The “hourly rate” dilemma – selling value instead of time
Why the hourly rate may be the wrong approach
What is the right hourly rate? What is better, cheaper or more effective? We explain why you should think differently and why comparability is not purposeful.
For decades, companies have been competing over this – the hourly rate. Who has the “best”? Who is the cheapest? Who is way too expensive? Especially companies that offer services are reduced to this word. It would be like reducing someone to their shoe size. If it is too small, it hurts everywhere, if it is too big, you might fall out. But in the end, you need it, your size. Just like companies need their “shoe size”. The main problem is that the hourly rate makes everything comparable.
The issue of the hourly rate has grown over decades. So someone once started to sell his services at an hourly rate because he could. Probably because he was the only one, he could demand a certain remuneration for the hours he spent. But then someone else came along and demanded a lower salary for the same services. Because he could. Maybe he didn’t have the same high costs, who knows. This of course went on and on and somehow you could always come to an arrangement. Once you won, once you lost. But in the end it was always down to the hourly rate.
In the meantime, unless you’ve got the unicorn on the market, you’re being compared internationally. With companies on other continents, with people from other backgrounds. But in the end, you are reduced to your hourly rate. For purchasing organizations, it’s the indicator. What happens as a result? Of course, one tries to choose the hourly rate as low as possible. But it is not always so easy. The costs of companies and people vary enormously around the world. It is not always possible to be the lowest. So what happens? There is a huge pressure on the “more expensive” organizations. People want to create as much value as possible with the time they spend. So it’s hard to invest an hour in a coffee conversation because it creates the impression that it’s wasted time. After all, you haven’t generated any value.
Buying time vs. buying value
And this is where the shift in thinking needs to happen. People generate value, always. Even during a coffee conversation. Companies need to get away from this “hours” mindset. The generated value is the only important indicator to compare companies, people and organizations. In the end, the customer does not pay for the “time spent”, the customer wants to pay for the value he receives. Basically, this is always the case. When the customer wants to buy a kilo of bread, he wants to pay for the food, not for the time the baker had to spend to bake the bread. The same idea needs to be established in the service industry.
When this mindset changes, the biggest winner is the customer himself. Because he usually judges on the basis of an indicator. Based on the “hourly rate” indicator, he gets the time of the provider. However, based on the “value” indicator, he gets, as the name says, value. And that is ultimately what should count and what you want to be compared to. These questions should and must be sales and purchasing argument number 1:
What value do I generate for the customer?
What value does the provider generate for me?
Author: Yannick Hirt, WebGate Consulting AG