Pros and Cons of Hourly Rate Billing
Hourly rate billing is a lot clearer for the designer. You know you're getting paid for the work that you do. By tracking your work, you can charge your clients only for the time they use. This can result in better prices for them if they have smaller sites or are less demanding. And if they have larger sites or need more meetings, you aren't losing money on their site.
Hourly rate billing is what most service industries use. If you put your pricing in those terms, most businesses will understand it - after all, many of their employees are probably paid at an hourly rate. But charging at an hourly rate brings its own difficulties, including:
- Deciding a fair rate.
- Getting enough jobs at your rate to pay your expenses.
- Raising your rates, once you've got enough work to justify it.
- Converting customers from flat-rate prices to hourly.
How to Handle Problems with Hourly Billing
The most common complaint customers have with hourly billing is that they don't know up front how much a project will cost. You can handle this issue by giving estimates or by setting agreed upon evaluation dates where you and the client check progress versus costs and decide whether to continue. The important thing here is to get this written into the contract.
When I start a job, I always make sure that the client knows up-front how many hours I'm estimating that the project will take. If it looks like it's going to run 15% or more over, I contact them to make sure they're okay with the overages. Some clients are more concerned with getting the project done right, but most want to know that they're not going to spend more than a certain amount. On a few jobs, I've set a cap on the billing and work. In other words, I've agreed to work on the project for up to a certain amount, based on my hourly rate. Once I'm close to that cap, I contact the client - if we both agree that I can finish it either within the deadline or with an agreeable amount over, I continue. Otherwise I set up the project to let one of their team take over.
Another problem you may experience when using hourly billing is that it can be difficult to raise your rates. One friend of mine raised his rates and his primary client (a large corporation) refused to pay him at that new rate because their policy was that contractors couldn't raise rates by more than 2% per year (he was giving himself a 15% raise, to be more competitive and inline with other contractors in the area). He was able to talk them into it by explaining that he hadn't raised his rates for over 8 years - which would have resulted in him costing more if he'd raised his rates 2% per year for that same period. He also made a point of upping his rates every year after that. He explained to other clients that his 1-2% increase was to keep up with inflation, and most people understood and accepted that.
What you have to remember is that you can lose clients when you raise your rates. This is especially true when you start out with very low rates. But if you take that into consideration when you raise rates, the increased income can offset the loss of clients. And it may give you more time to find better clients who are willing to pay more.
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