Whether your business sells services, products or both, you know that a normal day includes speaking with many different clients solely to offer them bits and pieces of your knowledge and advice. This accessibility is great because your clients see added value in your constant availability.
The problem with that accessibility, however, is that you’re probably not getting paid for it.
While a simple solution to this issue might be to charge your client for every second you’re servicing his or her account, it may not make the most business sense. You have every right to be compensated for your industry expertise, but nickel-and-diming your clients is an easy way to send them running to your competitors.
So what can you do?
Generally speaking, freelancers, consultants and small business owners have three options to ensure they get paid for their intangibles: increasing hourly rates, charging a retainer fee or getting paid per project. Let’s examine each of these options, as well as their associated pros and cons, and see what works best for you.
Option 1: Hourly Rates
Charging by the hour offers you more flexibility. However, it also makes it harder to charge for incidental advice or support beyond the end of the project. Additionally, when charging by the hour, clients typically expect to receive an itemized invoice, giving your clients more opportunities to pick apart your services and question your charges.
There are a few ways to counteract this:
- Make sure you account for every service you plan to provide. Put together a list, review it, and then review it again. Ask someone else in your organization or a person you trust to review it as well. You don’t want to forget a key expense and have to go back to the client later to ask for more money.
- Include a miscellaneous line item rate on your invoice template. This will give you a chance to recoup some expenses you may forget to include, no matter how thoroughly you review your invoice.
- Set your rates somewhere near the middle of what the market can bear. It’s a tough balance, but if you set your rates too high, no one will want to work with you. If you set your rates too low, no client will think you’re worth working with. Make sure you’re aware of what other service providers in your area and industry are charging so you can set your rates accordingly.
- Don’t be afraid to charge for your expertise that goes above and beyond. If you have an advanced degree or professional certification, you might be able to justify raising your rate by a dollar or two. Keep in mind, though, that if you do charge an additional fee for this added knowledge, it better come to bear on your clients’ projects.
Pros of charging hourly rates:
- Flexibility to charge for all expenses, including disclosed and foreseen intangible expenses.
- Ability to set a fair rate for both you and the market.
Cons of charging hourly rates:
- It’s important to find the sweet spot of your hourly rate so that it isn’t too high or too low; this can be tricky.
- Listing things out by an hourly rate will make it easier for clients to pick apart your services, which can result in them asking you to lower your rates by cutting corners.
Option 2: Charge Per Project
When you charge your client by the project, you typically agree on a final cost that covers agreed-upon deliverables and a set timeframe. Payments can be made all at once or scheduled throughout the duration of the project.
The difference between paying per project and charging an hourly rate is that you typically don’t need to provide an itemized invoice that associates each deliverable with a cost. You will definitely want to provide a scope of work document to the client that clearly outlines what is and what is not included in the project cost, but you don’t normally have to account for each item with a specific rate.
Pros of charging per project:
- It’s easy to account for your time and expertise by including a set number of consulting hours as part of the project cost.
- You can include intangibles as part of your project cost.
- You can also establish a recurring meeting or conference call throughout the project that will give clients the chance to ask you any questions.
Cons of charging per project:
- Clients may simply be looking for the cheapest vendor to complete their project. Since you won’t necessarily have visibility to other bids, if your rate is higher, you may lose the job simply due to cost.
- Even if your project rate is higher due to additional services, the client may not see this as justification to pay more.
Option 3: Charging a Retainer
Throughout the tail end of the 20th century, it was fairly common for companies to keep certain vendors and service providers on retainer. This enabled clients to call upon vendors at any time to get a project completed or to get a question answered. Nowadays, it’s more common for a retainer to be called a maintenance or service fee.
Pros of charging a retainer:
- You can set the terms (e.g. duration, price, etc.) of the retainer, including how available you or your employees are to the client, how they can reach you, and what types of services are included.
- It is a truly scalable solution based on the client’s needs, their revenue level and your time.
Cons of charging a retainer:
- Clients may be resistant to paying a fee every month when they may not use your services for extended periods of time. It’s up to you if you want to provide them with an ongoing manifest of the hours you’ve worked or a list of what you’ve done for them in the past month to help justify the charge.
- You can also include a clause in the contract that states the client can suspend the charge if they don’t use you in the course of a month or are having financial difficulty. For example, for a 12-month contract, you might give the client the opportunity to skip up to two months of fees if necessary.
As more and more services and processes become automated, your knowledge and expertise is an even more precious commodity. It’s important to determine how you want to be compensated for the expertise you spent years cultivating. Additionally, it’s important to set the tone with a client early in your relationship so they don’t grow accustomed to getting “something for nothing.”
Don’t be embarrassed to charge what you’re worth. In this instance, your intellectual property is a product, and you should be paid accordingly. It has as much value to your clients as the printer they rent or the cleaning crew they’ve hired.