Ditching Hourly

Hello, and welcome to Ditching Hourly. I'm Jonathan Stark. In this episode, I'm going to talk about how hourly billing is hurting your business. But let's start here. Why question the logic of hourly billing at all, right? It's what your clients expect. It's how competitors do business. Not to mention other professional service providers like lawyers and accountants and psychiatrists and so on. So if it works for them, why won't it work for you? So here's why. Hourly billing is corrosive to client relationships across all professional services. This includes digital disciplines like graphic design, UX, copywriting, software development, obviously. So you can't truly partner with your clients if you're billing by the hour, which means you can't do your best work. And what that means is that your customers are not as satisfied as they could be. Okay, so there are a ton of reasons why hourly billing is bad for you, your clients, and your projects. But here are three. The first one is that hourly billing misaligns the financial incentives between you and your client. In other words, the longer the project takes, the better it is for you and the worse it is for the client. And even though I know, dear listener, you are a 100% ethical person and you would never pad your hours or take time that you didn't need to take just to rack up more billing, the client can't read your mind. And the client's trust is only going to go so far. And so this creates a little bit of a fracture in the trust between the relationship, which can erode over time if the estimates that you're doing are sometimes too low. And you'll sense this erosion happening when people start asking about your hours. They're like, oh, how come it took so long to do this? How come it only took half the time last week and this week it took twice as long? Why is that? Or they start micromanaging you, sort of control the project, kind of sticking their nose into what should be your expertise and not theirs. And a lack of testimonials or referrals. So if your customers aren't sort of falling all over themselves to give you testimonials or refer you to their friends and colleagues, then you might have a problem. The second reason is that it encourages aimlessness. So what I mean by that is it allows you as the developer or the vendor or the seller to get started on some work before you really know what the client's goal is. And if you don't have a goal, you can't succeed. If you can't succeed, your client's not going to be happy. So what does this look like in practice? What will happen is a client will come to you and say, hey, I've got this list of features that I would like you to build. I understand that you're good at building these kinds of things. What's your hourly rate? And you'll happily tell them your hourly rate, and then you get to work on the punch list that they presented to you. At no point have you discussed what they are hoping this list of features or this, you know, tasks that would eventually get completed. You've never discussed what the point is. Why do this? Maybe it's obvious to you, but if you don't put that in front of them and confirm that that is the same reason that's in their head, then you're really driving towards the wrong destination. And when you get there, that's when scope creep starts to happen. That's when budgets get blown because you're not where the client wanted to be, even though the client never told you where they wanted to be. So you can't really be blamed for it. But I do think you do. I think that folks like us have a moral obligation to find out first what the destination is, what the desired business outcome is, so that we can drive toward that specific goal together in a collaborative way. And the third one is that the third reason that hourly billing is a bad thing is because it discourages efficiency. There's just no financial incentive to get more efficient. So building tools for yourself, systems, any kind of automation, processes, education, training, any of that stuff. You probably do those things because you enjoy your job, but there's very little, if any, financial incentive to do them. Maybe you could say adding a credential to your website is going to attract more clients, but I'm skeptical. Really what you want is to be able to invest in these things and have them give you a direct return. So to put that another way, I'll tell a quick story, actually. On one of my very first value-based projects, I found myself shopping around for plugins that would do a really difficult part of the job. There's this really difficult portion of the application I was going to build that had

