0:02 If becoming faster and better at your work means you get paid less, there may be something wrong with the way you're pricing your expertise. Today, we're going to look at how to stop selling hours and start getting paid for the value of the problems you solve.
0:22 >> [music]
0:23 >> Who are you? And where are you going?
0:29 >> [music]
0:30 >> What do you want?
0:38 >> Hello and welcome to People Making Money. I'm your host Kevin Bemmel, and I'm here every Wednesday at 10:00 a.m. Pacific time to talk about job hunting and being an employee, starting and running a business, and building wealth, the whole financial side of our life. And I've been doing this in repertory uh so far this year, and I'll be continuing to do this through the end of October. And then, stay tuned because starting uh in November, I'm I'm changing uh the the the format of uh
1:14 People Making Money, and uh hopefully you will find uh this new one uh even more interesting than the current show. So, today I'm going to be talking about a starting and running a business topic, specifically running a business, although it could apply if you're considering starting one. And that is this this uh this trade-off of um of uh um you know, sell the solution, not the clock. Some people call it the hourly trap.
1:50 So, here's here's kind of the the the the reality of the situation. There are 24 in a day and 7 days in a week, 168 hours in a week. We can't work all of them. Uh we have to sleep at least a few hours. You we have to eat and do some other things, right? And so, if we're billing on an hourly basis, we're putting a cap on our earnings. So, I'm going to talk about a a a a five um misconceptions
2:25 and uh ways of dealing with them that hopefully will give you some food for thought as you think about either again starting a business or the future of your current business. So, uh I think one of the most common misconceptions is charging by the hour is the fairest way to get paid. So, I'm not as you know, I'm not a big fan of this concept of fair, but uh you know, we'll use it as a proxy for uh
3:01 whatever else that we might say. So, people tend to think, well, you know, hourly billing, it's inherently fair because the client pays for exactly the amount of work performed, right? So, here's here's my question back to you, and that is what happens when your experience allows you to solve in 2 hours what you used to make in or what you used what used to take you 10 hours to do, right? So, essentially,
3:36 you are putting yourself at odds with your client's interest when you charge by the hour because there is always the incentive to sort of push up the hours to whatever the client will whatever you think the client will you know will pay um and and uh you know padding our timesheets is is not an ethical thing to do. So, al- um hourly billing it it creates kind of a strange economic penalty for expertise,
4:13 right? Because the better and the faster you become, the fewer the hours you the fewer hours you are selling, right? Meanwhile, a less ex- a less experienced person potentially can bill more hours and and and potentially even making a a a lot a higher income even though they don't have the skill and expertise that you have, right? So, a client typically does not wake up wanting to purchase, you know, 6 hours of your time if you're an accountant or a lawyer or a
4:49 consultant, a designer, marketing, whatever it is, okay? What the client wants is a problem solved. They have a tax problem, they want it dealt with. They have a contract that they need uh to make with another party and they need someone to write that contract. They need their website redone. They need a marketing campaign for customers, right? All of these that's what that's what the customer client wants. The amount of and and typically they want it as quickly as
5:25 they can get, right? That that's kind of a corollary, right? So, the hours are the input, the time it takes you to serve the client is the input, but the result is what the client actually values, okay? And and and that's you know, I think especially as we go ever more into the uh AI age here, we need to be focused ever more on what the client values, what they're what they're looking to get in order to keep
6:02 our businesses viable. So, uh you know, consider another sort of you know, classic expert problem. I was trying to find before the show, I was trying to find there's this uh comic out there. It's like a one you know, one frame comic where the the plumber has fixed something in somebody's house um and uh he's given the guy and and and you know, it took him 3 minutes and he gives the guy a bill for $100, right? And the the
6:40 customer is is kind of incensed like it only took you 3 minutes and you're charging $100, right? And the plum so that the plumber has scratched out the bill and he puts you know, uh time to fix the problem, you know, $5. Nine you know, gaining the expertise to know how to fix the problem in 3 minutes, $95, right? That is kind of the the the sort of experts problem is the longer we are in our careers, our professions, our you know, our trades, uh the more experience we get, the more
7:15 knowledge we gain and we're able to do things better, more efficiently and and and yet, you know, to get paid for 20 minutes of work does not represent the value that we brought to the customer or client, right? And so, the more expertise we accumulate, the more important it becomes to explain to a customer, you know, this this is what it's going to cost to fix it and and you know, here's the problem and here's how I
7:52 uncovered it and in other words, we need to spend some time explaining to the client the value of the service or product that we're providing so that they can see that it isn't the, you know, 5 minutes it took to, you know, where to turn the wrench, it's the ability to come to their house and be incredibly efficient in getting their problem solved and that's that's what they're paying for. Okay, so that's number that that that's the first misconception. Number the second one is um well, as I become more experienced, I I
8:28 just need to raise my hourly rate. Well, okay. Yes, that will in some ways uh compensate for your greater expertise. So, right? The way out of the hourly trap is simply to go from $100 an hour to 150 and then 200 and then 300 and um I have a friend who does expert witnessing work and he was telling me about one of his cases where the lawyer gets paid $20,000 an hour. He's a criminal defense lawyer evidently.
