-based) pricing. If you are wondering how I did it, wonder no more.
In this post, I'm going to share the top 5 hurdles that keep you from making the switch to value-based pricing & what actions you can take right now to overcome each hurdle.
If you are a solopreneur reading this, you'll get a ton out of this post. Guaranteed. By the end of this post, you will see clear steps towards value-based pricing that will allow you to gradually make the shift.
But this is not just for solopreneurs. Many established, full-on service businesses with physical locations and FT employees are still trading time for money by billing based on hourly rates. In most cases, there are legitimate reasons as to why they continue to do so.
Even then, I always encourage them to switch to value-based pricing, as the benefit of doing so is immense. We’ll go over that in detail later.
Here’s the good news. Unlike 15 or 20 years ago, when there were fewer options to charge for services, we now have plenty of options we can explore. Thanks to the evolution of internet-based services, especially SaaS/MaaS, it’s much easier for customers to accept new pricing models.
In other words, they are more open-minded.
This allows even traditional service businesses to change their pricing & billing with less resistance.
“So then, what’s the bad news?”
Actually, there is no bad news other than the fact that too many business owners are in the dark about the process of figuring out what works for them. That’s why I decided to write about this so that you no longer get to say, “I don’t know where to start!”
Hey! I’m Maiko.
Thanks for stopping by. If you are a visionary business owner with the desire to build a high-functioning, profit-generating machine of your dreams, let’s connect!
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Top 5 Hurdles that Prevent You from Finally Ditching Your Hourly Rate
Not sure if I have to remind you of this in every single post I write, but there is no shame in experiencing these road blocks. I don’t write about something I’ve never done or never helped my clients with. When it comes to this particular topic, as I mentioned earlier, I went through the switch myself.
What matters is that you are here so that you can make the necessary changes. Without further ado, let’s get into it.
Hurdle #1:
Not knowing why charging hourly keeps you from growing your business.
Hurdle #2:
Your industry thrives on an hourly rate model, and you don't see a way out of this tradition.
Hurdle #3:
You’re not quite sure how to package & price your service based on your expertise.
Hurdle #4:
You’re unsure how to go about communicating the change to your existing customers, so you put it off.
Hurdle #5:
You believe it's easier to convince new customers with your hourly rate pricing.
Are you nodding your head? I was. A few years ago.
Now that you are clear on what’s holding you back, let’s cover each of them with an action plan.
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Hurdle #1: Why Trading Time for Money Will Stall Your Business
Naturally, if you are unaware of the incentive expertise-based pricing can provide for your business, you have no reason to switch. But my guess is that you have the basic understanding of why you need to get out of your hourly rate model.
So, let me go over a few irresistible benefits of ditching your hourly rate.
1. You will be motivated to finish the work faster (= free up time to earn more) because, unlike hourly pricing, putting in more hours isn't going to reward you with this model. Once you find the sweet spot, your capacity to take on more projects increases.
2. It allows your scope of work to be clearly defined, and it makes it ridiculously easy to avoid scope-creeps without repeating wordy explanations! Anything supplemental can be done with additional value-based pricing, not additional hours.
3. Raising your price becomes seamless to both parties. Psychologically, raising your hourly rate is not palatable to customers. Too often, the reasons associated with an hourly price change is “due to increased cost of operating our business.” Please. No one wants to hear this. Instead, you get to say, “we are incorporating a new approach” or “improving XYZ.” You are making it easier for customers to see the value they are getting.
Keep in mind that your customers also benefit from value-based pricing for the same reasons I listed above. This is not advantageous for just one party.
Anytime I propose a change or introduce something new, I consider the impact on everyone involved. In this case, I can safely say that no customers would like to pay more just because something takes longer.
They would rather know what they get from simple pricing, and they would rather pay more for something that would provide more value to them.
You agree?
You can easily see that this is a win-win situation for you and customers who appreciate you or your team’s work.
“But it’s possible that I’ll end up getting the shorter side of the stick, right?”
