Case Study: Case of Hourly Rates

I’ve been surveying and developing prices for non-traditional printing items over the last several months like: creating QR codes, email broadcasting, setting up websites, and posting social media for others. Especially in these non-traditional areas, there’s one fairly common response that needs review: “Well, I don’t know what to charge so I use an hourly rate.”

While using an hourly rate to establish an initial price is useful; overuse can cost us money and customers. That’s because we need three things from a price plan: fairness, consistency, and quick answers. And our customers need the same things. Using hourly rates exclusively ignores these needs, plus one thing more: customers are highly suspicious of them. Here’s why.

There’s nothing wrong with using an hourly rate to establish an initial price. After all, it’s impossible to estimate something we have never done, whether it’s an email broadcast or our first press run of enameled stock. It’s just that relying on hourly rates for our prices exclusively and forever creates problems. What are they? The rate itself and the time the job takes.

 

The Rate Problem

When I asked about pricing email broadcasts and social media, a number of people said, “I took my typesetting hourly rate and cut it in half.” Why would they do that? I assume they think they’re not using prepress equipment so the charge should be less. That’s stinking thinking.

Most of us have only one prepress person and they can either manipulate files, set type, or broadcast emails. If they are doing email broadcasts, they aren’t using the prepress equipment. That means your costs are the same when they are doing either. The constraint is the person, not the machine. Machine hourly rates should be used only when you have something like two people manning a six-color press.

Now, carry the logic over to pricing from costing, and the retail rate should at least be the same as your prepress rate. But there’s a reason the rate should be more, not less, and the data I’m collecting bears me out. How many print shops do typesetting? Right—about all do. Now, how many print shops do email broadcasting and social media posting? Only a few. (I find about 18% right now). That means the selling rate should be higher than the regular rate, not lower, because the service is scarce (recommended rates are published in my report).

“Yeah, but the customer can do email broadcasts and social media themselves.” Yes, they can do a lot of things themselves. Some people have others cut their grass. Some of your current printing customers could really produce that work themselves (think of newsletters). They could set it up in Publisher and run copies, but they don’t for many reasons. Among them: you may make it look prettier than they can, you may keep their database current so they don’t have to, and you might help them with copyrights. Whatever! There’s some reason they bring it to you. And let’s not overlook the most obvious: people hire things done that they dread doing. Grass cutting and doing the monthly newsletter are two examples. Now carry this over to email broadcasting and having to deal with HTML sooner or later, and you will find plenty of customers who would like you to do it for them.

Now what rate? Don’t know yet. I am still working on the study, but I can tell you it should be higher than typesetting. A complete report will be available at www.crouser.com by the time you read this.

The Time Problem

The more times we do something the faster we become, thanks to the learning curve. This is especially true with software-based tasks. Therefore, using an hourly rate as a retail price results in the price for the same work going down over time.

The simple answer to that is to increase the rate as we speed up. Nice concept, but hard to implement. Increased production is easy to see when we buy equipment that does something twice as fast. But with a person’s work output, well, it’s harder to see. So the email broadcast you did six months ago, which took two hours, may take only one hour now, even though they are basically the same.

Then there’s the practical problem. The customer paid $180 last time (two hours of prepress) and this time it took an hour. Do you charge $90 or the $180 they paid last time? If you use the previous price then you are not using an hourly rate; rather, you have established a specific price (price list). What if next time your regular operator isn’t there and a replacement does the job in half an hour? Would you charge $45? What if they were slower and took four hours? Would you charge $360? An hourly rate can help you establish the initial value of a job, but you should convert it to a price list.

 

Why Establish a Price List?

Printers and customers need three things from a price: fairness, consistency, and quick answers. Only a price list provides these three things. (Using a computerized estimating system is the same as using a price list as far as getting a price goes.)

Fairness: as we’re often scared off by extremely low prices as well as extremely high ones, customers are also. We both are willing to pay a fair price for what we want. Otherwise, we’d never buy anything. Conversely, neither one of us is willing to pay an excessive price. And, when you think about it, both vendors and customers want each other to have a fair price. Why? Our customers need reliable vendors just as we need reliable vendors. And to be reliable, a vendor has to have a fair price in order to have the cash flow to stay in the business of providing the service.

So the question really is what’s fair? The biggest problem here from our side is that we can’t justify the price we ask the customer to pay. So, it’s just as much about negotiation skills as it is about the actual price itself.

Consistency: Imagine the reaction a customer would have to dealing with a printer who used an hourly rate exclusively in setting price. They might be charged $800 to reprint a job in month one, $1,200 in month two, and $600 in month three. When prices are not consistent, it raises issues of fairness to the customer and that’s when they turn to other vendors. Besides, if the job has a truly fair price of $1,200 in month two, why isn’t it being sold for that every month? After all, it’s not fair to the printer if it is not.

Quick Answers: I worked with a large company which found that when they returned a request for price to the customer the same day 75% of estimates turned into orders. When the price was returned the next day the close rate dropped to 25%. And the rate dropped to nothing as time went on (frequently estimates aren’t received for a week or more). So the printer is best served when prices are returned quickly. Additionally, most customers have a time issue when they decide to have work done. The vast majority don’t ask about something they don’t need for that is a waste of their time. And because they are under time pressure, they often choose between early estimates regardless of how low in price the later ones are.

 

A Matter of Trust

Using an hourly rate exclusively to establish price violates all three of these factors, plus one more: it violates the trust factor.

Customers are highly suspicious of hourly rates. Remember when the auto mechanic or plumber told you that your repair would be $90 an hour. How did you feel? Our customers feel about the same way. On the flip side, contract pricing (price list) adds to trust. So use a good hourly rate to help you develop an initial price, but don’t rely on it exclusively forever for it will work against you, not for you.

 

Tom Crouser publishes regular reports on pricing issues as well as recommends specific pricing for traditional and non-traditional printing functions. His Price Advisory Service is available at www.crouser.com for $290 per year, which includes both the Digital Printing Price Guide and the Crouser Guide to Small Press Printing. He’s located at Crouser & Associates, Inc., 4710 Chimney Drive, Charleston, WV 25302, 304-965-7100. You may email Tom at tom@crouser.com.

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