Problem with Hourly Rates

Tom Crouser March 2, 2012 Comments Off on Problem with Hourly Rates

There’s a big reason why we should quote a customer a specific price (from price list for instance) instead of quoting an hourly rate for a price. Admittedly, the hourly rate is simple, provides a quick answer and protects us from time overruns on a project. It’s built on a budget hour rate or cost rate of the company (also known as budget hourly rates). So, why is a price list preferable? Customers are highly suspicious of hourly rates.

Remember the last time an auto mechanic or plumber told you that your repair would be $90 an hour. How did you feel? Our customers feel the same way. While an hourly rate to establish an initial price is useful; overuse of it can cost us money and customers. That’s because both the printer and the customer need three things from a price plan: fairness, consistency and quick answers. Using hourly rates exclusively violate all of these and one thing more. Here’s why.

We usually have to use an hourly rate to establish an initial price. After all, it’s impossible to estimate something we have never done whether it’s an email broadcast or our first printing of enameled stock. It’s just that relying on an hourly rate as a price mechanism exclusively and forever presents problems, specifically the rate itself and the time you take.

The rate itself: this certainly is the first problem as a lotta folks have a lot of different methods. More than one printer said when I asked about what is charged for Email Broadcasting, “I took my typesetting hourly rate and cut it in half.” Why would someone do that? I suppose the thinking is that we are not using typesetting equipment so we should charge less. That’s stinking thinking.

Here’s another view. Most of us have one pre-press person and they can do either file manipulation or typesetting on our equipment or (notice the “or”) they can do Email Broadcasts and Social Media posts using an Internet service.

Now if your pre-press person is doing Email Broadcasts, then they aren’t using the pre-press equipment, right? Okay. So, who is using it? No one is. That’s right. So, whether we use the equipment or not; our costs for this person are the SAME.

In fact, most shops should not use machine hour rates for cost purposes for just this reason; rather should use people based rates. That’s because the constraint is the person who does the job not the machine. If you have a six-color with a three-man crew, then the constraint is the machine and thus a machine hour rate is called for as opposed to a person based rate.

So, if you carry the logic over to pricing from costing, then the retail rate should at least be the same as your pre-press or typesetting rate because the person can do either one or the other. But there’s even more to it.

Now, your retail rate for Email Broadcasts should be more than your typesetting rate. The data I collected bears me out. Why? Simple. Have many print shops can do typesetting? That’s right, about all of us. Now, how many print shops can do Email Broadcasting? Well, the answer is few in case you didn’t know it because less than 20% of the folks I contacted do it. And that means the selling rate of the prepress person doing this should be HIGHER than your regular typesetting rate, not lower.

Yea, butta the customer can do Email Broadcasts themselves. Yes. They can do a lot of things themselves but some hire someone else to do it instead. It’s like most everyone has a car and drives themselves but a certain number use taxis and chauffeurs. Not everyone cuts their own grass either. Plus, printing-wise, many customers could produce their newsletter but they bring it to us instead. Why? We keep the lists up to date; we make it look pretty; and some of us even do copywriting.

Most importantly, we do it and get it done on time. Don’t overlook that important point. Give us the job and we’ll see that your grass is cut (newsletter goes out) every time.

The time it takes: The more we do a task the faster we become, which is basically the learning curve. Often we get up to 50% faster especially with software-based tasks like Email Broadcasting.

So, using an hourly rate only as our retail price results in our lowering of price over time. And that is for the exact same work. Of course, the simple answer is to increase the hourly rate as we speed up. Nice concept but hard to implement.

Increased production is easy to see when we buy equipment that does something twice as fast. But with a person-based work, well it’s harder to see their productivity improvements for rarely are two jobs exactly the same. So the Email Broadcast you did six months ago which took two hours may take only one now even though both are as close to the same as possible.

Then there’s the practical problem. The customer paid for two hours of time six months ago or $180 and now, this month, it took an hour so that means the price should be $90. Do you charge $90 or do you use the same $180 they agreed to before? Understand if you use the previous price you are not using an hourly rate; rather you are using an hourly rate to establish a specific price for a specific job (price list).

Here’s a practical application. I had a hillside of weeds that needed to be cut periodically. The neighbor kid was willing to do the cutting but neither he nor I knew what I should pay to be fair. So we settled on an hourly rate and when he cut it the first time, I watched and even helped a little.

Now we both know the time it takes and settled on a specific price for each time he does the job. By using that fixed price, we avoid problems that the exclusive use of an hourly rate presents, the biggest of which is the wildly fluctuating price.

For instance, consider the Email Broadcast job that originally sold for $180 six month ago, but it took only an hour to do last time indicating a $90 price. Now, let’s say your regular operator wasn’t there and a replacement did the job in half an hour. Would you charge $45? What if they were less speedy and took four hours? Would you charge $360?

Why establish a price list?

An hourly rate can help you establish the value of an initial job, but you should convert it to a price list.

Printers and customers need three things from a price: fairness, consistency and quick answers. Only a price list (using standards within an estimating system multiplied by units is nothing more than a price list) provides these three things.

Fairness: as we’re often scared off by extremely low prices as well as extremely high ones, customers are also. We both are willing to pay a fair price for what we want; otherwise we’d never buy anything. Conversely, neither one of us are willing to pay an excessive price. And, when you think about it, both vendors and customers want each other to have a fair price. Why? Our customers need reliable vendors just as we need reliable vendors. And to be reliable, a vendor has to have a fair price in order to have the cash flow to stay in the business of providing the service.

So the question really is what’s fair? Biggest problem here from our side is that we can’t justify the price we ask the customer to pay. So, it’s just as much about negotiation skills as it is the actual price itself.

Consistency: Imagine the reaction a customer would have dealing with a printer who used an hourly rate exclusively in setting price: and being charged $800 to reprint a job in month one, $1,200 in month two and $600 in month three? When prices are not consistent, it raises issues of fairness to the customer and that’s when they turn to other vendors. Besides, if the job has a truly fair price of $1,200 in month two, why isn’t it being sold for that every month? After all, it’s not fair to the printer if it is not.

Quick Answers: I worked with a large company who found that when they returned a request for price to the customer the same day; 75% of estimates turned into orders. When the price was returned the next day, the close rate dropped to 25%. And the rate dropped to nothing as time went on (frequently estimates aren’t received for a week or more). So the printer is best served when prices are returned quickly.

Additionally, most customers have a time issue when they decide to have work done. The vast majority don’t ask about something they don’t need for that is a waste of their time. And because they are under time pressure; they often choose between early estimates regardless of how low in price the later ones are.

Using an hourly rate exclusively to establish price violates all three of these factors plus one more: it violates the trust factor.

Customers are highly suspicious of hourly rates. Remember when the auto mechanic or plumber told you that your repair would be $90 an hour. How did you feel? Our customers feel about the same way. On the flip side, contract pricing (price list) adds to trust. Now I don’t have to watch the neighbor kid whack the weeds on the hill. I know that if he’s done it; well, I owe him a specific amount. It’s fair, consistent and quick.


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