Why My New Rate is $400 Per Hour

There are two ugly trends in the world of consulting. I’m counteracting them today by more than doubling my “rack” rate to $400 per hour.

I think you should too.

The two trends ?:

  1. Customers searching the web compiling spreadsheets of what random consultants charge per hour  -with little apparent regard for whether the consultant is good,  has the capability to solve the problem or even has recent relevant experience with similar companies.

    Think I’m kidding? On an average day we’re receiving two calls that are nothing more than companies (or IT consultants who work for them) checking on our rates and “how many hours would it take” to [fill in random project here].

  2. Consultants who,  desperate for work, have slashed rates to an unsustainable $125 per hour (billed in quarter hour increments) and below.

And if word-of-mouth is to be believed those eye-popping rates of $125 are appearing in large cities like New York and Boston.

We bill our time for support and consulting as a fixed guaranteed fee.

So  for me –  quoting an hourly rate is meaningless. It does nothing but lower my perceived value to the same – or less –  of the consulting morons firms who are underbidding,  under-serving (and ultimately losing)  their customers.

Some other thoughts.

Other Reasons You Should Double Or Triple Your Quoted Hourly Rate

Those who are fixed billing purists will comment that you should not have an hourly rate at all.

Perhaps that’s true.

However I am finding in real life  that nearly every customer has been conditioned to work their analysis magic based on an hourly rate. Almost 100% of suspects  ask the magic “so what is your rate”. This approach doesn’t work when you bill on a fixed fee. I’ve provided the fixed cost and the customer still wants to know “so what is your rate”.

My new reply?

$400 per hour. Full hour increments. Minimum charge $1,600 when billed hourly.

Guess what.

Hourly is no longer cheaper than fixed price.

I am no longer comparable to my competitor across the street who artificially chopped his rate to 50% of what it needs to be.

I will lose the projects that insist on paying by the hour in 10 minute increments unless the customer is focused on value and outcome.

As soon as I quote the new rate – the customer has two choices:

  1. Price shop someone else (85% will)
  2. Focus on the value of a fixed price

Now you see why this is potentially a brilliant idea?

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Comments

  1. Wayne, since I’m not a fixed billing purist, I’ll wade in.

    What’s wrong with saying that you don’t have an hourly rate? I’ve found that anyone who is worth having as a customer is intrigued and delighted to find someone who is willing to break out of the moribund mold of billable time.

    And who says that hourly is cheaper than a fixed price? Maybe in the short-term (although even then I seriously doubt it is cheaper) but definitely not in the long-term.

    Why not make it difficult for someone to compare two consultants? The phone companies intentionally make their bills almost impossible to compare on an apples-to-apples basis.

    Maybe us Southerners are just a bunch of hillbillies but I’m finding more and more folks who get it fixed pricing and insist on nothing else.

    • John you raise a good point. I have not fully explored what the response would be for people looking strictly for project work if I said I did not have a rate.

      I do know that of everyone who I’ve quoted a fixed price for projects — there’s always been two questions:

      1. What’s your rate
      2. How many hours do you think it would take

      On the other hand I guess I should not say that I haven’t ever used the “I don’t have an hourly rate” — because anyone asking for hourly support will get the response that we dont’ bill hourly (and for un-referred prospects easily 85% – 95% leave immediately upon hearing that).

      In reality for me a high rate becomes a more convenient way to shorten the “what would it cost if you were to price it hourly” game.

      I’m just growing tired of it because I’ve heard from several consultants that they’ve been bidding about $125 and under hourly rates — which we know in the long run will either cost the same (less qualified person times more hours) or more likely result in an unhappy customer.

      I’m going to test both methods — replying that I don’t have a rate and quoting a $400 “rack” rate. I’ll report back in a month or so.

  2. My goal is to make my hourly rate as meaningful to the average customer as a room charge they read on the back of a door in the hotel room.

  3. Interesting idea, Wayne. Use a high billable hour rate to eliminate billing by the hour! I kinda like it!

    What you are John are both saying is that there are basically two type of customers – those who get it (it is not about the hours) and those who do not.

    One of my more recent mantras comes from a TEDTalk by Simon Sineck, who says, “The goal of business is to sell to those who believe what you believe, not to sell to those who just need what you have.”

    Your technique gets to the heart of the matter. It is psychographic in nature not demographic. I like it!

    • Ed what my method does is shortcut the need to offer any explanation or education about how you bill.

      One issue that I have been struggling with is that no matter what the response is about either not billing by the hour or it being more expensive — new customers tend not to believe it.

