A Real-Life Example of How Hourly Pricing Hurts Your Bottom Line

John Ray: [00:00:00] Hello. I’m John Ray on The Price and Value Journey. One of the red flags for me of inadequate pricing for professional services providers is pricing by the hour. Now, it’s not that hard once you dig into the details of a particular project or situation to prove it.

John Ray: [00:00:19] Here’s an example. Recently, I spoke with a professional about her pricing, and it was a service with significant value for the niche that she and her firm work in. They have comprehensive experience as both employees and consultants to several different organizations in this niche. They can cite case studies in which she has delivered demonstrable, hard dollar results. Their work delivered high six and low seven figure results for these organizations.

John Ray: [00:00:55] Now, one suggestion that she had received was to price her service at $150 per hour. Her first impulse was to wonder whether that was “too much”. So, let’s go through the math of this, I suggested to her, “Let’s take the example you mentioned of that $1 million result. How many hours did you spend on that project?” Well, after we chatted a bit, she decided it was about 25 hours.

John Ray: [00:01:24] I suggested we assume 50 hours for purposes of this exercise. So, double the number of hours and that we assume $150 per hour. The reason I suggested we double the number of hours is just to address the what if the project takes more hours objection that commonly occurs in these situations. So, in this exercise, which is hypothetical, but it’s based on actual results that she delivered, this provider’s total revenue would have been $7,500. So, that’s 50 hours of the project times $150 per hour.

John Ray: [00:02:04] So, let’s go back in time, I told her, to the point where you were proposing this project to the client. What would their reaction have been if you said you could deliver a $1 million result and that your fee for doing so would be $25,000? What would happen if you went on to ask them what they’d do if you only delivered $500,000? Wouldn’t they still believe the investment in you and your service was worth it? You’re still giving them a 20 times return on their investment, which is one indicator that that $25,000 might not be a high enough price, by the way.

John Ray: [00:02:48] Just in the side here, don’t ignore the fact that we’re just measuring hard dollar outcome that the client receives. We’re not measuring the intangible benefits to the organization and its leaders, which this outcome would also deliver. Those intangibles have value as well.

John Ray: [00:03:08] Further, I told her, by pricing your service in this way, you’re using your price to deliver a marketing signal to the client. A signal that indicates quality, your experience, you deliver results. Those results are demonstrable and you’re worth the investment on their part.

John Ray: [00:03:27] The question with getting off the hourly hamster wheel doesn’t even start with you. So, you start with the problems the client is experiencing that you solve. The friction in their business and their life that you can remove. And the consequent value, both tangible and intangible, you’re able to deliver back to your client. You think in those terms and you price to receive a slice of that value which still gives the client a substantial ROI. And there’s just one example of why when you price by the hour, your price is too low.

John Ray: [00:04:08] I’m John Ray on The Price and Value Journey. If you’d like to hear additional episodes of this podcast series, go to pricevaluejourney.com. And, of course, you can subscribe in your favorite podcast app. And if you’d like to connect with me directly, you can send an email to john@johnray.co. Thank you for joining me.