Pricing Service-based Projects: Part 2 – Hourly Pricing AKA the Unsung Hero

Published 7 months ago on May 23, 2016 — 8 min read

This is the second part in the Pricing Service-based Project series. Check out Pricing Service-based Projects: Part 1 – My Way or the Highway.

I spent my first five years of “professional” Web development as part of a team who billed by the hour. Hours were currency, and it was a constant balance between billable and not. I hated it.

I’ve already hit what will be a recurring theme in this pricing series, and I don’t think I’ll be able to reiterate it enough: pricing is personal. There are so many factors to consider beyond a black-and-white model breakdown. (spoiler: doesn’t exist)

I hated tracking hours. I hated estimating hours. I hated working “for free” when (notice I don’t dare mutter an “if” here) I went over my hours. My young angsty, narcissistic mind would constantly bemoan the need to track hours for so many reasons. Many of my teammates felt the same, but hourly billing was the only way it could work; we were working on so many things across so many departments, looking back on it I see it would have been a nightmare to manage any other way.

Hourly was a way that each department could communicate in a way that everyone could come to grips with. A basis for comparison, if you will. I was blind to it in my naiveté and like many young people thought I had a better way. When I started Iron to Iron with Kevin an early decision for us was to not primarily bill by the hour, but I’d be lying if I didn’t admit to it being the best decision at certain points on certain projects with certain clients, so we mixed it up. More on that later in this series.

Hourly billing: more than a stepping stone

I’d wager that the (vast) majority of you readers at least started out with hourly billing if you aren’t still doing it. It makes sense when you’re learning the ropes: do the work and bill for the work you did. Learn to estimate on a granular level, and get better at it over time. Humans are absolutely terrible at estimating work, so having hours as a reference point is super helpful.

For some reason it feels like our community loves to snub hourly billing as though it’s something you’re supposed to graduate from. What’s up with that? If you bill by the hour and like how it works, let this post be an encouragement to you: keep doing what’s working. If it’s not working, check out the other breakdowns in this series to see if something more aligns with your style.

There is plenty to like about hourly pricing, and it’s got problems too. Thanks to hourly billing there are a ton of companies out there doing fantastic work, staying on task, respecting budgets, and keeping clients appraised all the way. Check out episode 25 of the Businessology Show for a detailed look at a great shop doing just that.

There are a ton of great takeaways in that episode, and if you’re not listening to The Businessology Show I definitely recommend it!

Pros and cons of hourly pricing

I’m a firm believer that each pricing model in this series has equal but different pros and cons. These pros and cons help to determine which model best cooperates with your working style and the clients you’re going after. Billing by the hour is really attractive on many levels, but it can also problematic depending on how you (or your company) change over time.

Pros of hourly pricing

There’s a lot to love about hourly billing, which is probably why so many gravitate to it. There are plenty of well-aged, flourishing industries that only bill by the hour, so there’s something to observe and learn from.

  • You always have a pulse on project progress in regards to budget. Building a website is a huge undertaking. There’s lots of ideas floating around aimed at solving a pain point, and everything needs to come together to satisfy a client requirement. Having a metric like hours to compare to that end goal is super handy.
  • Clients can weigh whether something is worth the investment. I can see how this might be considered a con as much as it is a pro, but if we’re here to serve our clients well we can agree that allowing them to make the decision about a return on investment even for a particular feature you’re pitching.
  • Easy to be compensated for out of scope work. If you’ve properly scoped the work you’re going to do, it’s easy enough to walk through a change order with the client and add a line item to the next invoice for that additional work.
  • Consistent/forecast-able payment schedule. More often than not hourly billing results in invoices being sent out weekly/bi-weekly/monthly which translates into a more fine-grained overview of your finances as time goes on.
  • Easier to schedule work more accurately. When you’re billing by the hour you have a constant block to work with, everything is based on time. You have 8 blocks per person per day to get a job done, and it’s subjectively easier to project that out a bit further than other pricing models.
  • Can improve your estimation skill. When working by the hour more often than not you naturally have to break things down quite a bit so as to get a more accurate breakdown of time. This learned skill is priceless, you can always improve.
  • Metrics, analytics, projections. Over time you build an immensely valuable database of (in)accuracies that you can quantify periodically and improve the business in a big way.

Cons of hourly pricing

After spending years at an agency having to track and bill by the hour, I have a list of negatives that come from a purely time-based pricing model.

  • The faster you work, the less you get paid. As you get better at your job, you’re going to do it more quickly. If you’re billing by the hour you therefore get paid less to do your job better. There’s no way around this, but it also opens the door in the budget to work in something more awesome.
  • You can only charge for hours worked. If you’re working fast, you’re in the zone, you’re using that plugin you fell in love with to add this feature that matched the client requirement exactly. They’re getting more and paying less for it.
  • You have to log hours. This is just annoying. Necessary, but annoying. No matter how many tools come out to help keep track of hours, I would consistently neglect to track a day and then it’d fall off the rails. This is just habit-building, however, and can be overcome.
  • Clients can overstep and ask why something took so long. You’re showing clients behind the scenes. From time to time a client might ask why something takes a certain amount of time. This is demeaning and a sign that the client relationship is rocky (unless you’re taking advantage).
  • Clients may not expect to be billed for calls/emails/meetings. There are many companies that don’t bill for everything they should (in my opinion) but if you go against this grain and bill for all of the time you spend on a project, it might be an awkward talking point early in the project. Can be avoided with explanation up front, but not all clients react in the same way.
  • Your estimates will be scrutinized to a higher degree. When you miss an estimate (and you will miss an estimate) and need to sync up with the client to determine how to minimize the damage, you can find yourself beholden to your estimate.

Hourly billing gets the job done

Even though I don’t bill by the hour much, I do from time to time and it’s been a life saver. There have been projects, parts of projects, or clients that simply made any other pricing model inapplicable. When things were too open-ended or subject to change, it made more sense to hunker down and just do the work instead of trying to scope out every single detail so understanding was universal.

I think hourly billing is a great way to work for many reasons, for many projects, and for many clients. If you find scoping work to be a challenge, or you find yourself constantly underestimating the project at hand, hourly pricing might be a better move for you.

My list of benefits and drawbacks to hourly based pricing is far from comprehensive, so if you have thoughts on the matter I’d love to hear from you! Shoot me a note or ping me on Twitter (@jchristopher) and let’s chat! Tag it with #mbn6409

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