Hourly Rates
I took my first freelance job in the 80s. It didn’t take me long to realize that charging by the hour works against us in a three key ways:
- It takes time to keep track of the hours.
- If we are are more productive in one hour, we run into comparative rate issues.
- Most importantly, over the course of a single job, we get paid less as we get faster and better.
Very soon, I decided to negotiate a flat rate for any work I took whenever I could figure out an appropriate algorithm.
This week in the book, Sway, The Irresistible Pull of Irrational Behavior,
I got new insights into the buyer’s view of flat rate fee structures. Now, I’m even more convinced that when I can define a task or an operation clearly, I’ll be choosing a flat fee for a scope of work.
Why People Opt for a Bundled Minute Phone Plan
Think about your phone plan . . . have you ever bought more minutes than you need, just in case . . . ?
Who want’s a huge unexpected bill? We don’t want to worry. We don’t want to worry so much so that we’re willing to pay a more for the peace of mind. Even when those minutes rollover, the phone company has already sold them to you.
That’s called loss aversion.
Loss aversion is what gets us to buy insurance on a rental car too.
The word *loss* alone, in fact elicits a surprisingly powerful reaction in us. Companies like Avis and Hertz, facing the challenge of selling a product that is both useless and overpriced, have capitalized on this powerful effect. When we rent our cars, our credit cards — not to mention our own car insurance — automatically cover us should anything go wrong with the vehicle. But the rental companies push additional coverage that not only is redundant but also would cost a whopping $5000 on an annual basis. Normally we’d scoff at such a waste of money. But then, as the sales rep behind the counter is about to hand over the keys to that newish Ford Taurus, he asks whether we’d like to buy the
loss damage waiver. Sway, p.22
We don’t need to be selling useless insurance to use this fact of human psychology.
Focusing on Gains
Loss aversion can bring negotiating sense to a conversation about charging for the work we’re doing. It’s good business to show potential clients the gains in quality, schedule and budget realized when we clearly define and bundle our services so that they can see what they’re getting.
Comparing an hourly rate versus a flat fee plan is one way to do that. The communcation that happens around that subject is also a great way to get more information about the scope of project. Naturally, defining the work and working roles clearly is critical to this process.
Most importantly, client conversations are best focused on the value of our work, not the cost of an hour. When clients understand what we do, rather than thinking only in terms of time we’re saving, the partnership and our brand both get stronger.
How do you see loss aversion at work in your situation?
–ME “Liz” Strauss
image: Apple iPhone
Work with Liz!!
Related:
The Chameleon Effect: Can Othersââ¬â¢ Perceptions Hurt Your Success?
