The Psychology of Charging Clients by the Hour

*This post has been resurrected from my orphaned blog rulesoptional.com. It was written for entrepreneurs, but there are some important insights in here for business in general.

If your workspace is rectangular in any way, you are a failure. We’re all friends here so let’s just be brutally honest. Ninety degree angles are feng shui code for a life devoid of all happiness. Parallel surfaces are a direct path to a devastating erosion of the soul. We hold these truths to be self-evident. Duh. We design our lifestyles to our complete satisfaction and shun dependence upon the pedestrian geographical constraints observed by lesser mortals.

I call shenanigans. That’s right… Shenanigans! Cubicles are not the enemy. Offices are not the enemy. Commutes are an enemy, but not The Enemy. Trading away the hours of your life for linearly related remuneration is the enemy. If you’re working by the hour, you’re limiting yourself. This post is about shifting from hourly billing to a value based approach. If you’re already convinced that hourly billing is evil stupid, feel free to skip down to the heading with the asterisk.

The rest of this post is for entrepreneurs and related variations. If you’re an employee, the concepts don’t directly apply unless you’re willing to essentially create your own position within an existing organization. That’s definitely possible, and I encourage it, but this post isn’t tailored specifically for that purpose.

The good news is that for once, changing everything is merely a matter of making a decision. By the end of this, you’ll have everything you need to increase (perhaps exponentially) your income and profit without changing anything but your mindset. Don’t let the fact that it’s free and easy prevent you from doing it. In fact, if that’s a problem for you, let me know and I’ll send you a bill. Also, if you’re not making any money, multiplying zero will yield you an improvement of zero. However, it’s not necessarily even that harsh; you may be able to get jobs that you wouldn’t have previously by shifting your thinking as recommended herein.

Despite everything, some of you won’t be convinced. That’s society messing with your head. Stop it. First, a few words for those who need more than proclamation…

The Freelance / Contractor Problem

First of all, as I’ve written before, stop calling yourself a freelancer or contractor. Freelance is a concept, not a title. What’s worse, the concept is fatally flawed. I don’t think ‘contractor’ is different enough to talk about the distinction.

The thrust of this post is to get you to stop thinking like a freelancer and start thinking like a business. ‘Freelance’ implies that you are an employee without a job. We can argue whether or not that’s fair, but you’re going to have to buy me drinks first. Fairness doesn’t matter anyway. Freelancers generally act as if they are employees without jobs. Working by the hour is the structural foundation.

This is a good time to invoke Marshall McLuhan. Question: If “the medium is the message”, what message does the freelance medium convey? Answer: It conveys the practitioner willingly submits to act as a subservient wage-slave. Further, it communicates this externally to the client and imprints it in the mind of the practitioner. Freelancing as an “extension of man” in this case only extends the limits placed upon employees to non-employees. That’s a dirty trick if I’ve ever seen one.

I really can’t think of anything good to say about freelancing. The standard claim is that you get to be your own boss. It actually means that you get a new boss on every project. An underlying concept here is that you need to think like an advisor who’s hired because someone else needs you. While this may not seem financially accurate, you need to absolutely convince yourself that you do not need them. That’s an issue that could fill volumes alone, but it really does inform the rest of what I’m talking about from a more psychological, less practical, level.

For employees aspiring to upgrade to something more, the promise of freelancing is merely the promise of more of the same, but with more administrative paperwork. That’s hardly an improvement, I’d recommend skipping it if at all possible.

The Plague: The Bass-Ackwards Fee Calculation

For an example of exactly what NOT to do, you can check out the Hourly Rate Calculator by FREELANCE SWITCH. It’s seductively efficient in that it figures out the hourly rate you should charge by adding your estimated expenses to the profit you want to make for the year and dividing that by the amount of available hours. Yes, it’s ridiculously useful for the purpose it was designed. Unfortunately, industrial age thinking shouldn’t form the basis of software any of us use. This end-around calculation strategy is horrible for a few reasons:

