Early Exit #44: Hourly Rates Are Killing Your Business
A manifesto on retainer-based pricing and how it's the single largest driver of my income growth.
You’re reading Early Exit Club — a newsletter about leaving the 9-5 workforce to build a $20k/month solo business by Nick Lafferty.
Last time: Building an AI tool to automate my business
Throughout this post I quote from the book Win Without Pitching which I wrote a short review of a few weeks ago.
We sell our thinking but we do ourselves a gross disservice in selling it by the hour. The surest way to commoditize our own thinking is to sell it in units of doing: time.
Blair Enns. The Win Without Pitching Manifesto
What is the hardest part of freelancing?
Every freelancer will give a different answer to this question depending on what stage their business is.
If you just started out, the hardest thing is often finding clients, but your bottleneck shifts as your business matures.
After freelancing for the last 16 months, running this newsletter, and speaking with dozens of other freelancers, I’ve found that the next hardest part is nailing your pricing rate & structure.
If you price yourself too low, you’ll attract the wrong type of client and you need more of them to sustain yourself.
If you price yourself too high, you’ll struggle to get any clients at all (and losing one becomes that much more painful).
And if you screw up how you price, you’ll only compound those problems.
Moving to retainer pricing was the single most impactful choice I made to grow my business to those $30k/months I used to write about
This post is a long time coming and will outline why I prefer this pricing structure, how I implement it, and how you can too.
Hourly pricing humanizes your business (this is bad)
When we charge for this thinking by the hour we undo much of the work of the previous proclamations. “How much an hour?” we hear the client think. “How many hours?” When we employ commodity pricing we invite commodity comparisons, regardless of the value we deliver.
Most freelancers get stuck in hourly pricing due to some combination of:
It’s the only way they know how to bill
It’s easy and safe
It’s the only way the client has worked with freelancers
Hourly pricing invites a negotiation. Hourly pricing humanizes you and your services which is bad.
You’re a business. No one negotiates the price of their Big Mac. You either pay the price on the menu or you don’t eat McDonalds.
This is only the beginning of the problems with hourly pricing.
Why Hourly Pricing Sucks
There are many negatives to hourly pricing:
Hours don’t correlate with value delivered
It creates misaligned incentives (and punishes you for getting faster at your job)
You’re too reliant on your clients for work
Hours spent don’t correlate with value
I opened almost $7 million dollars of pipeline for one of my clients last quarter. It was their best quarter ever from digital marketing and also the quarter that I worked the least amount of hours for them.
We barely had any meetings. Between my move to NYC, my contact taking a vacation, and a company-wide kick-off, we met maybe 4-6 times all quarter.
That record didn’t come from me putting insane hours, it came from the compounding effects of us working together through the last year to experiment, nailing the right message to the right audience, and then doubling-down on our best performing campaigns.
The amount of hours you worked on a project doesn’t matter to the client.
They don’t care if it took you an hour or 10 hours, they’re paying for results and a specific outcome.
Hours are your problem, not theirs.
👉🏻 Hours are only the input metric to what you deliver and you should be incentivized to minimize them.
Misaligned Incentives
Hourly pricing incentivizes you to take longer at tasks because that’s how you get paid.
As you get better and more efficient at tasks, which you will, you’ll get paid less for completing them.
If you’re a new freelancer, you have a ton of newbie gains ahead of you.
You’ll start out with a bunch of baggage from your previous 9-5 job. You’re learning how to run your business, how to communicate with clients, how to create and send invoices, and a million other things.
You will suck at a lot of things.
But good news: you’ll eventually get better! And it’ll happen faster than you think.
And as you get faster about doing client work, you should reap those rewards.
If a task that previously took you 2 hours now only takes you one hour because you made a sick macro in Google Sheets, then congratulations you screwed yourself out of an hours worth of pay.
But if you don’t charge hourly, then you just gave yourself a couple hours back in your day.
👉🏻 You should be motivated to work as efficiently as possible.
Worst case scenarios can crush your business
Imagine you have a contract with your client for 20 hours of work a month.
