Charging hourly rates is often a good place to start early on in your freelancing career. It’s great for:
- Open-ended engagements
- Those who are new to freelancing
- Those who don’t want the risk of charging a fixed fee
But it also has a few drawbacks. In this chapter, we’ll outline some reasons to use hourly pricing - and when to avoid it.
Why charge hourly rates?
The big drawcard of hourly rates is predictability of income - you always know how much your time is worth and how much you’ll earn given a certain amount of work. If you work 20 hours and charge (for example) $50 per hour, you’ll make $1,000. When you know exactly how long you’re going to work, an hourly rate gives you clear expectations for how much income you will earn.
This makes it much easier to regularly hit your daily or weekly income targets. All you need to do is divide your weekly target by the number of hours you want to charge out, then fill those hours with client work. If you can find enough work to fill the hours, then you’ll hit your targets.
Another benefit of hourly rates is that you can just get to work immediately. If you’re charging fixed prices, there’s a lot of admin work up front. You need to negotiate with clients to determine how much you’re going to do; for what price; what’s in scope; and what’s out of scope. This can be time-consuming, and generally isn’t worth it for smaller projects.
Hourly rates are great for engagements that don’t have a clear scope. If you’re in a “you don’t know what you don’t know” situation, where you need to help a client solve a problem, but you don’t really know how big that problem is or how long it’s going to take to solve, then it can make a lot of sense to charge an hourly rate. Otherwise, it’s hard to accurately estimate a price for the project. What’s more, it’s basically impossible to put together a clear scope for these projects, because you don’t know what they’re going to look like.
This is one reason why lawyers often use hourly rates - it’s extremely hard (if not impossible) to guess ahead of time how much effort a case or other legal project is going to take. Charging by the hour means lawyers don’t have to sit and try to figure this out; they can just get to work.
Why avoid hourly rates?
But hourly rates aren’t perfect. The main drawback of hourly rates is that they do not reward efficiency.
Let’s say you’re a graphic designer. You have a client who you’ve been working with for a few years. Every month, you design a landing page to their campaign for that month.
As time goes on, and you become more familiar with their brand, their style, and their product, you’re going to get faster. You’ll also get more efficient at design work in general as you get more experience!
In this case, if you charge an hourly rate, you’re actually going to lose money as you get faster!
As an example, let’s assume you have 20 billable hours per week, charge $100 per hour, and at your current efficiency you can complete a project in 4 hours. That’s 5 projects completed per week giving you $400 in revenue per project.
As you become more efficient - under hourly pricing - here is what happens to your revenue per project.
Revenue per project as you become more efficient
This is not really fair, because you’re producing just as much - if not more - value as you were in the past. But your only option is to raise your hourly rate, which can get kind of messy. Do you raise it just for this client? Do you raise it across the board?
The other problem is that hourly rates set the tone for your relationship with your clients. When you charge an hourly rate, your client is effectively buying your time whenever they hire you - not buying the product you create, or the outcome you deliver.
This is a bit of a problem for your business, because you’re not just selling time. Time is essentially a commodity. If your client sees you as someone who sells time to them, then it’s hard for them to justify not finding someone else who will sell the same amount of time at a cheaper rate.
Finally, hourly rates can become an issue if you want to raise prices further down the track. Once you’re able to really produce quality work, efficiently, you may be better off charging fixed rates - because if you charge equivalent hourly rates, those rates are going to be really high. Clients might balk at paying an hourly rate of $300 or more, even if the total price is very affordable. So you can “hide” that hourly rate in a fixed price (more on that later).
Here’s a quick summary of the pros and cons of using an hourly rate as a freelancer.
Pros and cons of charging by the hour
A good choice for most early on
Hourly rates are often a good place to start early on in your freelancing career. When you’re just starting out, you need to figure out where your work is going to come from, what kind of work you’re going to focus on, as well as getting all those background things set up (like a Hnry account!).
At the same time, hourly pricing is simple. You choose an hourly rate. You give an estimate based on that rate. You work, deliver a product, send an invoice. This saves up your time and energy for all those other things you need to focus on when you’re getting started.
But as you develop your business, and become more efficient and valuable to your clients, it might make sense to start looking at other ways of charging. There are, of course, lots of good use cases for hourly pricing - but if you’re sticking with an hourly model, make sure you’re doing so for the right reasons, rather than just doing so because it’s the way you’ve always done things.