  • Ignores the market pressures of available work and competition.
  • Estimations are problematic at best. This applies to hours and expenses.
  • Unexpected expenses are impossible to plan for by definition. This strategy results in an unexpected expenses cutting directly into a preset profit margin.
  • Blocking out time a full year in advance assumes a magical balance between multiple clients’ deadlines, project timelines, overages, illnesses, et cetera to achieve the desired level of hours. Good luck with that!
  • Planning to operate at high levels of time utilization results in a complete elimination of schedule flexibility. Have you ever tried to defragment your hard drive when it’s full? The blocks don’t have anywhere to go. And it’s worse with a time schedule because you can’t use empty blocks in the past.
  • LIMITS PROFIT POTENTIAL! Way to go business wiz! Even if everything goes exactly according to plan, this pricing strategy results in the plan being the best case scenario. The numbers can get worse for any number of reasons, but they can’t get better… unless you invent more time or increase rates with new clients to make up for past shortcomings. For those familiar with trading or gambling psychology, you may recognize this from a related cognitive bias or two. In short, humans instinctively gravitate toward this strategy despite its inferior performance in the long run.
  • Along with the main theme of everything in this post, it creates an inherent disconnect between value to the client and the calculated rate.

The Medieval Surgery Tactic that Actually Kills

Time-Tracking Software. Remember how one of the worst things about having a job is having a manager? Remember that the worst kinds of managers are micromanagers?

Well, for a monthly fee, you can purchase software that allows you to micromanage yourself! What a deal! Okay, maybe you can even get this service for free. Lucky you.

The Immorality of Billing by the Hour

Let’s just make this simple… Billing by the hour is a conflict of interest. It is in the client’s best interest to get as much value as possible for the money they spend. It is in our best interest to maximize profit for the work we perform. Billing by the hour constructs a de facto barrier between price, value, and profit.

The only way to increase the client’s value in this system would be a qualitative measure of the work performed within each hour. Since an hour is quantitative by definition, its use for this purpose is patently absurd.

pros⋅ti⋅tute
[pros-ti-toot, -tyoot] noun, verb, -tut⋅ed, -tut⋅ing.
–noun

  1. a woman who engages in sexual intercourse for money; whore; harlot.
  2. man who engages in sexual acts for money.
  3. a person who willingly uses his or her talent or ability in a base and unworthy way, usually for money.

The only way for us to increase our profit margin is to decrease the qualitative input per hour. The only way to increase nominal profit is to increase the number of hours billed. Even if these billed hours are billed honestly, there is incentive to find, discover, or invent tasks that are of relatively low value. It is easy to rationalize them as providing some benefit to the client or the project, but each hour does not yield the same value as the pricing structure would indicate.

Examples

  • Scope Creep – Expanding the goals of the project
  • Feature Creep – Expanding the features needed to achieve the goals
  • Slow-playing (intentional or unintentional) – Working at different intensities during different periods of time.
  • Estimation – Is 7.5 hours billed as 8? Is 1 hour and 15 minutes billed as 1.5 hours? We could play the infinite reduction game forever, but at some point there’s a breaking point between accuracy and the absurdity of tracking smaller increments.

Even if you manage to convince yourself that every billed hour is completely justified (the psychological biases are too strong for you to even bother trying to convince me) , you’re not doing yourself any favors. You’re compromising yourself on a more basic level. You’re imposing stultifying time regulations on yourself. We have a term for this… masochism.

The key to the above definition for a prostitute is “in a base and unworthy way“. I suppose that an inherent conflict of interest qualifies billing by the hour as “base”. I’ll let you decide whether it’s “unworthy” as well.

The Myth of Industry Standard

This construct is the reason I felt the need to write this article. I get it. Most industries do have “industry standard” practices and billing practices are almost always part of this. Some clients are used to dealing with certain industries in certain ways.

One thing to keep in mind is that resistance along these lines is often an issue with a human resource department, billing department, or accounting department. It is very important to understand that these departments only exist to support the core business. It is easy for people inside organizations to lose this perspective. If you are working on anything related to the core business, it will be possible for them to adapt. If you run into an absolute wall of inflexible resistance, I would make the educated guess that you shouldn’t be working with that particular organization.
The more important consideration is that the industry standard rules are the rules the average players play by. The elite recognize their own value and communicate that value. This relates back to the mental distinction between freelancer types and businesses. The inability to become exceptional while following industry standard practices involving hourly billing will become clearer when we discuss the math of things.

