June 15, 2020
If you bill by the hour, there’s no financial incentive to get better at what you do.
Usually when I say this to people who bill hourly, their knee-jerk reaction is to reject the idea out of hand. They’ll point out that they love getting better at what they do and that they often invest time and money in their professional development.
And I’ll say, “Sure, but whatever your incentive is to do that, it’s not financial. The faster you get, the less money you make.”
Eventually, it will begin to dawn on them that there is a paradox at the center of their professional life. On the one hand, they love getting better at their craft. Who doesn’t? On the other, there is no financial reward for getting better. In fact, there is often a financial penalty.
Faced with this conundrum, they will sometimes deploy impressive mental gymnastics to avoid having to change anything. The most breathtaking effort I’ve heard so far goes like this:
“If I get so good at my craft that I’m faster than all of my competitors, then my estimates will be the lowest and I’ll always win the work. Therefore, I do have an incentive to get better even though I bill by the hour.”
The first time I heard this one, it made my head spin. It was so misguided that I didn’t know where to start debunking it. It was like the guy said to me, “Sure, it’s a race to zero, but hey... a race is a race and I want to win!” Unfortunately, this wasn’t the last time I’ve heard this argument so maybe it’s worth me walking through it.
For the sake of discussion, let’s say Bob charges $100 per hour and gets twice as many new project leads as he can handle. His success rate with landing new projects is 50%. He’s confident that if he could cut his estimates in half, he’d land 100% of these new projects.
So, Bob invests time and money into tools, training, and systems that make him twice as fast at what he does. Now, his estimates for new projects are half what they would’ve been, and he does in fact start landing 100% of his incoming leads.
Okay, so... what has Bob accomplished?
He’s now working on twice as many projects as before, but making only half the money on each as he would have. Therefore, his overall revenue has not changed, but his administrative duties and switching costs have increased. And he’s out the time and money he invested in getting more efficient in the first place.
Here’s the thing...
Even in this oversimplified example, there’s clearly no financial incentive for Bob to invest in getting better at what he does. In a more real-world scenario, it makes even less sense for hourly billers to get better at what they do.
In my experience, the problem that most self-employed professionals are wrestling with is not that their close rate is too low, it’s that they don’t get enough leads in the first place.
Getting better at what you do so you can undercut your competitors and close more deals doesn’t solve for the “I’m not getting enough leads” problem. In fact, it makes it worse because if you get twice as fast, you’ll probably need twice as many leads to make the same money.
(Regardless, you don’t have to go to all the trouble of getting better at what you do just to beat your competitors on price... just cut your hourly rate in half. Boom. Done.)
Hourly billing does not reward expertise, it punishes it. The better you get, the less you make. That’s the hourly trap.