When it comes to billing clients, most new consultants start off charging by the hour. It seems easy to simply determine an hourly rate, count the number of hours you are working, and bill accordingly. While this might seem like an easy way to get started, if you’re billing hourly, you’re leaving money on the table.
Why Not Bill by the Hour?
Billing by the hour is bad for both you and for your clients.
It’s bad for you, as a consultant or freelancer, because you’re trading time for money… and no matter how much value you’re bringing to your clients, you’re only getting paid for the work you put in.
For example, let’s say you are a marketing consultant who has spent decades learning your craft. Your client calls you in a frenzy… they’re launching a new online product tomorrow, and just found out that their chosen name for the product is trademarked by another firm. You spend3 minutes on the phone with them, and help them choose another name, based on your sharpened marketing skills.
The name you choose for them is fantastic… in fact, over the next year, your client sells $10 million worth of the product, in part because of your skill. You, on the other hand, bill $400 an hour… thus your entire income for the 30 minutes you spent on the phone with your client choosing a name is $200. Hardly seems like fair compensation for the $10 million you helped them make.
Of course, situations like that lead to another problem – one that’s bad for your clients. So many consultants that charge by the hour see situations where they feel underpaid for the value they bring to the table that they start padding their hours. In the above scenario, many consultants would say, “let me get back to you” and then claim to spend 12 hours working on a solution, even if they already knew the answer. Thus, they would be able to bill $4800 for the work. It’s unethical, but it happens all the time.
Even if you are completely ethical and only bill for the time you actually work, billing by the hour still means that your income is limited by the number of hours you can work in a day. If you work 10 hours per day, you can’t ethically bill for 12 or 14… and remember that you’re also going to need to put in time marketing, bookkeeping, etc., especially if you are a one-person shop.
Thankfully, there are better ways to bill!
If Not by the Hour, then How?
There are two other primary ways that you can bill for your services:
The first is to bill by the project. This means that you create a project outline or scope of work for your client and then set a project fee based on the size and complexity of the project. Thus, if you’re a fundraising consultant, you might say that you will charge a client $5,000 or $10,000 to write a new fundraising plan, regardless of the amount of time it takes to complete the project.
Billing by the project allows you to think about the time it will take you to complete the project as well as the value it will bring to your client, and to charge accordingly. You’re no straight up trading time for money, and instead are charging based on deliverables… in this case, a written fundraising plan. Mega-consultant Alan Weiss goes one step further, and advocates charging what he calls “Value-Based Fees,” which are essentially project-based fees where you are pricing the project primarily based on the value to the client (e.g. if a marketing project you are working on for a client will result in $1 million in new business for them, perhaps you charge 5%-10% of that total value for the project, or $50,000 – $100,000).
The other primary way to bill for your services is by retainer. A consulting retainer is where you charge a set monthly fee in return for being available to your client for a certain scope of help each month (e.g. perhaps in return for a $4,000 per month retainer, you are available for calls, e-mails, and up to one on-site visit with a client each month). Retainers have the unique benefit that you get paid even if you don’t do any work that month… your client values access to you so much that they are willing to pay for that access, whether they use it or not.
Choose Your Fee Structure Wisely!
As noted above, most consultants start out using hourly billing. My advice to you is to move to project-based billing as quickly as you can. When I started my first consulting business, I charged by the hour, but moved to project-based fees after my first year in business. It made a huge difference and made my work life much easier.
Once you start billing clients project-based fees, you’ll eventually have a number of clients who love working with you and are willing to pay for ongoing access to your wisdom and expertise. These are clients you can move to a retainer-based fee structure. I’ve found it is ideal to have a small number of clients on retainer, then a rotating cast of project-based clients, all while also offering passive income products such as courses, e-books, and webinars. Remember, diversifying your income streams will help you grow your revenue and ensure that you’re never at risk for putting too many eggs into the same revenue basket!