Monday, 29 September 2014

Super time packages

By Robert Vlach       Original version in Czech here: http://navolnenoze.cz/blog/balicky/

Do you charge by the hour? Does it make it difficult for you to price your work? A “Package” can reestablish the strength and flexibility of hourly work and raise profits significantly.


Many people think that if one works with hourly rates, it is not possible to establish different rates for different services. That is supported even by experts such as Václav Lorenc: “we all start with hourly rate pricing, which has its advantages. Nevertheless, it eventually becomes a cage (and not a golden one, unfortunately)”.

I have to admit, that I do not share this mainstream opinion. Instead of criticizingit, I am going to show you a simple, yet far-reaching tool to better manage the pricing of your worked hours.

How many self-employed workers charge by the hour?
Freelance Industry Report‘s 2012 edition indicates, that around one third of self-employed professionals charge by the hour for their services. Most of them arefreelancers (60%), who charge fixed prices for projects. Even those fixed prices are calculated by the estimated gross hourly rate and the total time estimated for the project.

This means, that most self-employed workers “sell” their time by the hour. That makes sense because, although they provide services or solve tasks, what they charge for is the time they spent on those activities. After all, even a freelancer´s day has only 24 hours.

People value their time differently and these differences in their view can vary vastly.. The 
difference in the hourly rates between two fields of work, for example business consultancy 
and graphic design can reach up to hundreds of percent.

Price packages, on the other hand, are used much less often. Actually, only when clients use the service repeatedly, for example for teaching languages, massages, gym sessions, tennis or piano lessons, physical therapy, beauty parlors, etc. Besides that, and friends and family discounts, offers are rarely tailored to the client.

“Pricephobia” and its’ manifestations
Critics are right when they state hourly charged labour it is an adamant tool that reflects the worked time but denies the employee the benefit of having a creative approach, know-how sharing, author´s rights or capability of working seasonal variable shifts.

Of course, by working by the hour, we can raise and decrease prices independently and as we see fit. That can also create trouble as there can be clients, to whom we charged the same hourly rate for a long time and newer clients, to whom a different tariff applies. The rate increase for services can mean having to raise the price of each hourly rate, which can take a long time and is, in no way, a pleasant task.

In fact, it often happens that we choose not to raise the price for current customers, or that we do it, but not without hesitation. This causes the price difference between new and old clients to grow, which entails other problems; from “pricephobia” (chronic aversion to apply prices to labour) to the ethic matter of charging significantly different prices for different clients for the same kind of service.

It might look like the best solution would be to abandon hourly rates altogether and go into a system that applies prices to projects, tasks, the kind of service, etc. Nevertheless, here are professions (including mine), in which a hourly rate pricing model is so entrenched and accepted, that it’s not possible to simply wipe it out and replace it. In addition, many professionals are not even interested in doing so, since even the most experienced freelancers are at risk of miscalculating the time to finish a project and therefore undercharge it badly. In the end, hourly rate pricing has both big advantages and disadvantages; the latter, against which professionals (not exactly willingly) have been fighting for years.

One Price to rule them all
Is it bad to have a pricing system with different hourly rates for each client? In case you neither mind having a complex pricing system nor it bothers you that your clients could meet and compare the prices they pay, then it is not a bad thing. However, it is a fact that both of the situations are inconvenient and that prices should be as simple as possible, so clients know clearly how much and for what they are paying. 

It is for that reason that, a few years ago, I have changed my system myself. I have established a single floating hourly rate, which is the same for all my clients, both new and previously existing. I have developed this system slowly over time, step by step, allowing me to manage the demand with more freedom and ease, which is nearly impossible when there are multiple fixed prices in place.

In case I notice my workload is in the long term above 80% of my capacity, I slightly increase my hourly rate. I also do this during the high season for consultancy (spring and fall), when I usually face temporary fluctuations of up to 100%. However, I know from personal experience, that by the beginning of summer or winter, demand will go down again.

