The question of hourly rates is very relevant now. With costs increasing almost everywhere, business margins are being squeezed at a relentless rate.
If you are in a service-based industry where your revenue includes a charge for time, then this may be of some interest to you.
One of the topics I often debate with clients is where does the “Hourly Rate” sit in terms of how the business is seen by the customer. Quite often it is “Front and Centre” of the business offering. When a potential customer contacts a business, usually the first question is “what is your hourly rate?”
The issue with this is there is no way at all to demonstrate your “Value” by answering the question directly. What the customer is doing is comparing your hourly rate to others in the area or in the same industry and making a judgement that the cheapest hourly rate is the best value. This is of course rubbish and your answer to the question needs some careful consideration.
If I may go back a step here and set the scene in more detail. When considering pricing (of labour charges in particular) a key question to ask is what do you think the rates should be? (Yes rates i.e., more than one). Usually, I get the answer in a single form – that is, $X per hour. When I suggest it is too low and it should be increased, the common response is something like “no one will ever pay that much” (I have tidied that statement up a bit too!!!).
Why will no one pay that? How do you know they won’t pay it? Generally, the reason is to do with no one else charges that much and there is a fear that being the highest hourly rate will drive business away.
There are two main things to consider in this situation. Type of activity you do that generates a Labour Charge, and the service you provide.
First, your activities.
I see many examples of businesses charging one hourly rate for all activities they do. This can be a problem as you could be missing out on large amounts of revenue.
Let’s consider a Trade environment. Typically, you get margin on hours charged and materials used.
What happens when the customer provides the materials?? If you have answered the customer’s question of “what is your hourly rate” Then you have reduced your margin.
So, if you charge for labour and materials, you need to have multiple hourly rates that reflect your offering – depending on what work you are asked to do.
Something like:
- Labour only work – easy = above usual hourly rate.
- Labour only work – specialised = Top hourly rate.
- Labour + materials = Your usual/normal hourly rate.
- VIP Labour rate = only for the best, recurring work and good payers (use sparingly).
- Non-VIP rate = for the difficult ones.
This represents quite a range, and there are other types that can be included.
So, when you are asked, “what is your hourly rate?”. It is an opportunity for you and your business to tailor a solution. The answer should be a question, along the lines of.
“We have a number of options to suit the customer. What work were you looking to have done?”
Then, you can get more info and start drilling into what the customer wants, and then you can match the correct rate to their needs. Remember, if you just offer them an hourly rate, they will shop you against other operators and their rates. You need to give the customer more of an idea on what they get for your rate, and what an outcome might look like. The outcome being made up of an estimate, perhaps a time lag before work can commence or be completed, and an overall estimate.
You may want to consider a “Menu” of things available to the customer so you can enhance your “Value”.
This leads into the second part of the question you need to answer. The service you provide.
If you just advertise, or give out an Hourly rate, all you say to the customer is we are the same as everyone else. You are saying you are not better, or worse, just the same.
It is an opportunity to explain why you are better and sell your offering to the customer. If you do not have a clear offering, then you will struggle to get the customer to engage. But, in your reply, if you can succinctly describe your offer so that the customer gets a real indication of the value, then you are well on the way to getting a premium for your service. In fact, when this part of the pitch is working well, the hourly rate is almost irrelevant. The customer wants to get value for their money and feel like they matter. Sadly, many do not get to experience this, and an opportunity is lost.
It is interesting that those businesses that do not have an hourly rate component for what they charge, focus more on the pricing of the offer and they too miss the chance to make a pitch for their value.
The message here is not what you charge, but what service do you give. Customer service and customer experience is where many businesses fail to take full advantage. The better you take care of your customer, the less importance they place on your prices!!!! But, if they don’t know any different, then you are judged purely on your price.
I can sum it up best by sharing part of a conversation I had recently with an owner of a Transport Business. He had just been challenged (aggressively) by a customer that the rates he was charging were way too high and that there was no way he would pay such bills. The owner paused for a moment and said:
“I tell you what. From now on, I will do your work for free.”
The customer was stunned and said, “Wow, ok, great. But how can you possibly do that?”
The owner of the trucking firm said:
“Well, I will pick your freight up afterhours, misplace it for a week or so, during which time it will probably get damaged. Then I will transport it to an undisclosed destination, where it will remain, unprotected, for another week or so. Eventually, I will deliver what is left of it, to the wrong place!!!”
The customer was stunned and said, “That is no good to me!”
To which the owner said, “So it’s service that you want. In that case, here are my rates”.