The Math Is Simple and It’s Bad

For capitalism to function, the person holding the cash must be able to answer the following question: Is the value of the service greater than or equal to the purchase price? Any reasonable expectation of creating maximum value for both parties requires an easy path to this question’s answer. The variables become too abstract for clients when hours enter into the equation. I promise that this abstraction lowers your profit potential… and that is in the best case. In the worst case, you will simply lose deals. The rub: often the others offered to do the same thing you would have done for a lot more money.

The moment you willingly participate in any conversation about hourly rates, you have lost. As soon as a client hears an hourly number, their mind immediately shifts to the hourly rates of things they’re familiar with. If their first job out of college paid them $11/hour, bias creeps in. If they pay their attorney $150/hour bias creeps in. This relative quantification is a death knell. It ranks you in relative position to everyone they’ve dealt with on an hourly basis. There is no way to predictably win this game. Perhaps you provide a lower number than your competitors. Sure, maybe you’ll seem like a better relative deal, but it’s more likely that you’ll seem low quality. Perhaps you’ll provide a higher number than your competitors. Sure, you’ll avoid the low quality perception, but it’s more likely that you’ll seem overpriced.

“Wait a second Andrew? How can you suggest that I’ll lose if I price something lower than everyone AND higher than everyone? Is there a Goldilocks sweet spot that you’re going to talk about next?”

Nope. It’s not a mistake. There is no way to predictably win this game. The game is rigged. The game is rigged because there is a disconnect when you try to answer the fundamental question of capitalism using the abstract representation of hours as value. It’s a lose-lose proposition. Good luck with that!

It’s simple math; With rates based on hours, the only way to increase income and profit is to work more hours. Since the number of hours at your disposal is limited, your income and profit are limited.

My final note on the math may be its most damning. Billing by the hour guarantees that money will be left on the table in every project (that’s honestly estimated/billed). Because of the capitalist question discussed above, any acceptance based on an hourly abstraction would have been more powerful if the discussion was conducted in pure cost and value terms.

To be fair, there is one exception… If your hourly rate is higher than the value you’re capable of delivering. But if that’s the case, well…

Friction Points and Temptations to Avoid

There are a few exceptions that I don’t want to dwell on in this post, but are worth mentioning and discussing.

What About My Employees? The entire economic system declines rapidly if employees are removed from the mix. There are compelling and valid reasons to be an employee. Short-term risk exposure is one thing that comes to mind. The unrecognized genius of employees is that they have effectively outsourced management. This has negatives as well, but it’s actually kind of brilliant. It’s definitely a good strategy for some.

Supply and Demand. I mentioned this briefly before, but I think it needs to be highlighted again. Hourly pricing strategies are generally biased to discount the importance of supply and demand in relation to the market and competition.

When you’re creating a demand, there is no curve. The reversal to the previous point is that creating and/or demonstrating a need in a company negates the need to pay attention to supply and demand.

“Am I getting billed for this”? When billing by the hour, clients are forced to make a cost-benefit analysis every time they think about you. In a sense, it’s very prostitute-esque. This results in potential work getting delayed or ignored because you never get a chance to intervene in the sales process happening in their brain. This may sound insignificant, but it’s devastatingly powerful and will impact your business.

Pricing by project. Another way to think about this might be when the practitioner makes an estimate of time a project will take, does a bunch of calculations, and slaps a price tag on it. This may be pitched to the client along with a list of deliverables. It’s then generally understood that the work will be done for a fixed price with the practitioner taking on risks of overages. This is essentially an hourly billing scenario masquerading as something else with the added negative of increased risk exposure. Pricing by project itself isn’t a bad concept, but the figure should be calculated with the methods below rather than the time-based methods discussed above.

The outsourcing loophole. Whether we’re talking about outsourcing piecework to the design office next door, or a programmer on the other side of the planet, this can break down when dealing with anyone you’re hiring (including employees). There are a lot of reasons for this, but one of the main ones is that more up-front investment is required to execute the methods below. This results in an efficiency nightmare that increases geometrically as the project or job in question gets smaller. I’m sure you can imagine this so I’m not going to flesh it all out now.

*The Required Paradigm Shift

While this is most directly applicable to things like web development companies, consultants, and designers… it has far-reaching implications. The same approach can be adapted to products and services.. even prepackaged services.

