Why You Should Stop Charging for Your Time
Time-based billing is how most of us start our freelance and consulting careers, but it quickly becomes obvious that it causes many problems. I set out to find a better way..
This is Part 1 in a series of articles based on a talk I gave at the FutureSync Conference held at Plymouth University on 9th June 2017.
The Problem with Time
As I imagine is the usual story, when I set up Plymouth Software (and indeed, when I was freelancing before), charging by the hour was the norm. After all, it’s just “the way things are done”.
The story goes something like this: Once you’ve decided to make the plunge and set up your own business, you head to one of the many freelance rate calculators. You tap in your living costs; some estimated budgets for nice-to-haves (coffees, holidays, new laptops, etc.); your expected number of holiday days, and a target profit margin. With that all done, you hit submit and out pops your new hourly rate. You round the figure, and set off to work.
Pretty quickly, though, you learn that selling your time is really quite painful. And it’s not just painful for you — it’s just as bad for your customers.
Understandably, they don’t want any ambiguity in what they are going to pay you, and they want to know what they’re going to get for their money. We’ve all been on the other side of those transactions, and nobody likes receiving those surprise end-of-the-month invoices.
It’s a hard lesson, but you quickly come to realise that time-based billing—a relic of the industrial age—simply isn’t fit for purpose in the world of knowledge-based and professional service businesses.
It is fraught with problems and frustrations for everyone involved, but there are three major problems with time-billing that underpin all the others.
1. Time billing puts you in a position of conflict with your customer from day one.
This is perhaps the most fundamental issue with time-based billing — every project becomes a zero-sum game.
As a business, you want to maximise income, so you need to work as many hours onto the timesheet as possible. Naturally, your customer wants to minimise their costs, and so they want to keep those hours down. In this scenario, a win-win scenario is impossible.
Recognising this, we usually try to mitigate the damage by employing fixed-price quotes.
Now, you estimate how long the job will take, and quote a price for the customer. They get some certainty in their spend, but you have taken on virtually all of the risk.
Unfortunately, this type of fixed-price quote doesn’t solve the problem — it simply reverses the dynamic. You want to minimise hours to maximise your effective hourly rate, but your customer wants to maximise their return, squeezing as much as possible from that quote and reducing your effective hourly rate.
This is where (in software development, at least) we fall into the trap of hefty upfront specification documents, and pretending_ to know how things will be three months down the line.
In all but the rarest cases, fixed-price quotes based on time usually result in big squeeze of work near the end, as that estimated number-of-hours draws close, and work is crammed in to maximise the budget.
Unfortunately, the end result is usually poor relationships and awkward conversations about what was included in the original quote, where things went wrong, the finer details of the contract, etc.
This is valuable time and energy that would be much better spent delivering results for your customers.
2. Time billing encourages busy work
Time-based billing naturally encourages doing something rather than the right thing. This often means we jump into a project without really knowing the end goal. We skip learning what success looks like for our client to get hours on the timesheet.
This almost inevitably leads to disappointed customers. Without taking the time to really understand your customer’s needs and goals, we end up delivering nothing of value.
For example, if a customer comes to you saying they need a new website, the last thing you should do is start considering which of the latest cool new frameworks you want to use.
Instead, you should start questioning why they think they need a website — and keep working with them until you reveal the underlying goals behind their request.
Nobody wakes up one morning thinking “I’ll spend a few thousand on a website today.”
There is always an underlying reason.
The problem with time billing is it encourages us to skip the learning phase, and deliver the website.
A few weeks later, our customer has a shiny new website, a reduced bank balance, and the same problems as before.
We’ve delivered what the customer asked, but failed to solve the issue that led to them asking us in the first place.
3. Time Billing puts a ceiling on your income
Admittedly, this is not a problem with which your customer is concerned, but as a business-owner it should worry you. There are only so many hours in a day, and so by billing for your time, you are putting an artificial ceiling on your potential income.
There are 3 main ways we can try to overcome this issue:
i) Increase your workload
This is OK in the short-term, but eventually you’ll burn out or hit the very hard limit of 24 hours a day.
ii) Increase your rate
Certainly this will be the quickest and easiest way to break through the income ceiling. However, your rate is also subject to the market, and the laws of economics mean there will be an increasing downward pressure on your rate. This is especially true as implementation work becomes more commoditised. Ultimately, you’ll hit another ceiling.
iii) Increase your staff
Likely the most effective strategy over the long-term, but taking on staff may require big changes to your business — particularity if you’re currently solo.
Unfortunately, though, increasing staff just scales up the problem of time billing: now you’re selling ten people’s time rather than just one or two—and you’re still subject to the same problems as before.
Finding a Better Way
I knew there had to be a better way than time billing, and set out to find it. Fairly early on, I learned the concept of Value Pricing from the first edition of Brennan Dunn’s Double Your Freelancing Rate (a book I highly recommend)
As I read more into the subject, I became increasingly convinced value pricing was the only way to truly escape time-based billing, and grow my business.
There was one problem though.
I struggled a lot to reconcile how value pricing could work with software development. There are just so many unknowns in software projects…but it turns out this we’re not alone in this!
Changing your own mindset is perhaps the single biggest challenge of switching to value pricing.
After all, I’d spent 30-odd years being taught that time is money and everything in business is reduced down to an hourly rate. The modern world of work — especially in service industries — is still very much designed around the billable hour.
By doing anything different, you’re going up against a lot of expected norms.
In 2016, I decided the only way I could make value pricing succeed was to embrace it 100%, force myself to abandon time billing, and accept that mistakes will be made…
In the next part of this article series, I’ll talk more about what value pricing is, and outline 3 practical steps you can use right away to begin changing your business to value pricing.