Escape the Hourly Rate Trap
Many businesses and sole traders are caught in the hourly pricing trap, charging for their services according to an hourly rate. If this is your business, you probably don’t know you’re caught in a trap. Everyone you know is working the same way, albeit with higher or lower hourly rates. You’re trapped in a business model that means the maximum you can earn is the number of hours you can charge for, multiplied by your hourly rate. And subtract all your business costs to arrive at the actual maximum profit.
You don’t even get paid for all the hours you work! No one will pay you for the hours you’re on holiday. It’s unlikely anyone will pay you to raise a quote, invoice, or for the hours you spend on marketing or learning new skills.
You only get paid for some of the hours you work, the ones that customers are willing to pay you for. And typically, that’s about three to four days per week out of five. If you don’t believe it, write down the number of hours you spend on the things you can’t raise an invoice for and subtract that from the number of hours you work. Let me explain further.
How the trap works
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Efficiency Penalty: Imagine you charge £100 per hour and a job takes an hour – you make £100. You invest in learning and hone your skills and after lots of experience, you can achieve this same job in 30 minutes. Congratulations, now you’re so good you can earn £50! You need to find twice as many jobs to make the same £100!
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Hourly Pricing Limits: When you’re more skilled, it makes sense to increase your hourly rate. How high can you raise it before customers spit out their tea when you tell them your hourly rate? £200 per hour? £500 per hour? Unfortunately, most customers will compare your hourly rate with how they value themselves, and that rarely works in your favour. In 2024 the average hourly rate in the UK is £17 per hour. If you charge £170 per hour, they’re likely to think that’s outrageous! They’re comparing with themselves, not necessarily comparing you with others in your trade and, even if they are, they’ll always find someone with a lower hourly rate, but not necessarily cheaper for the same job at the same quality.
Escaping the trap
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Value-Based Pricing: There are a few ways out of the price-per-hour trap, and you’ll need to find what works for you. One route is to focus on value. This works especially well if your service provides a positive Return On Investment (ROI). If your customer perceives the value of the work you do as worth £1,000 and you charge £500, they’ll probably be delighted. Even if it only took you ten minutes.
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Hire-based Pricing: sell your employee’s time operating a digger, let’s say £600 per hour using a digger that costs you £20,000. You’re caught in the hourly rate trap but have pretty good profit from effectively hiring out the use of the digger. But if instead you buy one trade for £20,000 and make it available for hire at £500 per week, you need to successfully hire it out for 40 weeks to break even. Let’s say that it takes 52 weeks. In year two you make £20,000 profit and the same thereafter for a few years and then sell it used for half price. You break out of the hourly rate trap because you can hire out any number of devices if you remove your employee from being the operator. It may sound obvious, but there’s mileage in thinking along these lines.
Action Point
These are just a couple of examples of ways to break out of the hourly rate trap. Research and brainstorm the options that you could apply to your own business. Do a few comparisons and look for low-cost ways to test the idea. You might get it wrong a few times, but keep going and when you get it right, you’ll become a highly profitable and saleable business. It’s way better than the alternative!