So far, I’ve basically been discussing the negatives in terms of time. Now I’m going to switch things up on you without a ton of explanation and hope you stick with me. We’re not really talking about time and billing by the hours. What we’re really talking about is the relationship between inputs and outputs. Time is simply the most obvious input to discuss.

Here is the paradigm shift (in terms of pricing): Disconnect all relationships between inputs and outputs in your mind. From this moment forward, only think about inputs.

This is important, so let me rephrase it another zillion ways…

  • Inputs are not related to outputs.
  • The amount of work you perform has absolutely no bearing on its value.
  • How hard you work has no relationship to output value.
  • How long you work has no relationship to value.
  • Output is the only thing that has value.
  • Value is easy to put a price tag on.

(Things like “rush jobs” are in a different category. Artificially compressed timeframes with serious deadlines imply an increased value to the client. Mandated speed is different than nominal hours.)

Any attempt to pass input costs to clients is arrogance. Reverse calculating your rates based on your wants is a de facto personal charge passed along to the client. Your needs are important, but they are only important to you, and are not connected to the value you deliver in any way. I hope I make myself clear on this point. It should never be ignored that your success should be important to your clients. If they don’t want you to win, don’t work with them or fire them.

The reversal to the preceding paragraph is that if you charge based on value, your margin should be high enough that wants and needs never comes into question… and that is the ultimate point.

Clarification: Inputs such as raw materials and hired labor may be billed directly to clients, but this is a separate conversation completely.

Back to the Question of Capitalism

As I said above, this is the important question to answer: Is the value of the service greater than or equal to the purchase price? Any reasonable expectation of creating maximum value for both parties requires an easy path to this question’s answer.

Here is the actionable principle in its simplest form: Once you determine the value of something you’re offering, the only question is the balance between what the client is willing to pay and what you are willing to accept to deliver that value.

Example: If the value (to the client) of a marketing initiative is agreed to be $500,000 over 2 years, what is the dollar figure agreeable to both parties for you to deliver that value? The only real question is what that number is between 0 and 500,000. If you agree to $100,000, there are questions of terms, interest, et cetera. However, these are more math and budget questions than conceptual questions.

If you can reliably deliver the client $500,000 worth of value, they will not begrudge you for making $2,731 per hour after the fact. For one thing, you no longer talk about inputs, so it shouldn’t even come up.

On the other hand, go to a client and attempt to negotiate a contract for $2,731 per hour. I dare you! Please… By all means… Film it and share! First, try to do this with a straight face. If you do, you will be the only one in the room not laughing. Deadlines notwithstanding, clients DO NOT CARE how much time it takes you to complete a project, but they get weird when talking about hourly rates… especially when they’re large (the rates, not the clients). It’s not logical, it just is. This doesn’t seem to change a whole lot between average folks and mult-millionaires. I haven’t had the conversation with any billionaires… yet.

Loose Ends and a Note for the Aspiring Rockstars

Answering the question of value is not always easy. It varies widely by industry and market. There isn’t a shortcut to solving for X in this case. It will likely take some level of expertise in your field. In lieu of expertise, there’s always research.

I will admit that implementing these things requires a degree of confidence. Often, confidence comes easily with examples. In this case, it might help to think about all of those sensational celebrity news stories that talk about how much Oprah and Bill Gates make per hour. Those numbers are in no way connected to quantitative inputs in comparison to coal miners or deep sea fisherman. Oprah and Bill Gates get paid on the value they deliver.

For an dose of validation directed at consulting specifically, Value-Based Fees by Alan Weissis a great resource. It greatly clarified my thinking on the topic and informs much of what I’ve written here.

Aspiring Rockstars! If you’re charging by the hour, you have no idea what it’s like to be a rockstar. Act like a rockstar, not a barista who happens to also be in a band.

Requirements

As I mentioned way back up at the top, the requirements for this are very small. You have to take the paradigm shift seriously, then you have to apply it. If you do, Congratulations! You are thinking like a business, not an employee.

20 Comments
  1. Barry 5 years ago

    This is excellent. You are quite right, the value of the product or service to the client should be the only critical factor in pricing – everything else is either based on fear, psychological nonsenses, ingrained thinking or consideration not directly related to these circumstances.