Moreover, I have no problem bringing prices down, as it happened recently during the 2008 EU crisis, when I changed my basic rate from 200 to 60 € per hour. All my regular customers greatly appreciated, that I supported them and that I decreased the prices along with the market. I could have relied on my savings and waited until the crisis was over, but I did not and that was an invaluable professional experience.

In case you work with a single hourly price, you should make sure those prices are perfectly synchronized with the long-term workload and, therefore, also with your management and organization of time in general.

The hourly rate doesn´t work though, if you are afraid to work with it correctly. If you miss the right moment, time and demand will push you against the wall and you will be left solely with a tiny space to attempt any gradual price increase. An extreme solution could be a “leap” in prices, which would be hard to explain to your clients. So, if you decide to work with uniform hourly rate, it is only fine as long as you can predict and adjust it to your demand. If not, it will all become the same trap as it was with the “one price for each client” system.

7 super-package discounts
n hourly rate defined just above 80% of the workload is absolutely perfect for small jobs or occasional, shorter consultations. That is because they correspond well to the requirement level of the new job. However, I would possibly not have lasted very long using them, unless I started offering my long-term clients the “Super-packages” for 30 or 50 consulting hours (including the project management costs) As in the case of floating hourly rates, the package prices depend on time and many other factors.

For example, a package with 50 and 30 hours with the basic price of 1000 € per hour would look like this:

  50 hours with a 35% discount of 32.500 € + taxes
(50 h = 50.000 € – 35 % = 32.500 €, which is 650 €/h)
  30  hours with a 19% discount of 24.300 € + taxes
(30 h = 30.000 € – 19 % = 24.300 €, which is 810 €/hr)

Attention: This price offer is not transferable and is valid until 31/09/2014. Payment to be done in advance and it does not expire.

The package is actually a combination of 7 textbook discounts in one price:

1.    Quantitative — 30 or 50 hours of consultancy in one single package.
2.    Deposit — Paid in advance (no need to go after debtors and no pending payments).
3.    Fidelity — Old clients have preferential conditions.
4.    Seasonal — Out of season, I am able to offer a bigger discount (so I can compensate for the low demand).
5.    Incitement — Offer is valid for a limited time only (encouragement for the undecided).
6.    Individual — I adjust the offer according to the required service.
7.    Premium — includes special benefits and a preferential treatment towards the client

Of course, discounts are justified by   specific advantages, which vary according to each case. For some, these benefits will amount up to 30%, for others, only 15%.
If you disagree with charging 1000 € in advance, even out of season, or making a special price for a satisfied client so that you continue your business relationship without any interruptions, even if it means you don’t get paid a lot, then price packages are not for you. They’re not for everyone.
 
For me, the price packages allowed me to reduce prices and considerably increase my sales, keeping the same level of profit thanks to the elimination of administrative work and risk of income fluctuations. (I still allow my clients  to pay by the hour, according to standard rates).

Furthermore, super packages also solve the ethical issue of having different prices for different clients, since each calculation is unique. The same client can have different discounts through time with the new calculations being based on but not bound by the previous ones.. This means, that in case I am operating on 100% of my capacity in the middle of high season, then I will give this client a slightly lower discount and hopefully, that will be understandable.

Using price packages to relate to clients, is a lot more flexible than with single requests. That is another reason why I do not offer price packages to everyone and I do not offer them from the beginning. After a while though, and once I understand better what the client needs, how demanding the client is, etc., do the super packages greatly widen the leeway for prices, which professionals that work with fixed hourly rates can not. Packages allow us to sell a greater work volume, achieve higher efficiency and therefore, have more profit.

How to prepare the ideal price package for your clients? That I will tell you in the next article.

About the author:



Robert Vlach is a Czech enterprising consultant, lecturer as well as an author and an editor-in-chief of the portal navolnenoze.cz (být na volne noze translates as "to be on a free foot", meaning to be a freelancer), the Czech Republic´s leading platform for freelancers to meet, share information and advertise.

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