9:01 >> [laughter]
9:02 >> I mean, I guess that guy's in the hourly wage trap as well, but it, you know, if he's bought if he's billing 5 hours a day, he's making $100,000 a day. He's making a half a million dollars a week. Okay. I mean, I guess that's a trap. Maybe it's okay to be in that one, right? But for most of us, uh we are not going to get anything close to that kind of hourly rate, right? And the fact of the matter is whatever our rate is, it's not really a different business model. It's still exchanging
9:37 time for money, right? So, there's no valuing of expertise per se, right? So, the well, you know, a higher hourly rate may improve your income, it the the underlying problem still remains, and that is there are only so many billable hours, uh you know, in in your life. And so, uh you know, we we need to understand the ceiling that's created by selling time, right? So, there's 24 hours in a day, we're going to spend roughly a third of
10:13 them getting ready to and sleeping. We're going to spend, you know, maybe a couple of hours a day eating, fixing meals, where we got to do laundry, we got to have to take care of personal hygiene, right? So, uh you know, uh hopefully we have friends and family, we're going to spend some time with them. So, you know, in a given week of 168 hours, you know, can we really bill more than 30, 40, maybe 50 hours a week without just completely exhausting ourselves or destroying our relationships? So,
10:48 the you know, we we we have to handle administration, we have to handle marketing, proposals, collections, all these other things. None of those are that none of that's billable time, not to mention vacations and illnesses when our billable hours drop to zero, right? And so, eventually, in increasing our income through charging more per hour, or you know, there there will be a ceiling to that, or we're going to have to hire other people, and then sell their time, and we they get part of it,
11:23 and we get part of it, but now we've made our lives more complex, especially in a state of like California, where having employees entails a lot of uh regulatory compliance, right? So, is you know, is that the model to which we want to adhere, right? So, if we think about changing the unit of sale, we we change the economics of our business. So, can we instead of selling by the hour, can we sell by the project? Can we sell
12:00 a diagnostic or a defined result? Can we uh get a monthly retainer, okay? Or you know, sell con- some kind of access to your expertise, right? Um all of these are different ways of conceiving the value that we deliver to customers and clients, right? So, the question becomes, can I create revenue without requiring another hour of my time for every additional dollar, right? That's why, for example, manufacturing
12:37 can still be so uh so lucrative, because to the extent that we can, you know, create twice as many uh um items to sell with you know, with this working the same amount of time, because we have more machinery or whatever. So, we can double our income without spending any more time, right? That that is one of the one of the advantages of a product-oriented business. So, the the question is, can we sort of turn if for those of us in service businesses like
13:13 me, can we turn our services into somewhat of a product, right? So, raising your rate can make you more comfortable, but changing what you're selling can remove this this this cage into which we put ourselves. Okay. That's misconception number two. Misconception number three, clients will never pay for outcomes, right? So, customers, you know, the the the misconception is customers expect hourly billing, so trying to price differently
13:48 will scare them away, right? Now, I have not found that to be the case in my business. Uh and and uh I I think you know, for me, I have a multi-family office and I act as a trustee and a probate administrator. So, clients having, you know, knowing month by month or over the term of a project what it's going to cost them is much more comfortable for them than having the not knowing and each, you know, each month they're going to get an invoice with a number of hours I
14:24 worked and, you know, and what that's going to cost them. And I know for myself, I don't I I really don't like having to keep track of my hours. It takes it takes as much time to keep track of the hours, it seems like, as it does to actually do the work. And because so often I'm switching between clients and just doing, you know, something short here for 5 or 10 minutes, if then I I have to I have to have stop, I got to make sure I put it in my time sheet, it really slows down and and it wastes a lot of my time. So,
14:59 the question is, how do you get paid um on an outcome um when every customer is different, right? So, first you have to stand understand, what is the problem economically worth to the client or customer, right? So, this requires a different sales conversation, one centered on the results and the value of the effort rather than the effort itself. So, better questions to ask the