    For businesses that supply a service to a company eg Web Design, this is straightforward. The client doesn't care how long it takes in terms of man hours, nor does he care – he only knows what a kickass site could for his business and what he's prepared to pay for that.

    However, how would you go about implementing this pricing approach when your are delivering a service that doesn't have an accurately quantifiable end product such as a life coach, personal trainer, driving instructor or budding rockstar for that matter?

    In the case of the driving instructor, you could say his work is quantifiable when somebody passes their test. However, it's clear that not everybody learns at the same speed. How could he avoid charging by the hour?

    In the case of the rockstar, Bruce Springsteen can charge what he wants for however long he wants to play for – because he's Bruce Springsteen. However, what if you're the next Springsteen on the way up. How can you run against the grain when Venue X has always paid X amount for 2 x 45 minute sets and has never heard of you.

    Is there a way you can adopt this approach to billing when you are starting out and still proving the value of your work or do you have to put up with trading hours for money until you can demonstrate the value that allows you to circumvent the conventional pricing structure? You might know you are awesome and can blow the competition away but how do you demonstrate that value and build a reputation without having to pay your dues – by the hour!?

    • Author
      Andrew 5 years ago

      Thanks Barry,

      The valuation process happens on a continuum from the purely perceived value of a unique service to market priced parity goods. In the examples of things like personal trainers, the market plays a larger role in valuation. In turn, the establishment of value becomes more of a marketing function than a cost-benefit analysis. That said, it's still somewhere toward the middle of the continuum and there is definitely some room to influence the decisions.

      Another tricky thing is that personal trainers usually provide services on an hourly basis to begin with. It's hard to remove discussions of cost per hour from the equation when you're measuring the product by the hour to begin with. In this sort of scenario, I'd probably try to shift to something that looks more like an unlimited retainer agreement than 4 hours per week. This gets complicated and depends on market forces as well as clientele. I guess what I'm trying to say is that personal trainers talk about hours as outputs to begin with. When the hour is the output, that's the base frame of reference. So it then becomes question of talking about outputs in terms of hours, or outputs in terms of something like… "I will make you a chiseled specimen no matter what it takes. Period."

      In the case of the aspiring rockstar playing in a club, I'd suggest it's easy to have a value conversation with the owner/promoter/whatever. If you have a fan-base that you bring to the venue, that's real value that can be assigned a price tag. However, if you're showing up at a club as an unknown, the venue may effectively be providing more value to the musician. That precludes having a pure, value-based discussion.

      I'm neither a personal trainer nor a musician, so I'm speculating based on external observations only.

      Rather than submit to hourly calculations when starting out, let's deconstruct that situation a bit. A "just starting out" problem is not a value question, it's a risk question. The value to the client should still be firmly established. Since risk is a legitimate concern, I would deal with it on the terms of the contract (delayed or staged payments) rather than the amount of the payments. It may be necessary for the practitioner to assume this additional risk to offset the additional risk by a client taking on a relatively unproven quantity. Compromising on value/price doesn't directly respond to the risk objection. If a client tries to get a discount because of inexperience, they're taking advantage of the situation. Trade value for value. Trade risk for risk.

      Does that help?

  2. Jenny 5 years ago

    Ahhh shit! I just started making a rate sheet last night with hourly rates.

    Love this – "Remember how one of the worst things about having a job is having a manager? Remember that the worst kinds of managers are micromanagers?"

    Fantastic post. I will retweet later for sure.
    My recent post Help Haiti Blog Challenge: Let’s Do This

    • Author
      Andrew 5 years ago

      You're welcome. :)

      Do you think you'll be able to adapt your rates to the output based approach?

      I'll admit that one negative to this is that it's hard to publish rates when your services are priced on a purely case by case basis. It then becomes a balancing act between the perception that "if you have to ask, it's too expensive" and publishing a price out there that's going to lower your perceived value. In the long-run, I think it's more profitable and a better lifestyle to customize prices, but how to market services isn't a no-brainer.

  3. Jacqueline Dooley 5 years ago

    Damn good post. I stopped calling myself a freelancer years ago. I now consider myself a luminary.
    My recent post Unicorns have rules too

    • Author
      Andrew 5 years ago

      Thanks Jacqueline. Luminary is a great term. In a world full of self-proclaimed gurus, experts, mavens, and rockstars… I really like it.

