The Dangers of
hourly pricing
Mark Coster
Founder of Pixooma
As a business owner, setting the right price can often be one of the most challenging aspects of running a business.
The worry is that if you set your prices too low, you may attract price-sensitive customers who are less loyal and more likely to switch to a competitor for a lower price. Conversely if you set them too high, you might alienate customers, create barriers to entry, and cause potential customers to shop around for cheaper suppliers.
Hourly pricing is about perception, without an idea of how long it will take, it's pretty meaningless.
Too high or too low
But it’s not just the price that can be difficult to agree on, it’s the whole structure of pricing. Do you opt for hourly rates, daily rates, project-based pricing, or retainers? In this blog, I want to focus on hourly pricing - something which in the creative industry, can prove to be quite divisive. Because let’s face it if I spend more time on a client design project, does that necessarily mean I am creating higher quality work, than if I spent less time on it?
Hourly pricing is about perception – it can be deemed to be ‘high’ or ‘low’ but without an idea of how long it will take it's pretty meaningless. For example, I might be twice as expensive as someone else, but the ideas I produce might be 3 times better, or I might be 4 times quicker than my competition, but still get the same result.
Penalising efficiency
Whilst hourly pricing is easy to apply and is quickly understood by your clients, one of its major disadvantages is that it punishes efficiency. If I can create a brilliant design in less than an hour, rather than it taking me a day or two, I will earn a fraction of what I could have. And whilst my client might initially love the cheaper invoice, they may start to later question my value. Plus, the hourly pricing model fails to take into account my years of experience, specialist knowledge, honed skills and ability to creatively solve problems.
To illustrate this last point, I want to share a well-known Pablo Picasso story. Picasso was at a Paris cafe, doodling on a napkin, when an admirer, recognising the artist, approached him and asked if she could purchase his drawing. Upon completing the napkin sketch, Picasso asked for a million Francs in exchange for the sketch. The admirer was taken aback by this seemingly exorbitant request. After all, it had taken Picasso just a few minutes to create the drawing. In her eyes, the value of the sketch appeared disproportionate to the time it took to create it. Picasso, however, responded with a phrase that has since become an enduring testament to his artistic journey and mastery: "My dear, it took me a lifetime to be able to draw this sketch."
Haircuts and car washes
That brings me neatly onto haircuts and their pricing structure. When I go, the haircut takes maybe 10 minutes, or less, and on average costs £13 but it’s just a basic service, no washing or faffing about. But at £13 for 10 minutes, that means my barber’s hourly rate is probably around £78.
It will come as no surprise to know that Jo’s salon experience is quite different. Not only is she there for longer, but there’s hair washing and drying included too. But on closer inspection I found that the actual hourly rate is actually not so different to mine, yet we often think that women’s haircut costs are pricier, because they take longer.
The same logic could be applied to car washes. Our local automated jet wash (self-service) is priced at £1 for 125 seconds. Whilst the hand wash option is around £10-£15 for what takes approx. 8-10 minutes, whilst a full valet can start from £50 for a basic service that is an hour or so and goes upwards from there.
Plenty of other pricing options
My advice is that the next time you are pricing up your service for a client you take the time to look at alternatives to hourly pricing. Flat fees, value-based pricing, custom packages, or day rates all shift the focus away from time spent to value delivered, thus rewarding efficiency rather than sluggishness. These options also increase predictability for both you and your client and can often lead to higher profitability for you as well as creating higher levels of client trust (and less opportunity for dispute) because of your price transparency.
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