The Problem With Hourly Billing

When starting a new service business, one of the first questions to answer is “how much should I charge?”.

A simple enough question on the face of it, but there are so many variables involved. So, we thought it would be useful to share Purple’s billing philosophy, having spent 10 years in the service industry trying to answer that very same question.

Starting Point

These are usually the first things you ask yourself as a startup:

• Do I charge per hour? Or per service?
• Either way, how much?
• What are my competitors charging?
• What does it cost me to perform this service?

It’s not difficult to answer these questions and as a result, a great many companies end up charging for their services by the hour.

Quite quickly, as a new entrepreneur, you work out how much money you need to make in a given day/month/year and divide it by how many customers you can handle (or services you can perform) in that same timeframe. Hey presto – most new business owners end up with an ‘hourly rate’ structure.

Limitations of Hourly Billing

A few months into your new enterprise and suddenly the hourly rate starts to work against you. Here’s what happens:

• Some customers need a faster or more on-demand service than others
• Some tasks need to be completed urgently, but may be very quick to do; others are not at all urgent, but can be very time consuming
• You may be able complete a very technical task far quicker than somebody else less-experienced
• Everybody is worrying about watching the clock rather than focussing on the task at hand

Instantly, we see where hourly billing falls down. Urgent or complex jobs, completed very efficiently, result in lower billing. Yet, they are much higher value to the customer than minor, time consuming niggles which are very costly.

There is also the stress of the unknown; the customer has a potentially unlimited bill AND the supplier has no incentive to get the job done quickly. The customer is looking over your shoulder, wondering how long something will take to complete. What a mess.

Alternatives To Hourly Billing

We believe that most service businesses should consider the following when setting prices:

• The expectation of your customers on your availability – must you always respond quickly to perform your role properly? If so, there must be a premium on making your service and staff highly available.
• What is the cost to the customer of NOT paying for your service? What problems will they encounter and how much will this impact them? This defines the value of your service.
• Who else could perform this service and how long might it take? If you are an expert, the value of your time should be at least equal to the cost and time of a moderately competent person completing the same task. Plus, a premium for having the job done well, and done quickly.
• What are the hidden costs beyond the job itself – enquiry handling, booking and rescheduling, billing admin, credit control. These all have associated costs which are not easily factored into a basic hourly rate and often not considered by clients.

So, what other billing methods can we consider?

1 – Fixed price services

Consider what variables make your services take longer or shorter to complete. This might be the number of people, involved, the amount of equipment or the overall complexity of the task. Try to create a formula to price that service in a consistent way. Of course it has to be based on the time it’s likely to take, but the customer will want a fixed price rather than having to write a blank cheque. If you develop the formula over time, it will become increasingly accurate. Any problem-jobs will average out with those that go smoothly (and the smooth jobs will be very profitable). Never forget that a job which goes smoothly benefits both the business and the customer alike.

2 – Retainers for higher service levels

If your customers expect you to be on standby throughout business hours, or even at nighttime or the weekend, there has to be a premium on that. Even if trade is slow on a given day, the need to be available on-demand for clients who might call you prevents you from doing anything else. This is what’s called an “opportunity cost”. Consider charging a retainer for high priority access to your service, which may (or may not) include a certain amount of labour inclusively.

3 – Subscription billing and service packages

Something of a combination of the above two, consider if you can bundle up several commonly used services into a fixed-price, recurring service. Recurring revenue for your business is of high value and the customer can budget more easily under this structure. You may also be able to offer a better price if you’re able to complete several services together more efficiently, while at the same time making those individual services more profitable. Why shouldn’t both parties benefit if you can complete a lot of good work quickly and with high efficiency?

Summary

So there you have it – some things to consider when setting your service prices and an insight into Purple’s billing philosophy. It’s not always possible, but we try to operate all our services on fixed prices and without an hourly-billing structure. We think this is the right approach, but what do you think? Tweet us @purplecomputing to continue the conversation.