As a consultant or freelancer, you're in the professional services business. There are a lot of practices that fall under professional services. Plumbers, doctors, lawyers, and Shopify Experts. All professional services. And they all bill differently.
Hourly, daily, weekly, monthly, per feature, per project, or by the pound. (Not necessarily in that order.)
For freelancers, hourly is the assumption. “What’s your hourly rate?” is a client question I often hear. And the answer is that I truthfully don’t have one.
While you might think you're limited to billing a certain way, the reality is other professionals bill different ways, and you can to. In the past, I’ve billed by the hour and worked on retainer, but these days I bill 100 per cent upfront.
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Why bill 100% upfront?
As an example, let's compare two recent experiences I've had with different professional service billing practices.
Earlier this year, my wife had a minor surgery performed at a local hospital that she and her doctor agreed was necessary. While the procedure was discussed, money was not. We didn't know what the surgery would cost, what the terms of the bills would be, or how much (if any) our insurance would cover.
For the next sixty days, we received seemingly random bills from the doctor, hospital, and various diagnostic labs for different amounts. We'd pay one bill, just to have another show-up.
By contrast, when my wife had a deviated septum corrected by a plastic surgeon, we were given a single flat fee, to be paid upfront, for the procedure. There were no hidden costs, no random bills from diagnostic labs I'd never heard of, and best of all, no ambiguity. I loved it.
If there's one thing people dislike, it's the unknown. The unknown represents a risk, and contrary to popular belief, I think entrepreneurs and business owners are risk-averse. No one wants to intentionally expose themselves to risk, especially when it comes to money. Unknown or unexpected costs are treacherous, especially when you own a business. Cash flow is the lifeblood of any business.
That’s why my web design agency, Ethercycle, moved exclusively to upfront payments at the end of 2015 (and didn’t lose one client in the process).
To reduce the risk for myself and my clients, my agency Ethercycle works exclusively through upfront payments. To do this, our projects require two things:
- A fixed price
- And a fixed scope
Most freelancers approach fixed prices by estimating the typical number of hours a projects takes, adding some percentage for overage like 20 per cent, and then multiplying the result by their hourly rate. If the project’s scope changes, they add additional hours.
Rather than valuing projects based on how long it takes me, I value them based on the perceived value they deliver to the client. It's a value-based fee. I want to be seen as an investment in the success of my clients' businesses, not an expense. My clients shouldn’t have to worry about my hours, they should only be concerned with getting a return on their investment. (For more information on value based fees, I highly recommend Alan Weiss' book on the topic, ‘Value Based Fees’)
I clearly define the scope of work, listing exactly what we'll be doing, who's responsible for what, and even identifying what isn't included in the scope. Lastly, I include a single fixed price. This is sometimes called a "productized consulting" model.
Don’t punish efficiency
Working in a fixed-price, fixed-scope business model is extremely beneficial to you and your clients because it divorces income from time. Hourly billing, by contrast, punishes efficiency; the faster you work, the less you get paid. With a fixed price, the faster you work, the better your effective hourly rate. You earn more, and your clients get their projects done faster.
It also prevents blown budgets, allowing you to accept 100 per cent upfront payments. Since you've agreed on the work to be done, and the price, it makes sense to pay in full upfront. This eliminates the stress of clients holding payments hostage, prevents scope creep, and in general paves the way for a collaborative relationship with the client. Neither party has to worry about late or missed payments.
I do have clients who push back and ask to split the payment into two 50/50 payments, but I request a 10 per cent surcharge for this, as it represents an additional risk to the success of the project.
And should we realize a project or relationship is a bad fit, I don’t hesitate to refund 100 per cent of a client’s payment, and amicably go our separate ways.
You might also like: Shopify Partner Session - Learn the Secrets to Building a Web Design Consulting Business.
Healthy projects, healthy business
Upfront payment, fixed-scope, and fixed-price all require a shift in mindset, and may even be intimidating. But the reality is bill 100 per cent upfront will drastically improve your client relationships, your sanity, and the financial health of your business.