Independent Service Provider Pricing

Question everything

I recently received this question:

“Hi Mark, I’m a consistent reader of Pragmatic Pricing and try to apply each concept to my own business.  As a consultant, I take on projects and bill by the hour.  How can I apply Good, Better, Best?  Thanks, Bill.”

Thanks for the question, Bill.  Many people sell their time by the hour so you’re not alone.  However, you are right to notice that it’s very difficult to use a Good, Better, Best strategy when you charge for your time.  Instead, let me ask (beg?) you to consider charging by the job instead of by the time spent.  Then you have the ability to use price segmentation strategies like good, better, best.

Most people who charge by the hour do so because it seems fair to both you and your client. Also it’s hard to accurately predict the size of the job (number of hours).  Both reasonable answers at first glance, but let’s dig a little deeper.

Is it really fair?  The client wants the best job done at the lowest possible price, of course.  However, your incentives are not the same.  You are paid more the longer the job takes.  Once you finish this job then you have to go find another.  Why not drag this one out, at least a little.  Of course you don’t actually do this, but this is exactly what your client is thinking … “Is this detail necessary?”

Can you predict the number of hours?  Maybe not.  But it turns out many service providers who have been doing their job for a long time pretty much know about how long something is going to take. The more experience you have, the easier it is to make these estimates. Do you ever say to your client, “This should take about two weeks of work”?  If so, you do know how to estimate time.  You just don’t want to take the risk of being wrong.  Instead, you put that risk on your client when you charge by the hour.

What I really hate about hourly pricing is the price is not directly correlated with the value the client receives.  Instead, it’s correlated with your costs (your time).  It’s almost impossible to use value based pricing by the hour.

It turns out, your clients would prefer to pay a fixed fee.  Then they know they are getting value for their money and they don’t have to worry about the gotchas.  When you get your oil changed, would you rather pay by the hour or by the job?  I’d much rather pay by the job knowing that if something goes wrong they are responsible.

My suggestion is always offer fixed fee WHEN YOU CAN.  Many jobs you have done numerous times.  You have much more knowledge about how long it takes to do one of these than your customers do.  Figure out what the average time a job takes and then add a percentage (like 25%) since you are assuming all of the risk.  Then, you can offer your customer the following deal:  This is my fixed price.  If it takes much less time I’ll charge you less.  However, if it takes much longer I reserve the right to raise the price but only with your permission.  At that point you can choose to take the business elsewhere.  For normal jobs or jobs that really are fast, bill them 10% less and you’ll get tons of referrals while making a much higher hourly rate.

Back to the original question.  Once you’ve moved to fixed fee pricing, it becomes much easier to offer good better best.  Think of the different services or outcomes you could bundle together.  Then, you can create 3 packages.  One that’s barely acceptable to some of the market, one that hits the sweet spot, and one that offers a ton of service for a very high price.  This will help you win more deals and win some at much higher prices.

Hope that helps and thanks for the question.

 

photo by dullhunk