Why is hourly billing bad?

I want to start off by stating if you having yet read Hourly Billing is Nuts by Jonathan Stark go ahead and get it and read it!

Hourly billing puts the 2 parties in the service agreement at odds. The financial incentives are misaligned from the start. From your perspective, you want to take as long as possible so you get paid as much as you can and your client wants you to finish as quickly as possible to keep the costs down.

This puts the goal, the motivation of the project, regardless of what that project is, on the number of hours to completion. Not on the business objective of that project.

There’s a laundry list of reasons why hourly billing is bad. So I don’t want this to become a two-hour long podcast of me spouting out a list.

What I’d like to focus on are 3 reasons.

Clients prefer fixed price (certainty) vs hourly billing (uncertainty)

You are doing client service work and you can’t have your motivations different from your clients. “Serve first”, “Help”, “Put your customers first” are all things that you hear and see as inspirational and motivation phrases because of the archaic hourly billing model.

Clients want the lowest risk possible when hiring someone. They want to know exactly what they are getting and for how much. This means, understanding when the outcomes and deliverables will happen within that cost.

Clients will always invest in something that they can see the positive ROI.

The reason clients want the hourly rate as low as possible is because they (along with the freelancer) don’t exactly know how long it will be until the outcome is realized.

Businesses want certainty and in an uncertain world, the only way to limit risk is to have the investment as low as possible.

It’s your job to provide an outcome, a deliverable that’s the solution to your clients’ problems. If you know what that outcome is and have a proven track record for that outcome, you should be able to put a price on it.

When you focus on the goals, the outcome, rather than the time spent, you and your client are in alignment and as such there’s a value (from your client’s perspective) and price (from your perspective) that is placed on that outcome.

Get into the vicious feast or famine cycle

It’s the quickest way to become a commodity. If you feel like you are on a hamster wheel, then I’d be willing to bet you are billing hourly.

You started freelancing because you wanted to travel or spend time with your family. Yet, those things seem so far removed now because if you take your eyeballs off the screen, your income stops.

You can’t even schedule or book ahead either because you aren’t completely sure of when your current project will end.

The feast or famine cycle is a real thing and the reason why so many freelancers fall into it is because they start with hourly billing. It’s easy math to do and it’s something that they are asked for right from the start.

You are looked at as labor and a pair of hands on a keyboard once you answer that question with an hourly rate. Your clients will always tell you how to do your job.

Because of that, you’ll be held down not just from your competitors, but also by your clients, and yourself.

You limit your growth

If your main source of income is hourly billing, then it is arguably, a lack of professionalism on your part.

You can’t prepare or predict when that next payment will come in if you don’t know when your current project will end.

If you don’t know when your current project will end, then you aren’t sure of what the outcome or goal of that project is.

Is that being a professional?

There are only so many hours in the day and that’s the most you can bill.

There is only so high of a rate you can charge for the work you do too.

It’s extremely hard to build in profits when there’s a ceiling placed on them.

If you have started freelancing with the idea of not having a restriction on your income and then charge hourly, let me save you some time and I’d suggest that you need to stay working your full-time job. Maybe freelancing isn’t for you.

The idea of hourly billing at its very core puts a restriction on income and scale.

I’m going to quote Jonathan on this “You need to sell your head, not your hands. Your expertise, not your labor. Outcomes, not activities. Benefits, not deliverables.”

You didn’t start freelancing because you wanted to work more, right? So why are you charing hourly?

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