Why hourly rates stunt your growth opportunities

Pricing is one of the most challenging components of your go-to-market strategy, especially when you're pricing knowledge and expertise in the B2B world. If you price too high, you run the risk of the prospect or the client walking. If you price too low, you're eating into your margins. The struggle is real.

Your pricing strategy is a key piece of your go-to-market strategy and has a significant impact on your profitability, perceived value, and even the types of clients you attract.

I know of very few professional services and technology companies that are truly great at pricing. Most companies that are selling knowledge and expertise price somewhat erratically and base their pricing on an hourly rate. Sometimes the hourly rate is provided directly to the client (i.e., our IT consulting is $200/hr). Other companies might provide a price for a project and express it as a flat rate to the client (i.e., this marketing campaign will be $100,000). To get to these rates, companies typically calculate the hourly cost of everyone involved in the project and the number of hours needed, then add some margin on top (which is a cost-plus pricing strategy). Some companies will then adjust the final price down or up based on what they THINK their client will pay.

Hourly rates only put a value on the unit of time. They don't put a value on knowledge and expertise. Ask yourself...are you in the business of selling time? Or expertise?

When you charge an hourly rate, you're severely limiting your growth opportunities. Because time is a finite resource, the only ways you can increase revenue are by raising your hourly rate or hiring more people.

So what's an alternative?

Using a value-based pricing strategy opens your growth opportunities substantially because you're not tied to a finite resource (time). A value-based pricing strategy sets the price based on your customers and how much they value the work. For many, the concept of value-based pricing makes sense. However, applying the concept in the real world can be challenging, especially if you've operated under an hourly pricing model. Once companies figure out value-based pricing the game changes because you can be paid a lot more for the same work.

So how can you move from an hourly pricing model to a value-based pricing model?

Know your client and tie your pricing to your client's business objective(s).

Your client is coming to you to help them solve a problem. They don't get up in the morning and say, "Boy, I think I'd really like to go buy some time from someone today."

They are coming to you because you have something that's of value to them. It's your job to understand, at the most basic level, what problem your client wants you to help them solve and why they are coming to you. Before you even start a proposal or think about pricing, make sure you are clear on these two things.

But Josh...it's hard to tie what I do directly to a business objective. Hourly rates are the common currency in my space.

Got it. But you will never win. It's incredibly difficult to get a client to take an hourly rate increase without causing friction in the relationship. Your costs will increase much faster than you can increase rates. Even if you sign new clients with higher rates, you're likely still servicing the older clients at lower rates. You're just adding more work and stress to you and your employees. It's also likely you can't pay yourself or your employees market rate or better because your rates don't cover increased salaries. Then employees leave for a better-paying gig and you're working all the time. Then you're stuck recruiting and hiring a replacement. It's a vicious cycle and you'll burn yourself out trying to get out of it.

I encourage you to get into the head of your customer. Stop thinking that you're selling something entirely. Instead, focus on the fact that your customer is buying something. They are coming to you for a reason. What's that reason?

If you have multiple decision-makers in a company, you often need to customize your value conversation to the individual decision-maker. For example, if you're talking to an executive that is measured on revenue growth, tie your value to helping them achieve their revenue growth objective and show them how your solution will help them achieve their revenue growth objective. Now, let's say you are talking to the marketing director at the same company. The marketing director's performance is measured on MQLs. While that marketing director is likely aware of the revenue growth goals, they aren't being evaluated based on revenue growth. They're being evaluated on the MQL volume that they generate. So when you're talking to the marketing director, frame your value to show how you're going to help the marketing director achieve their objective related to MQLs. The value that you bring to the table doesn't change...you're just framing it differently for individual decision-makers or influencers so it's relevant for them.

The truth is that, even in the B2B world, you're dealing with human emotions. By nature, humans are wired to protect themselves. Buyers want to protect their jobs, income, lifestyle, performance reviews, ego, and more. Once you understand what your buyers need from you to help protect themselves, serve that up on a silver platter.

Of course, this requires you to listen, ask questions, and be present with your buyers so you know what they need at the most fundamental level. We'll address how to listen to buyers in another blog post.

One more note on pricing by the hour: you lose the upper hand in negotiation 100% of the time.

Every one of your buyers understands the concept of time and they assign their own value to time (whether they know it or not). If your rate is $300/hour, but your client is only willing to pay $200/hour, you have very little to stand on in a negotiation. Your client is very clear on what a unit of time is and what they think is reasonable to pay for that time. Your only recourse is to negotiate based on your subjective view of how much your time is worth. While your buyer may come up a bit in your hourly rate negotiation, it's not likely that you'll see the full $300/hour that you want.

In a value-based negotiation, you gain the upper hand. Because your buyer doesn't completely understand everything that you'll do to help them achieve their business objective and they don't have the expertise to do it themselves, you have the opportunity to demonstrate your expertise to close the deal. Let's say you're negotiating a deal that will help your client increase their net profit by $3 million in the next 12 months. Your proposal has a value of $300,000. It's pretty easy to figure the ROI on their $300,000 investment. Who wouldn't spend $300,000 to net an additional $3 million in profit?

Now, let's say you estimate the number of hours that you and your team will need to spend on this project. You estimate it will take about 500 hours. At a rate of $300/hour, your total project would be $150,000. Regardless of whether or not you share the hourly rate with your client, you're leaving at least $150,000 on the table of pure profit. You've also given your client the power to negotiate your hourly rate.

But if you propose an investment of $300,000 to get $3 million, the answer will likely be a resounding, "Yes."

The examples in this article are extremely simple and may not translate to your specific business. Value-based pricing can be challenging to implement and each company and industry has its own nuances. If you need help figuring out how you can shift to a value-based pricing model, drop us a line.