      I get locked into another 20 minute philosophical discussion.

      I’m hopeful that the “it’s $400 per hour with a $1,600 minimum for hourly billing” essentially shuts the door on questions because everyone should be able to understand that.

  4. Wayne,

    Great article! We are HUGE believers in Fixed Fee pricing and one lesson we learned a while back was that if someone insists on comparing a T&M proposal to our Fixed Fee proposal, we always make sure our T&M proposal is much higher than the fixed fee.

    • I love fixed pricing if for no other reason that it frees me up to spend as much time as I want at a client site without regard for “is this going to cause a billing headache”.

      You would think that the opposite reaction would be true — however so long as I’ve provided a fair price — I find that I’m perfectly fine with going to a client site (assuming no expansion of Scope) and extra two or three times.

      It’s difficult to explain but that effect of absolutely delighting the client by providing as much service as is needed for the project has been a surprise benefit of fixed fee billing.

      This also assumes that you’ve correctly scoped and priced out the job — I’ve seen many consultants who think that fixed fee is just their hourly rate times a lowball guess of the effort – when in fact more has to be considered.

  5. Here’s an idea that I have used in the past. Tell them that your billable rate is $0.

    My labor is free. However, my knowledge is transferred to you at a fixed price based on the value of the project.

    • I love the idea. My issue is that on many suspects this evolves to a discussion about pricing philosophy and how come and why not…

      Multiply that times an inquiry or two a day and suddenly it’s eating into your productivity…

      And there still seem to be some people who simply won’t rest without getting a rate….

      I’m getting much more comfortable at explaining this however and I think that’s part of the issue. When you can answer inquiries cold it’s much easier to resolve the questions.

      When you’re making up the responses — as you are the first few times — then it becomes a more time consuming task.

      • Having those conversations is exactly how you refine your delivery.

        The more curve balls you see, the better you become at hitting them.

  6. I had two calls just today on this very topic. Customers browsing the web on v3.71 software looking for a kind soul to provide a free answer to them — “because they hardly ever call”.

    I totally get the expense of having to form a relationship with a consultant might be more than what some companies want.

    So I politely suggested that they search the Internet some more — because they probably could swing a stick and hit 10 consulting firms who would take their $10 for a quick answer.

    Sadly I do not think I’m over-estimating the willingness of consultants to bill inefficiently and without regard for their true value.

  7. Ben Meredith says:

    Great post Wayne!

    I run into competitors (several a week) that are almost giving their time and knowledge away for free. They really do appear hungry to and will then go and discount their already low rates.

    Fixed fee billing is the only way to go – it shows professionalism, competence and confidence in getting the job done.

  8. Wayne,
    BAM, as my kids would say (thanks to Emil). You put the spicing on this dilemma. Actually it is two dilemmas- a market flooded with “consultants” who will not be around long and are making a mess of things and the ridiculous (and insulting) paid by the hour dance.

    I am thinking I might make mine $500 an hour and anxiously await the day a client meeting gets canceled to the tune of $4,000.

    Fixed billing (and value billing especially) has given me the chance to move from client to client often on the same day to gather, interact and transfer my knowledge. If as a client you expect hourly then as a consultant I will assume full day and charge you for it- even if I am only there for a short meeting.

    Sometimes that is all the explanation they need (at $500 an hour it has even more impact).
    Good stuff!

    • Be advised any mention of an estimated number of hours or the approximate time that a task should take will immediately put your client on the “not to exceed” track.

      Once on that track it’s difficult – if not impossible – to steer them back to a total price.

      I’ve had that issue arise recently and I no longer will price a job with a stipulation that it’s “up to xx hours” and if it goes over then the client pays more.

      The problem I’ve encountered is that when the job goes under because I’ve been efficient the client automatically wants to pay the smaller # hours.

      And I too see a lot of consultants who are making a mess in the market. All the more for us to clean up.

      • A good senior consultant, in any field, can give advice equivalent to many hours of “billable hours” (I like “billable expertise” better)in one meeting- or one sentence in some cases.

        Consulting is as much a cerebral offering as it is hands on (more so the higher up). I think clients who ask for or expect hourly rates are shorting themselves.

        Just the paperwork required for recording hours (especially with those clients who insert multiple layers of middlemen with third parties) negates any benefit from an hourly structure.

        Wayne your comment is excellent and the best argument against hourly- efficiency is fairly meaningless…
        And if you are efficient and forced into hourly you just raise your rates.

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