15:35 or or I should say good questions to ask before quoting a price are, "What are the problems you're trying to solve?" Right? That's the top one. "Why does it matter now? What happens if you do nothing?" Right? How many service providers ask a client, "Well, what happens if you do nothing?" Is it really going to cause your life to be materially worse? Right? Because sometimes clients get in their heads that they they want to do this, but it's really not worth them spending the money
16:11 on it. How much is is that worth it in that you just saved them money by having them not hiring you? Say, "Well, wait, why would I want to talk him out of a job?" Because when they really do it when they have a genuine need, they're going to come back. Okay? Because they see that you're focused on delivering value to them, right? So, what is this problem costing you right now? Right? What would a successful result make possible? Right? How quickly do you need it? Right? And what else is affected? And finally, what
16:46 is the financial or strategic value of getting this right? So, all of those can help you understand the the the the situation from the client's perspective and get a sense of what is the value of the solution that you can provide. By the way, it can also help you get a grasp on whether you're really the right person to be helping this client. You may not be. I tell people that all the time. I said, "Well, tell me what you need. Let's Let's talk about it. If I'm the right person, I'll
17:22 be happy to help you. If not, I'll be happy to help you find someone who can do the job better than I can, right? So, for me, if it's a if it's a smaller matter, I'm not the right person for that. You know, frankly, I'm too expensive. So, you know, we but we don't want to leave someone without a solution. And so, you know, for those situations where I'm not the right one, I'll I'll tell them, "Hey, you know, let me put you in touch with, you know, such and such. That This person I think is a better fit for you." Right? So,
17:59 imagine two companies that ask you to solve the same problem, okay? And for for company A, the problem is costing them $10,000, and for company B, the problem is costing them a million dollars. Okay? We'll say a million dollars a year. Um so, your work might take approximately the same amount of time in both cases, right? But, should the value of what you do be identical? Right? In one case, you're saving a company $10,000,
18:35 but in another, you're saving that company 100 times $10,000. So, your work is much more valuable to the second company. Okay? So, even though it takes the same amount of time. So, what do you do about that? Right? Well, so, this is where, you know, outcome-oriented pricing starts to challenge our assumptions about what should determine the price, right? So, I know for me, I I I have a what amounts to a minimum fee.
19:11 If someone comes along that doesn't fit that minimum fee structure, typically I will refer them to someone else. However, if if what they're doing is is interesting uh and and it's something on which I want to work, okay? So, then I might consider discounting my fee in order to have them as a client, okay? And and part of that is because the value they're going to get from me isn't as great because you know, the the impact on them is not going to be as large as it would for
19:46 uh a you know, a client with a a higher net worth or something like that, right? So, I'm not, you know, we need to be careful um about how we think in terms of um uh outcome-oriented or value-based pricing. So, it doesn't mean that, you know, we're trying to, you know, size the person up and uh okay, it looks like this guy could afford, you know, $25,000. No, that's not what we mean at all. But, the the price still needs to make sense uh for the customer. So, whereas if you're solving a million-dollar problem,
20:22 it may be worth $100,000 to that client. Clearly, that doesn't make sense for someone whose problem it only is only costing them $10,000, right? Uh but uh you know, again, maybe that smaller client is just not a fit for you or maybe you do it um because there's something interesting there for you to do or something like that and you give them a you know, a significantly lower price, right? So, the main thing is the scope and the responsibilities need to be clear, okay?
20:59 And um not and keep in mind not every service is appropriate for this model, right? So, there may be some services where charging on an hourly basis is going to make more sense than charging on a sort of value for services basis, right? So, before asking how many hours will this take me, ask what is solving this worth to the client. Those those are maybe somewhat in competition, but you want to understand both of them before you make a proposal. Okay, take a
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22:13 Call us today at 213-264-4396 or visit magnumprops.com. Okay. So, misconception number four, right? Fixed fees are too risky because I could underestimate the work, right? So, hourly billing it it may seem like it protects you, the provider, while the fixed fee or, you know, outcome-based pricing, it it it means you're assuming unlimited risk. But, here's the thing.