You have a meeting scheduled with your client to kick things off, but they cancel. No problem, we’ll reschedule (do you bill them for this?).
You eventually meet with them and setup next steps. Your client is going to send you a report on the last 6 months of their business. Once they send that over, you can get to work.
Except they take two weeks to send it to you, so you don’t have anything to do.
This goes on and on.
You end up having to pull work out of them, because if you don’t then you don’t get paid.
This is a real story.
I know someone who had this exact problem. Their client never gave them any work so they couldn’t bill any hours.
This is a worst case scenario. You’re reserving time on your calendar for a client that isn’t delivering work to you, and they’re not incentivized to give you work because it doesn’t cost them anything to delay.
You can’t allocate that time elsewhere, because what if the client finally gets off their ass and gives you some work. Now you’re double-booked.
All of this can be solved with a different pricing structure.
Retainer Pricing 101
So, what is retainer pricing?
Retainer pricing is like having a client put you on speed dial with a monthly subscription. They pay you a set amount each month, and in return, they get a certain number of your consulting hours or deliverables, plus the peace of mind that you're always available when they need you.
Retainers are best paired with a tight scope of work that defines what you’re doing and what you’re not doing.
Retainer pricing can also be useful if you have specific knowledge or domain expertise and your client wants to guarantee that you’ll pick up the phone in an emergency or that you’ll provide ongoing maintenance of a project (e.g. if you built a website for a client on a project-basis, your retainer fee could cover monthly maintenance and changes within a certain scope).
Do you guarantee a set number of hours?
The strength of our strategic processes, rooted in our deep experience and systematic thinking, is what ensures our high likelihood of a high-quality outcome. This is the basis of the premium we command, therefore we should not be charging for it in units of time.
None of my retainer agreements mention hours.
Instead, they focus on outcomes like driving $X amount of pipeline or completing XYZ Project. That works for my type of work as someone who manages paid ads on behalf of my clients — it’s very easy to tie the value back to my work (and my cost) — but often doesn’t work with more project-based work like Marketing Ops or Product Marketing.
Even though my clients only receive access to part of my time, they get access to my entire career experience.
I get questions like these all the time:
Are your other clients seeing a slowdown right now?
How’s this working for your other clients?
What ad formats are working best for you?
This is a massively underrated value of any freelancer with a decent book of business: pattern matching across your clients.
Retainers come with the understanding that some months might require less of your time, and some months might require more of your time. This is certainly true for my business.
That same client who I helped drive a record amount of pipeline for? We’re about to increase budgets and add new channels to the mix which will take up a ton of my time.
When a client asks how much time I’ll commit to them, I tell them the truth.
I’ll do whatever it takes to make sure we hit our goals.
This is a dangerous commitment because it theoretically allows uncapped hours. None of my clients have abused this yet and luckily I’ve helped many of them drive record amounts of revenue.
Use that line at your own risk 😇.
It’s also a good filter to use for prospective clients: is this a person I want to commit to working through challenges with?).
How To Set Your Retainer Prices
I completely made up my retainer prices in the beginning.
My first retainer client was $4,000/month to run Google Ads and LinkedIn Ads for a late stage B2B SaaS company.
I was stoked at that amount!
And then I talked with another consultant who charged $6,000 for the same service.
Shit.
But here’s the secret: we all just kind of make the numbers up.
This is not uncommon, other consultants I’ve talked with also just make up their numbers or base them on a number they got from someone else (who probably made it up too).
I try to benchmark my prices less than the cost of a premium agency. I’ve hired a few agencies in my full-time days so I had a decent idea, but even agency prices can vary by a large margin.
After signing a new client I increase my prices by about $1,000 for each subsequent client.
And last month I closed a client for 3x the amount of my first client.
My advice for picking your rates
Pick a number that makes you nervous to say out loud. The number you say should feel like too much.
And then add 20% to it to account for you sandbagging your value, because humans are really bad at valuing themselves.
I promise you that the right client’s won’t think twice about it.