Ahhh, skeptics. But I hear you. The shortest answer is no. The longer answer is, no, as long as you do your pricing right. If you average out all the projects, you will be likely to generate more revenue even if one or two projects go sideways.
Transitioning from charging hourly to value-based pricing is the first step towards prepping your business to be scale-ready. In order to scale your business, you need to eliminate anything that's considered a time-suck from 3 angles:
1. By charging for your expertise so that you waste less time
2. By reducing or eliminating one-on-one services so that your business can serve more customers
3. By hiring & forming a team to support what you build that’s streamlined & replicable
Now that you are crystal clear as to why you want to ditch trading time for money immediately, I want to offer an action plan to get you started.
ACTION PLAN:
The most important first step to make this transition successful is to make the mindset switch.
Repeat after me:
I'm not selling my time; I am selling my expertise.
This is THE MANTRA you need to say to yourself and eventually to your customers time and time again. Not being able to own this new concept and incorporate it into your business will hinder your transitioning process.
First and foremost, you have to believe this statement. Scaling a business is not about work more & do faster. That is a sure-fire way to massive burnout. Remember, you didn’t start this journey thinking you wanted to work yourself to death. I don’t know you, but I am willing to bet that you started your business to make a difference.
Hurdle #2: My Industry is Built on Time-Based Pricing, So There’s No Way Out.
If you are expecting me to use the legal industry to make this point, don’t. I am not going to use that as an example.
But you are right on money that the legal industry has enjoyed hourly rate pricing for ages. I say, “enjoyed” in rather a sarcastic manner because they are the very few who were able to profit from this model.
Times are changing for the better, though. The reason I am not going to use it as an example is simply because they are finally moving towards value-based pricing mainly due to a huge development in the area of legal technology. As a result, they are forced to be creative to retain their clients.
Instead, I am going to use a much tougher case to make my point. There are many service businesses whose main customers are government agencies. They generate revenues through government contracting projects.
The agencies make up the rules, as you probably guessed, and their rules for billing are based on hourly rates.
See, I told you this one is tough.
I became quite familiar with this setup by getting involved with such businesses.
Needless to say, this is the least favorable business in my book, as you are completely restricted when it comes to how much you are able to charge. Not only that, but there are a few formulas used to prove how your time has been spent in order to justify your billing.
Talk about the amount of paperwork and labor associated with just applying (RFP’ing) for these projects! I’ve seen this firsthand, so I can tell you how ridiculous it is.
Without getting into too much detail, you can already see that it seems nearly impossible for you to propose value-based billing if you are in this situation. Who would dare tell government agencies to change their ways?!
Even if someone is courageous enough to do so, we all know what kind of outcome we could expect from that.
Disappointed? Don’t be. The reality is there are ways to transform this unsustainable business model into something more robust. So, it’s not entirely doomed in every way.
Even if you are not in the business of scoring government contracts, you may still be faced with a huge obstacle because whatever industry you are in, it is considered the norm for everyone to base their prices on hourly rates.
This is the most difficult & legitimate hurdle to overcome, as opposed to just self-created hurdles.
ACTION PLAN:
Here are some suggestions I have that you can implement so that your business does not solely rely on an hourly-based pricing model.
1. Expand your target market without going out of your niche. Beginning with “neighboring” industries is a good start. Just to continue with my government contracting example, looking into the private sector for smaller projects that can fill in dry periods can help a business eliminate “feast & famine” cycles.
2. Create an offer to help and educate other businesses that are in the same industry/niche, i.e. how to write an effective proposal, how to improve time management, etc. It could be a form of consulting or giving workshops. Whatever the delivery method you choose, you get to charge for the value you are providing.
3. Consider taking on some projects as a sub-contractor, in which billing regulations are not as rigid. If you are able to take a role as a sub under another business which directly contracts with a heavily regulated agency, you have a better chance of charging what you want. This is something I learned from working with a business which does exactly this. Per project value will definitely decrease as you will not be the main contractor, but you also reduce the risk of getting stuck with projects that generate low profit margin.
