Why quoting an hourly rate can be fatal for your business
In this post I want to share why it's crazy – even fatal – to quote an hourly rate. And, to prove it, I’ll give you three very good reasons.
If you prefer to watch rather than read you can watch the video here.
#1 There’s no value in hourly rates
Quoting an hourly rate doesn't convey any value. Think about it: your clients don't buy time. They don't wake up in the morning, remember they've got a meeting with you, and think, “Fantastic! I'm off to buy an hour of my accountant’s time.”
No one does! There’s no value in time, so it makes no sense to quote an hourly rate.
#2 Hourly rates increase payment pain
This is to do with what behavioural economists call saliency – or payment pain. A good example is from the taxicab industry. In the old days, when we jumped in a taxi – a black cab in London, or a yellow taxi in New York – we’d sit and, as the journey progressed, however much we tried to avoid it, our eyes would be drawn to the meter. And, as we watched it ticking up… up… up… it would create anxiety. It would create stress, because we’d know the journey was costing us.
Well, that's exactly what we do to our clients when we quote an hourly rate. If you have a meeting with a client, it should be an enjoyable experience for them, one in which you add lots of value. But, instead of paying attention to all the benefits you can bring them, if you’ve quoted an hourly rate they’re more likely to be looking at their watch thinking, “Aren’t we done yet? This is costing me money.”
#3 Hourly rates seem more expensive
An hourly rate will always seem expensive. Why? Well, it goes back to price psychology. One of the things price psychology has taught us is just how clueless we all are about price. We don't know the price of anything. So, what we do when we see a price is we make comparisons. We contrast it with something else. Let's say you do bookkeeping work and charge $35 an hour. When you reveal $35 as your hourly rate, your prospective client will probably think, “I can employ someone else for $15 or $20.” It isn’t a relevant comparison, but they'll still make it and it means they’ll see your price as too high.
Avoid hourly rates and you’ll avoid price resistance, too
And that’s why, when we price based on the hour, we always find price resistance. People think we're too expensive. So please, please don’t quote an hourly rate if you don’t want people to push back.
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Wishing you every success on your pricing journey.
Chartered Accountant, public speaker and #1 best-selling author of
“Effective Pricing for Accountants”
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