had a ton of really weird data, and then it needed to be visualized in an interactive graph format. And I'm looking at this thing, and I'm like, when I first took the job, I was kind of excited about this piece. I was like, ooh, that's going to be really fun to build. And then when I got into it, I was like, this is going to be a ton of work, and the longer it takes me, the less money I'm making. If you divide it and calculate an effective hourly rate, I want to be done as quickly as possible. The client wants me to be done as quickly as possible. And so much to my surprise, it occurred to me to look around for a plug-in or something like that that I could use to achieve this particular goal. And sure enough, I found one. And it was like 700 bucks, which was more than I had spent on pretty much any piece of software up until that time. But of course I paid for it because it saved me like two or three weeks of effort. Client was happy, got their thing done earlier. It was a complete win all the way around. But the thing that really shocks me looking back on it is that I never would have, it wouldn't have even occurred to me to do something like that if I had been charging by the hour. Okay, so those were three big reasons why hourly billing is bad. Misaligns financial incentives, encourages aimlessness, and discourages efficiency. But there's a really big one, which is that hourly billing puts an artificial limit on your income. You can only charge so much per hour, and there are only so many hours in the day, in the week, in the year. And if you multiply it out, there's a pretty clear ceiling. So I polled a couple hundred software developers, and the averages across all of those were that people worked about 30, they worked about 40 hours a week, and they worked about 50 weeks a year, and they charged on average $100 per hour, and they estimated that they were about 70% billable. So maybe those numbers are similar for you, maybe they're higher or lower, but just to give you a rough idea of the average, that works out to $140,000 maximum, you know, US dollars, maximum revenue per year, which is not a bad income. I mean, that's like a salary for a software engineer in Silicon Valley. It's decent revenue, but you're working like a dog. You know, you're just working 2,000 hours a year, and you still have to pay everything. You still have to pay your insurance. You know, it's not net profit. So what you end up with after that, it's really not, it depends on where you live, of course, but it's certainly not a king's ransom. And if you haven't really bumped up against this ceiling yet, maybe you're like, ah, you know, hourly's not so bad. You know, it starts exaggerating. But after you've been at this for a few years, and you are stuck around 140, 150 a year, and you're thinking, man, how am I ever going to get past this? You know, like what if something happened and you wanted to double your annual income? You know, let's say you had a, let's say your spouse quit their job, or you needed to do a massive renovation on your house, or there's some relocation, kids going to college, some big expense coming, and you wanted to double your income. How would you do that? I can only think of three ways. The first would be to just flat out work twice as much, which, of course, is probably not attractive to anybody. It probably doesn't sound like a good idea. You probably already feel like you're working too much. But even if you did decide to do that, it's unsustainable, and it doesn't scale your business in a meaningful way because working more just decreases your productivity over time, and therefore produce diminishing returns, and eventually you lead to burnout. You just quit. You probably end up going in-house somewhere. So working twice as much is not a viable solution. The second thing that occurs to people is they'll say, well, I'll just raise my rates. But if we're talking about doubling, I mean, raising your rates is tough enough as it is. I know from experience, and I know from the experience of people I coach. It's very hard to raise your rates. Even a small increase is annoying to everyone. It's very disruptive to the customers. But if you were going to go crazy and double your rates, significantly increase your rates, it's going to be really hard to close deals because the new rate's going to appear unfair or perhaps even offensive in comparison to the old rate or market rates for similar services. So you've got really two scenarios. You've got existing clients where on Friday you were charging $100 an hour, and on Monday you're like, oh, by the way, I'm going to charge $200 an hour. They're going to think, well, what changed? This doesn't seem fair. And now they've got almost, you could think of it almost as like a budget to shop around for a cheaper competitor. So unless you're charging dramatically lower than you should be,

It's probably unlikely. Then your clients are just gonna start looking for someone else because it's not gonna feel fair that you just arbitrarily increased your hourly rate significantly. The other scenario is new clients. So, maybe it's hard to convert your old clients over to 2x per hour, but what about attracting new people? So, if you assume, I'm gonna assume that your current rate is more or less in line with other folks who do what you do. Maybe you build websites or iOS apps and you're charging somewhere between 100 and 200 bucks an hour. Yeah, it's like fairly standard, at least in the US. Now, if you double your rate to 200 to 400, then you're gonna look like the premium option, which is fine. Maybe you are a premium option. Maybe you are the best of the best, but you need to have some way to significantly differentiate yourself from your competitors or you're never gonna close deals with new clients. So, you need to have something you can point to that will justify what they will think is an extremely high price. So, raising your rates, it's possible to increase your income, but it's difficult. And I feel like there is a irrational psychological limit on how much people are willing to pay anyone for anything by the hour. I mean, the highest rates I can think of are probably partner-level lawyers, attorneys that are partner-level in their firm that will charge $800 an hour for a very special short-term assignment, maybe a high-profile case, something like that. So, maybe you could do that, but it's extremely rare. Okay, then the third way you could dramatically increase your income, potentially double your income, would be to hire a bunch of junior employees. And this is the one that I find most people gravitating towards. So, if you're a solopreneur, an independent contractor, and you're up against the ceiling, you're like, man, I've been stuck, I've been plateaued at $140,000, $150,000 for a few years. What can I do about that? I know I will start, I'll just keep doing sales and I'll get all of these jobs and I'll farm out the grunt work to either employees, junior employees that I hire, or I'll farm it out to Upwork or Fiverr or some sort of outsourced virtual agency model. And this is doable. I know people who do this. I have students who do this. And it is certainly a valid option, as long as you are aware of the fact that you're dramatically changing your job. So, if right now you sling code or you're a Photoshop jockey or a photographer where you're doing creative work like that, you're sort of working on your craft, you aren't going to be doing that anymore. So, you're going to be making a change from being a craftsman or craftswoman to being a business owner, entrepreneur, a boss, a manager, that kind of thing. So, your day will involve just a wild array of administrative stuff. And that's totally fine if that's what you want to do. But if you're just thinking about hiring junior employees because you think that's the only way through this income ceiling, I'm here to tell you that there are other ways to do it. And hiring juniors is something you should only do if it's what you want, not because you think it's the only way to increase your income. That's all for now. See you in the next episode. Hey, Jonathan again. Do you have questions about how to improve your business? Things like value pricing your work instead of billing for your time, or positioning yourself as the go-to person in your space, or maybe productizing your services so you never have to have another awkward sales call or spend hours writing another custom proposal. Book a one-on-one coaching call with me and get answers to these questions and others in the time it takes you to get ready for work in the morning. Best of all, you're covered by my 100% satisfaction guarantee. If at the end of the call you don't feel like it was worth it, just say the word and I'll refund your purchase in full. To book your one-on-one coaching call, go to jonathanstark.com slash call, C-A-L-L. That URL again is jonathanstark.com slash call. Hope to see you there.