Why high billable rates don’t work

When it comes to billing by the hour, I find most people defend their rates in terms of skill as it translates to efficiency. Certainly in terms of efficiency there are distinctions individuals can make in terms of their hourly rate. Distinctions that may make the difference between $50 per hour and $150 per hour. It is possible that some individuals, given a standardized workload, are three times more efficient. In other words, they usually get their marching orders done in one hour instead of three. Though I would argue even efficiency is subjective and as such the three to one rate may be specious.

The problem is, efficiency is bounded. Take typing, some people can type 50 words per minute and others can type 150, but nobody types 1000 words per minute. So if your only means of economic growth is tied to your efficiency, you have a natural limit to what you can earn. Simply put, when you sell time, efficiency is your only multiplier.

And not only are you capped in terms of efficiency, you tend to get good at doing what you’re told, quickly. Regardless if it’s the right thing to do. Regardless if it provides marginal or negative value to your customers. And therein lies the problem with high billable rates, while you may be immensely valuable in terms of efficiency, when you get into larger sums of money, other things become more important than efficiency. I would argue doing the right thing always matters, but it especially matters with high billable rates because large sums of money quickly become involved.

But because you charge by the hour you aren’t responsible for doing the right things. You’re responsible for doing what you are told. Your customer is responsible for telling you the right things to do. Your customer is responsible to avoid asking for things that are marginally valuable, or worse. Your customer is responsible for what your time commitment actually turns into, regardless of what you estimate. You have every incentive to say yes to everything they ask for, it’s hard to say no to a customer, doubly hard when it means you make less money. Your customer is responsible for paying for all the gold plating you recommend as the expert. Ultimately, all of the risk falls into the lap of your customer. And likely nobody has spent much time talking about outcomes because they’re too busy obsessed over estimating cost, both you and your customer are busy doing this.

The only way to unlock your potential for growth is to provide more than efficiency. The key to higher rates are not rates themselves, but what else you provide to your customers. Efficiency is simply a pre-requisite to do business. But it’s also contextual, it’s better to do the right thing slowly than the wrong thing quickly. There’s simply no comparison. So in many situations, efficiency is irrelevant and your customer may actually need you to be inefficient so long as you are highly effective.

What else can you provide? You can take on reasonable risks that are unreasonable for your customer to handle. You can focus on doing the right things, not the wrong things. You can even structure and price your work around outcomes, not inputs. Results, not time. If you do this, then you have an unbounded potential. Because you can provide unbounded value to your customer. And, if you cared to map revenue to hours you would see potential for higher rates than you could ever imagine. Because minimizing risk and doing the right things are immensely valuable. Expending time is not a guarantee of anything, therefore it has a cap on what it can be worth.

The average person can type 40 words per minute. The best might get into the low hundreds. If Ralph Waldo Emerson were alive today, he would write around 30 words per minute, that’s about as fast as people can write. Though, nothing would make me believe that talented writers actually write fast. If someone special in your life passed away, who would you hire to write the eulogy?