  4. Earl 5 years ago

    I noticed you built up the anticipation for this post yesterday and it certainly delivered. Your "most important post" indeed. For me, I'm interested in this information as it pertains to selling products, as I've found it difficult to determine a selling price based upon the value that my potential customers would receive. I can test different price points forever, but ultimately every customer will receive a different value from a particular product, and I am unable to know that value ahead of time. So I am forced to charge one price that is an educated guess of the value that the average customer might receive. But that seems somewhat similar to hourly fees!
    My recent post Long-time Friends and Long-term Travel

    • Author
      Andrew 5 years ago

      Thanks! After I made that claim, I almost second-guessed myself. :)

      Products are definitely tricky because there really is no way to scale a purely output based pricing strategy. This is another case of the collision between value to the purchaser and and market pressures as well. One of the reasons (if not the main reason) that those ridiculously long "long-copy" pages selling information products are proven to be successful is that they spend a lot of time shifting focus from "another product" to the potential value.

      With all products, input-output calculation attempts break down rapidly because there is no reliable way to divide the manufacturing/production costs across the number of units sold until the units sold is known. If we're talking about eBooks in particular, analyzing inputs breaks down almost completely because the input is brainwaves and the output is electrons. This is kind of a good thing because we're forced to think about value rather than inputs.

      You're right though, there isn't really a way to avoid averaging value over a range of customers where products are concerned.

      One place we benefit from non-value-based pricing as consumers is with traditional books. There are a few established tiers that are based on the type of book or construction materials. The tiers have zero relationship to value. Good for consumers, bad for authors delivering highly valuable information.

  5. Anthony Feint 5 years ago

    From an employers perspective, I don't think being called a "freelancer", means not having a job. I hate the term "blogger" but hey, its a useful description to give to a type of writer.

    I work with lots of freelancers and yes I pay many of them by the hour. Some, who I've worked with for a long time simply send me a bill at the end of the project – no estimates before hand, I simply trust them and from experience I know exactly how much each task should be charged and how long it will take.

    When it comes to fixing things like bugs – A developer isn't going to know how long it will take and shouldn't give an estimate on the total project cost, simply because software bugs can often be uber complex and take weeks to fix. Therefore, the developer needs to track how long they spend fixing the bug.

    Clients also do care how long it takes! If my competitors are more agile in taking advantage of new technologies and can develop better quality, faster, it really hurts my bottom line. In high technology you can't afford to delay.

    I've worked for 6 startups and now run my own – unfortunately, as romantic as a concept you have proposed it just won't always work. I pay my uber talented freelancers by the hour, by the project and also a retainer fee. And I know similar startups run the same type of virtual teams.

    If it works so well for us, im happy, so are the freelancers, why should we change?
    My recent post How to Take a Caffeine Nap

    • Girl Startup 5 years ago

      I'm with Anthony with this. I do the same thing and I also call myself a freelancer. I couldn't care less, if people think I do not work. I mean whatever the case it's paying the bills. I also hire freelancer/contractors and like Anthony, do it via the hour, per project depending on certain factors.

      • Author
        Andrew 5 years ago

        I'm not sure you are with Anthony on this. Perhaps he does hourly work as a freelancer, but that's not what he's talking about here. He's saying that he hires freelancers on an hourly basis because of management efficiency. In this sense, he's not operating in the wage slave, employee mindset.

        When you say, "whatever the case it’s paying the bills", you're stuck in the wage slave mindset. That's fine if paying bills is the ultimate goal, but…

  6. Author
    Andrew 5 years ago

    I think I already agreed with your main point.I thought it's what I was saying in this paragraph:

    "Whether we’re talking about outsourcing piecework to the design office next door, or a programmer on the other side of the planet, this can break down when dealing with anyone you’re hiring (including employees). There are a lot of reasons for this, but one of the main ones is that more up-front investment is required to execute the methods below. This results in an efficiency nightmare that increases geometrically as the project or job in question gets smaller. I’m sure you can imagine this so I’m not going to flesh it all out now."

    Let me say it another way… It's to our advantage to be paid on value/output, and more efficient (and likely profitable) to pay those we hire on an input basis. Marx would have a different view on this, but I'm assuming the capitalist framework.