You may not be able to change the industry standard single-handedly, but if you are willing, you can come up with alternative options. You can diversify your offers so that you will be able to hedge the risk of not being able to scale your business.
Start experimenting with your offers based on the suggestions I made.
Hurdle #3: Not Sure What to Offer at What Price If Not Based on Hourly Rate
It seems like a daunting task, and this is where many give up or just keep putting it off. When I decided to take a deeper look into making the switch, I felt the same way.
Most of the time, it’s not that we have no clue what to offer. It’s that we have too many services we can think of. Because we have too many options, we find ourselves having decision fatigue.
Sounds familiar?
There are 2 steps to figure out what to offer.
Step #1: Narrow down your list of offers
Step #2: Crunch some numbers to see whether these offers make financial sense
Doing Step #1 alone is hard enough, then you have to face Step #2. Some of you may feel already defeated because you think crunching numbers & pricing are not your strong suit.
My intention for this post is for you to get started with the process. So, I am going to suggest something easier to get started with. There is no pressure. You can work on this on the side little by little. Once you do this, it’s likely that you will have enough insights and data to take the next step.
ACTION PLAN:
1. Choose only offers that pass the below test:
a) Does this offer generate measurable results for your customers?
b) Is this simple & clear enough for you to train your team to implement without your help?
c) Does this have potential to be upgraded or extended to another offer?
The first test is to assess whether what you are about to offer is enticing for your customers. The second test is to assess whether your offers are scalable. Then, the last test is to assess whether you can build layers of offers on top of the base offer as a retention strategy.
Instead of just aimlessly brainstorming, you can figure out your offers systematically with this method.
2. From the list of offers you carefully selected, test to see which one generates the most interest.
Until you make an offer to existing or new customers, you won’t know if it works. First, talk to them and see if they respond positively. It’s preferable to call or meet with them so that you can ask various questions.
I don’t recommend running a survey, as people tend to rush through them without giving much thought to each question.
This will not replace calls or meetings, but you can add sending emails and/or asking over social media platforms. These would work well, especially during the beginning stage of your research to get quick responses to determine which offer is the winner.
3. Figure out packaging & pricing.
It’s possible that all of them can be somewhat enticing to various customers for different reasons, and there is no clear winner. In this case, what you want is to dig deep to see what the best way to deliver your services is before you dive into pricing.
Based on feedback you get, assess which one of the following works best:
a) Retainer basis – a flat rate to be charged every month with or without an ending date.
b) Packaged price – There is just one price tag.
There are pros and cons for both delivery methods. Ultimately, you must take into consideration which one generates the best results for your customer, and that is something you and your team excel at.
Once this is done, you get to work on pricing. Here are the 3 steps:
Step #1: Figure out the base cost to execute this offer.
Step #2: Consider the worst-case scenario and see what the cost of that is.
Step #3: Double the number from Step #2.
First, write the entire process to get this work done from beginning to end. Otherwise, you might miss a step or two, which will affect your cost. Ironically, using a standard hourly rate as a benchmark will help calculate this number.
While you figure out the base cost, be sure to consider how you can systematize and/or automate some steps with tech tools that are available. The more seamless your processes are, the more you can earn.
Built-in cushion must be part of your base cost.
Now, you might have cringed to see the last step. To be clear, I’m not suggesting that is the final price. The whole purpose of doubling the base cost is to rewire your brain to think your price is based on value, not time.
Once you get used to seeing the number after doubling the cost, you might even think you can triple it.
“Are you crazy? No one will buy it with this price!”
Well, if you don’t feel comfortable with this idea, do check out my post, “No Budget, No Problem: How to Overcome “No Budget” Objections,” where I go over how to convey a kind of value you offer that can transform your customers’ life or business (or both.)
Hurdle #4: The Thought of Breaking the News to the Existing Customer Freezes You Up
Our mind works in funny ways, don’t you think? This one totally got in my way of sticking with my original timeline, for sure. This was the main concern I had, even before I figured out how to package & price my offers.
