If you're in just about any service business, you probably bill some, if not all, of your work by the hour. The practice is most sacred with our lawyer friends, but engineers, accountants, plumbers, even elevator inspectors charge by the hour.
Heck, I did it in my business for years. Then I realized that there were only two paths to growth in this model and neither are very appealing... The first is the "pyramid scheme". In this strategy you get to the top of the pyramid by owning the firm. Then you add layer upon layer of labor under you, building a pyramid. Each new layer needs to be bigger than the one before it to support the weight of overhead and promotion and salary growth of the layers above.
The second is the "hour expansion" model. In this model you and your billable labor must work ever increasing numbers of hours. In law firms, young associates fall into a pecking order based on billing 2000, 2500 or 3000 hours per year. The problem with hour expansion is that you have to sleep sooner or later. And as your labor force grows up, they increasingly choose to spend time with, of all things, their families (the nerve).
In most successful hourly billing businesses both models are employed simultaneously. But there's a limit to how far these businesses can grow. And if you can't grow, you die. So here are the 7 reasons hourly billing is killing your business:
- You limit your income - only 24 hours in a day...and only so many suckers you can get to work them all.
- You put quantity of work ahead of quality of work. Most of you billing by the hour will vehemently disagree, but you pay for quantity...you get quantity.
- You create distrust in your client relationships. Here's a secret--client's hate hourly billing, because they never know if they're getting fair value for the result.
- You eliminate the incentive to innovate. This affects you, the business owner, and your staff. Why get faster...we'll get paid less.
- You create a conflict between your desire for profit and your client's desire for rapid, successful resolution.
- You force yourself to treat your staff like mere machines, not intelligent, creative, problem solving PEOPLE.
- Your leaving BIG BUCKS on the table. By attaching your price to a unit of time, rather than the value you deliver, you're often going to under charge for your service. Your losing money! And, when you bill more by the hour than the total value of your service...you're pissing off your client. In both cases YOU LOSE.
Bonus #8: You're leaving a HUGE marketing advantage on the table. If you're in an industry where everyone bills by the hour, it's a great opportunity to stand apart from the crowd.
Take a stand like the folks at Valorem Law Group where they invite clients to adjust the fee to equal the client's view of the value delivered.
Most owners will see this as a huge risk (but not our steely-eyed readers). No. You see this for the marketing coup it is.
I'll bet Valorem almost never sees any ink on the "value adjustment line", but I'm sure they can count every dollar of business they've gained since they started doing it.
The bottom line is this: billing by value keeps you on-your-toes. No value created, no profit received. If you can't successfully charge for value, you've got other problems to fix.
Do you agree or am I off my rocker...spout off below!