I’ve hired marketing agencies that cost $36,000 a MONTH.
Your $5,000 retainer is nothing in comparison (and 3 x $5,000 retainer clients is $180,000 a year).
How I set my rates now
This is specific to my business but I’ve slightly changed how I set my rates now.
I used to bucket all of the currently scoped work into one price. That worked great, until the client wanted to expand the scope of work and I didn’t have a mechanism for increasing my rates.
I’d still do the extra work, I just wouldn’t get paid for it.
Now I define everything up front:
Google Ads is $X, If you want to add Bing, it’s $Y
If you want to add LinkedIn it’s $Z
Prices increase after you spend $100k in each channel
That’s all I do. I only do those three channels which is why this works so well for me. My scope is still limited and is much better defined.
The key here is clear expectations from the beginning. And it’s not just beneficial for pricing, you can do this for every aspect of your engagement:
How many meetings you have (and how frequently you have them)
How many people you interface with (e.g. all communication must be funneled through one person)
My average price per customer is way up since I implemented those changes, and as long as I continue to provide tangible value then everyone is happy.
Set Your Rates on Easy Mode
If you want more help to determine your rates, I made a free calculator you can use.
It’s a simple Google Sheet that you can duplicate and play with, starting tops-down (what your desired income is) or bottoms-up (how much your monthly expenses are).
FAQs on Pricing Yourself Fairly
We all go into the world woefully underprepared to think and talk about money.
We’ve been told not to talk about money with our peers, friends, or even family.
I have bucked this trend from day one when I told everyone how much revenue my business made, and I’ll continue to do that here.
Here are the most frequently asked questions when I talk to other consultants about pricing and retainer models.
I’m afraid I’m charging too much — what if they can’t afford me?
Then they can’t afford you.
You should have a minimum price that you absolutely cannot go under. Doing so is a disservice to you and the unique value you bring.
And in my experience client’s who are price sensitive are often not the best clients to work with.
👉🏻 If someone is sweating my fee then it’s likely not a good fit.
This is primarily why I only work with B2B SaaS companies. I tend to avoid local businesses unless I have a previous connection with them.
We should charge based on the value we are providing the client. Larger clients receive larger values from us and they also have the ability to pay more.
Smaller clients receive smaller values from us, but we have to enforce a minimum price for us to be profitable as a business.
I’m afraid of saying no to work
My biggest mistake as an early freelancer was saying yes to everything and tailoring my offers to best fit the client’s needs. This is not a winning strategy.
You need to have a specific, focused offering that leans into your deep expertise. Only then can you command a price premium and speak from authority, which helps you find better clients and command higher prices.
Here’s how it plays out:
A prospect comes in and needs help with something outside your core area of expertise, but in an area you’re familiar with.
The new consultant will pride themselves on being flexible and will adapt their offering to help this new client out.
The new consultant does this for many reasons, but somewhere deep down is a fear of turning down money.
I’ve been there, I’ve taken those clients, and I’ve always come to regret it down the road.
If you have an established client roster then I would strongly recommend declining to work with this newly out of scope client.
If you have nothing else going on, take a risk and use this new client as a learning opportunity.
Every time I’ve said no to work a better client has come around that I otherwise wouldn’t have been able to say yes to.
Say no and refer that work to someone else (preferably without the expectation of a referral fee because relationships are not transactional).
Wrapping Up
Moving to a retainer pricing model and slowly increasing my rates for each new client is the single biggest driver of my financial success.
It’s how I can afford to move to Brooklyn and pay silly amounts of rent every month without freaking out (too much).
Finding a way to incorporate this into your business will:
Help stabilize your income every month
Build resiliency from clients not sending you enough work
Help you achieve your financial goals
If you enjoyed this, here are 3 of my past newsletters you’ll find helpful:
Thank you for subscribing. It continues to mean the world to me.
See you all next week.
Nick
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Agree with you on this one! Hourly rates are just a way to conveniently come up with a price. But there’s always a better way like what you’ve said about retainer, subscription and value based pricing