Hindsight is 20/20. Now looking back, I see how silly I was. Why in the world was I concerned about it when I had nothing ready to present… But because I did it, I can relate if you are having the same challenge. This is one of the self-created dramas that we all face while running a business.
Here’s the secret: You don’t need to break the bad news.
Surprised?
It’s true. If thinking about this stops you from moving forward with value-based pricing, then you don’t need to break the bad news to your existing customers. The alternative solution is simple: Phase them out.
You can map out a plan so that you will have enough new customers who are on board with your new value-based pricing from the beginning. This way, you can easily phase your existing customers out. Knowing this is an option allows you to put your focus back on creating new offers.
What happens next is magical. Once you feel you have enough new customers, then you no longer care whether your existing customers will be on board or not.
So true, right?
For more on how to off-load your unfit clients or customers, check out “Clients from Hell: 51 Ideas You Can Implement When Your Top Paying Clients Are Ruining Your Life.”
In my personal experience, I didn’t have to phase all of them out immediately. Some naturally came to an end, and one was on board with the change. Then, new customers were added to make the transition smoother.
ACTION PLAN:
1. List your existing customers and assess how many of them are likely to be on board. This helps you to get a realistic idea of how you can transition your business with value-based pricing.
2. Quantify the total revenue loss from off-loading those customers, which will be the bare minimum amount you need to replace with new customers, so you know what your target number is.
3. Focus on 50/50 customers to see what would help them get on board, and how you can incorporate that into your offers.
Hurdle #5: Hourly Rate is Convincing Only When It’s Low Enough
You might be thinking it is much harder to get new customers on board with flat rate, value-based pricing. It sounds logical only because you are also skeptical about value-based pricing. In other words, you don’t even believe it yourself.
Ouch, I know.
When you say, “We will not rack up hours to over-bill you,” which part do you think customers dislike?
This is just the beginning. Customers like to know that the value you & your team provide will likely bring in more revenue for them (or improve their lives significantly), and it will pay for itself.
Are you convinced?
Just one caveat with this, though. Can you guess?
If you are going to make a promise that your offer will be easily covered by the results your customers get, then you must be able to deliver on that promise. Basically, you’d better be able to bring it.
I’m sure you have seen this happening. The only time hourly rate gets buy-in from your customers easily is when your rate is low. You know very well that this is the beginning of the race to the bottom, right? Once you get on this treadmill, there is no turning back.
“But Maiko, I can easily price myself out of the market by offering value-based pricing!”
How we describe our business situations is very tricky. What if I tell you that you are not going to price yourself out of the market. Instead, you are letting them decide for themselves that they are simply not your ideal customers.
I am not being deceitful or putting a spin on it. It’s only a matter of how you look at it. Below is the work you can do to fully own the value you offer so that you don’t need to feel like you are pricing yourself out of the competition.
ACTION PLAN:
1. Check outside of your industry or niche and see if you can find similar offers and find out if there is anything you can incorporate into your offering. Before you say no to this, just try it. You will be surprised how much inspiration & insight you can gain from other service businesses. To top it off, because you gain new information from somewhere else, chances are, no one in your industry is doing it. Can you say, opportunities?
2. Revisit the offer you have been testing. Can your approach, methodology or overall customer experience differentiate itself from what’s available in the market? If not, rework. Once again, if you are going to make a promise about a kind of value you bring to the table, you better be able to deliver it.
3. Start talking about your new offers to anyone you see. In this case, it doesn’t matter who they are because you are only going to practice on how you convey your value-based offers. The more you do, the more you feel you own the value-based pricing concept. Once you own the concept, you become naturally convincing to your customers.
Now, It’s Your Turn
There you have it. I know this one was a hefty one, but I strongly recommend you start using the action plans listed here. This is not a small task, and you will need to work on this over a long period of time, say, 6 to 18 months.
So, starting now makes sense, right?
If I missed any other hurdles that you are experiencing, I’d love to hear from you. Write your comment below or reach out to me via this site.