22:51 How do you sell an outcome without accidentally proposing unlimited work? That's really the crux of the matter. And and and that really comes down to um understanding the scope of what it what needs to be done in order to solve the client's problem, right? So, selling outcome doesn't mean telling the client I'll do whatever it takes for one price. No, no. It means defining what you're going to do to solve the problem, what you're delivering, and what the
23:26 assumptions are that you're making, and what falls outside of the scope of work, right? So, define the boundaries before setting the price. So, what exactly is it included? What is excluded, right? What What does the client have to provide, right? And how many revisions or iterations are included, right? What happens if the client changes the objective, right? And then what constitutes completion, and what happens when something genuinely
24:01 unexpected appears, right? So, you see this with with building contractors, right? They will quote a scope of work. This is what we're going to do. If you change anything, that's considered a change order, and that is going to change the price, right? So, this is the quintessential uh you know, outcome-based pricing, right? And contractors protect themselves by, you know, limiting the scope of work, and then making sure that if if the if
24:38 the client changes something, that they can charge extra for doing that, okay? And it's justified. Sometimes it can even mean, you know, pulling something out that was already completed and rebuilding it. So, if it wasn't the contractor's fault, by all means, they should be getting paid to do the work again, right? So, fixed pricing, it changes who benefits from efficiency, right? So, under an hourly billing, if you find a way to work uh twice as fast, right? Your revenue
25:16 may fall, right? So, under a properly uh scoped fixed price arrangement, so greater efficiency can increase your overall earnings, right? And so, now you become the beneficiary of your gaining ever more knowledge and expertise. Okay? And now, by the way, your clients can benefit as well. Presumably, they do because you're going to do a better job. And so, now your clients, your customers, and your and and your
25:52 interests are more aligned, right? So, um when when you have, you know, better systems, when you use AI, automation, templates, training, all those kind of things, they they help you accumulate more experience, and now you can improve your margins rather than reducing your billable hours, okay? And here's the thing. So, let's say that a a you know, a particular task used to take you 10 hours, and you made $100 an hour to to do that ser- not task, but a
26:30 particular service which took you 10 hours, you got $100 an hour, so you made $1,000 for doing that. Okay? And now, let's say that uh you're able to do the same thing in 2 hours, right? So, maybe you charged out maybe you charge outcome-based pricing, okay? And you say, "For solving this problem it costs $550." Okay? And you can do it in 2 hours now instead of 10. Well, now you're going to make you know, 5 * 550, that's uh $2,750
27:09 in place of where you only made a thousand. And if you know, one one particular job you notice something that makes it you can solve it even more quickly than the 2 hours, right? So, you may not even work 10 hours to make that 2750. Maybe you work a total of 8 hours to make the 2750. And it as long as the client is is is agreeable that, you know, to pay the fixed fee so that you can do it more quickly and get it and deliver it to them or if you're doing a repair in their home, you can get out of their
27:44 homework quickly, they're probably going to be happy about that cuz their problem is now solved and they can move on with their life. Right? So, your real protection isn't your timesheet. It's knowing exactly what you've agreed to deliver, right? And and so in that way a a, you know, fee for value agreement work can work very well. Okay. Now, final misconception. Selling outcomes means I have to guarantee results I can't control, right? So, if you stop
28:21 charging by the hour and you have to promise a specific, say, financial resort more result, more sales, more more profit, you know, a successful lawsuit or whatever, right? So, you know, you have no control over those and and inevitably you're going to have a bunch of unhappy clients. Well, how do you sell value when you can't control the ultimate result, right? So, lawyers have been doing this for, you know, centuries, really, right? Any lawyer who can who says to you, "I can
28:56 guarantee you the outcome of this legal matter." Okay, don't use that lawyer because they can't. Okay? They cannot guarantee you a successful verdict if you're a plaintiff in a lawsuit, they can't guarantee you that you're going to not be held responsible if you're a respondent in a lawsuit. Okay? If you're on, you know, if you're facing a, you know, criminal trial, they cannot guarantee you that they that they're going to that you're going to be found not guilty. Okay? No lawyer can do that.
