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  • Writer's pictureJoel White

When Price ≠ (Hours * Rates)

Pricing based on Hours * Rates has its place and quite frankly drives the large majority of pricing for most pricing tools I develop. This approach provides a grounding in the work involved at rates the business requires to achieve target profitability, especially for industries where different customers have widely varying requirements and influence on how the work is performed.


Yet Services pricing should not always equal Hours * Rates. You should always be striving to perform services more efficiently tomorrow than you do today, next year compared to last year, etc. Strictly pricing everything on an Hours * Rates basis can penalize you for operating more efficiently. Furthermore, you likely provide certain unique services, and/or certain services at dramatically better quality than your competitors (if you even have competitors), where you know the true Hours * Rates result is a fraction of what customers will eagerly pay.


Ah, you say, but my pricing tool and finance system only handles hours and rates!


My favorite option in this scenario is to capture the difference as a distinct non-labor item (call it "non hourly fee", "fee differential", "non resource fee", etc.), within the service itself, with no associated cost. And that's the point- this differential is pure profit margin resulting from superior efficiency and/or a superior service offering.


Whatever you do, do not inflate your hours to cover the difference. You'll simply inflate your operational budgets, confuse your implementation teams, over-hire, and thus lose the margin opportunity you were aiming to achieve in the first place.


Don't let "the system" hold you back! Find creative ways to maximize the profitability of your pricing and implement those results into your systems in the simplest way possible.


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Contact me or book a meeting to discuss how these principles can be applied to improve the performance of your organization.

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