    In your case, you should be happy. Your margins are higher because of the arbitrage between your income based on value/output and your expenses based on nominal input. However, if the freelancers you employ read this, they might not be as thrilled. 😉

  7. ALF 5 years ago

    Hey dear, great post. I also want to commend your use of Futura (grrreat font), but this always translates to Arial on the iPhone. D:

    For related reading, muselife.com posted something about freelancing a while back: http://su.pr/1O8Iqa
    I think it just grazes the surface though, as your post gets into detailed analyses of value and input-output calculations.

    I admit my masochistic tendencies in the past, as I work for my father's company for many years. A son is a son is a son, but it helps pay the bills when you're in university. That's why I dread working for his company now that I'm graduated, because I feel that, although time spent on important projects is not wasted effort for the company, I take advantage of the hourly rate monster like how a pimp takes money from a whore–and I don't want to be that sort of hypocrite anymore because it's just not quality character and it's simply not worth it in the long run. Also, working for his company is unfulfilling as I would rather work for myself. His other employees are no exception to the rule, and I see this in action as I prepare the payroll for the accountant.

    I think when you operate with limited finances and employees with specalised skill sets, the ability to execute value-based judgements is a balancing act, and oftentimes keeping employees happy (via hourly-rate) is the best route to go (but I don't think so, being a "luminary" and all). Of course I would imagine that they all want a high salary, but pfft, all his employees (except for my father, sister, me, the accountant, lawyer and psychologist) lack some sort of formal university education, and frankly I don't think he can afford drastic pay raises every year. And the fact that my sister notices a decline in work efficiency/ethic and an increase in distrust between boss and employee is something that needs to be addressed at some point as well. Sorry I rambambled.

    My recent post Gratitude

  8. Liz 5 years ago

    This is SO timely for me. I just ran into a situation where I was "trying" to give a client an hourly rate, one that would have been very high and the whole thing just looked so damn ridiculous, I tossed it. I no longer invoice by the hour. I'm glad the Universe brought me over here-just what I needed today.

    • Author
      Andrew 5 years ago

      Awesome! It's a scary transition for some people so I love it when people just pull the trigger. This shift in thinking has the potential to change everything. …it can become a philosophy that finds its way into the strangest applications.

  9. Steve 5 years ago

    Thanks! After I made that claim, I almost second-guessed myself. :)

    Products are definitely tricky because there really is no way to scale a purely output based pricing strategy. This is another case of the collision between value to the purchaser and and market pressures as well. One of the reasons (if not the main reason) that those ridiculously long "long-copy" pages selling information products are proven to be successful is that they spend a lot of time shifting focus from "another product" to the potential value.

    With all products, input-output calculation attempts break down rapidly because there is no reliable way to divide the manufacturing/production costs across the number of units sold until the units sold is known. If we're talking about eBooks in particular, analyzing inputs breaks down almost completely because the input is brainwaves and the output is electrons. This is kind of a good thing because we're forced to think about value rather than inputs.

    You're right though, there isn't really a way to avoid averaging value over a range of customers where products are concerned.

    One place we benefit from non-value-based pricing as consumers is with traditional books. There are a few established tiers that are based on the type of book or construction materials. The tiers have zero relationship to value. Good for consumers, bad for authors delivering highly valuable information.

  10. J.T. Shaver 5 years ago

    You've done an amazing job articulating a concept that I have never fleshed out but has been in my head for years. Now I don't even have to think about it anymore. It would be awesome if you could do some kind of follow up on what to say to your clients when they ask how much you charge per hour, but you charged a value based fee.

    Let me know if it happens!

  11. Jenny 5 years ago

    You're prob officially one of the smartest dudes I know. Happy to have your new blog post tweets flying through my Twitter stream again.

    • Profile photo of Andrew Author
      Andrew 5 years ago

      And you're people who know people! Thanks Jenny, I'm happy to be back spamming the hell out of your Twitter stream. :)

  12. Brandon 5 years ago

    If you have balls that clang you could present the value the client will receive and then ask them to make an offer. Be willing to chuckle and walk away, or at least say, "consider what this will contribute to your company/life/etc., and make another offer."

    I'm not saying I've done this myself, yet, but I've seriously considered it.

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