29:32 Right? What they are essentially promising you is to represent you as vigorously as possible. Okay? That's very different from guaranteeing an outcome, right? And so, you don't have to guarantee something that you cannot control. Instead, identify the valuable deliverables or the transformation that you can responsibly commit to providing. Right? So,
30:05 >> [clears throat]
30:06 >> uh in my in my work, right? I'm I'm my deliverables are number one, you're going to have someone who's very experienced in handling financial matters uh keeping an eye on all of your finances. Okay? So, the chances that something will will go wrong are reduced. I do tell them, "They're not eliminated, okay? I'm not perfect. And I haven't seen everything. I don't know if I've seen 80%, 85, 90%, but I haven't seen 100%. Nobody has. Anybody again,
30:41 anybody who tells you they've seen it all, okay, do not walk, run away from that person. Right? So, my deliverable is greater peace of mind, okay? Greater security, but it's not peace of mind or absolute security cuz I cannot deliver those last two. Okay? And and and this is, you know, this is the relationship that I that I develop with my clients, um especially over time, right? And
31:16 I I know for myself, because I generally work on value-based agreements, so I look to, in essence, under promise and over deliver. Right? And and and that way they see that they really are getting good value for the cost of working with me, right? So, in in the end, this whole thing is about changing your professional identity, right? So, hourly thinking is what is my
31:52 time worth? Outcome thinking is what problems am I unusually good at solving? Or maybe put in a more sort of, uh you know, spiritual way, if you will, where can I deliver the most value to society in my work or professional life? Okay? That's a different way of thinking about this part of what we do, right? And so, the second question will probably lead you to some kind of
32:27 specialization, right? It's it's the you know, the days of generalists in pretty much gone. We don't see it among doctors so much anymore. We don't see it among technicians, right? Even among like auto mechanics, there are very few if any auto mechanics left who can repair every kind of car. Cars are just too complicated. Okay? So, specialization creates valuable expertise, and that is our goal, right? So, it expertise can create confidence, which
33:04 can create speed in the sense of being able to handle different situations more quickly, right? Um and and finally, that that combination can allow you to charge for something much more valuable than just another hour on the clock. Okay? And it gets you out of the hourly trap, right? So, the ultimate escape isn't a pricing trick. It's It's a change of mindset, a change of perspective
33:39 about what work is, how it fits into our lives, and as and in and in alignment with the, you know, three three pillars of attainment, how it impacts our identity. Okay? So, just some quick quick closing thoughts, okay? There's nothing inherently wrong with charging by the hour. And for some professions, okay, engagements, whatever clients, it may be the simplest and most appropriate, right? Lawyers still largely charge by the hour. So do a lot
34:15 of accountants, right? More and more are moving to a fee-for-service model. Okay? You see this a lot in estate planning, okay? But there's nothing inherently wrong with charging by the hour. Just understand the constraints of doing so. Right. But and and and that and and and that really is it, right? And when you charge by the hour, you are putting a ceiling on your earnings for the most part, right? So, the economic opportunity is to ask whether you can, instead of charging by
34:52 the hour, package your knowledge, your experience, your skills, your judgment, the the the systems you've created into a result that is of a high value to someone. And because and and and once you stop asking how much can I charge for an hour, you can start asking a much more important question. And what and that question is what is this problem worth solving, right? And when you have
35:28 the answer to that question, you'll be on your way to truly maximizing your income. So, uh love to hear your thoughts. If you are if you are pricing by value, uh look right below you in the show notes, you'll see links to social media. Comment on that. What What are you doing? How are you doing it? Have you always done it or how did you make the the the transition from hourly to uh you know, to uh uh value-based uh pricing uh uh uh of your service or
36:03 product, right? Uh I'd love to hear your thoughts. Ha- always happy to comment on them. Okay. So, let's see. Schedule of shows, all Pacific Time, Monday at 10:00 a.m., uh Trust and Estates Weekly, Tuesdays at 10:00 a.m., uh Business Lessons from the Military, Wednesdays, like today, at 10:00 a.m., People Making Money, and every other Thursday at 5:00 p.m. Join me at Jiggers' Place for a cocktail and a schmooze and we'll talk about all kinds of things not related to finances like
36:39 books and movies and ideas and relationships and all those things that make life just really worth living. So, I thank you very much for joining me today. And if you are not currently a subscriber, I would really appreciate if you would consider clicking that subscribe button or the follow button whether you're on YouTube or Spotify or Apple Podcasts. Those are the three platforms you'll find the way to Wow shows on them. Would would that way you'll never miss another
37:16 episode. So, once again, thank you so much for joining me. Wishing you a wonderful rest of the day and signing off as I always do. Marie darling, you are my bell. Courage at all times, my friends.