the sky floor

Still Stuck on Hourly Billing Rates? A Quick Thought Experiment

August 29, 2022
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Let’s say you need a skilled worker, something not everyone can do well, like a tutor for your child. 

If you contact a tutoring company for their prices, and they bill hourly for their employee’s time, you will get a range of rates. A tutor who just graduated college with an undergraduate degree will be cheaper than a tutor who has been teaching for 20 years and has a Ph.D. That makes sense, right? Their education and experience make them worth more. 

The higher hourly rate for experience in many industries implies higher value. In other words, the hourly rate structure hints at how value-pricing works because you feel you are receiving more value for a higher price per hour. And you may well be, but what are you truthfully buying when you buy hours? 

What you want is a worth that matches or exceeds (i.e., profit) the price you pay. How do you determine if each hour of work you buy is worth that price? 

Higher rates per hour for experienced workers are the shadow created by the sun that is the actual value – you know what you want is the outcome, but higher hourly prices are the only way you feel like you can control the quality. The better way is to fully understand the desired result and sell/buy based on that. 

In the tutoring example, you want your child to improve in their academics. That is what you are buying, their betterment, not a tutor’s time. The higher hourly rate hints at value, and a higher value means a higher price. So skip the hourly billing and focus on the value/outcome because that is what the purchase is about. 

Takeaways:

  • If you are a service provider, consider selling value-based outcomes. You will be able to charge more, stay focused on what you provide for your client, and reduce the client’s overall risk – all of which is a competitive advantage. 
  • If you are a buyer, try to find providers who can communicate what outcome they are delivering and hire them. If no such business exists for what you buy, focus the provider on the result in the buying process to ensure you are aligned. 

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