How Service Businesses Lose Money
When it comes to knowledge work, these service-based professionals like designers, strategists, analysts, researchers, etc. must become experts to separate from the market. The only way to become an expert is from time. The upfront cost of time, along with some talent, is the price all must pay to not only be a knowledge worker, but get to the next level of some expertise.
Even a knowledge worker who is just starting has a good amount of experience that has helped form their perspective, craft, and logic. As a knowledge worker gains experience, they can recognize patterns more efficiently to get to more effective solutions; ultimately solving problems.
To me, this pattern recognition and effectiveness is what eventually creates a true expert in a field.
As you can see, time is inherent in the cost of building a knowledge-based skill like the ones I mentioned before. These types of services need an investment of time to obtain the skills and expertise to be an effective service provider. The biggest realization for a lot of service businesses is that the knowledge(and expertise) of the skill is more important than the deliverables. The knowledge drives impactful results, the “doing” is just part of the process. Whether that “doing” is simply sketching on the back of a napkin or spending some time thinking, the brain work is what creates the biggest leverage in the relationship.
For example, I recently was hired to provide strategy work for a luxury brand that specializes in premium hospitality experiences. They aren’t wanting me to deliver anything more than my thoughts on where they are in the market and why their audience loves them. No paperwork. No reports. They want my brain to examine their business, observe their audience, and spend time thinking about why it all matters and what the next steps could be for them.
Being sent to observe and discover has always been a joy, but it’s amazing at what one can dig up. Ideally for this particular client, I’m going to discover areas for them to generate extra value and increase revenue through brand extensions. I believe we will find ways for them to generate hundreds of thousands of dollars in additional value creation and value capture. All through my expertise and knowledge work.
How long will it take me? We never even talked about that.
The amount of time it will take me is irrelevant.
The results I will bring to the table are all that matter.
Many knowledge workers will get stuck in the chasm of time; tracking time, charging hourly, etc.
When in reality, this doesn’t focus on results, but rather your input of time.
This can become unhealthy for not only your business, but also for your relationships with your clients.
It’s best when a knowledge worker(those who specialize in their thinking whether in perspective, calculation, problem solving, etc.) charges a value based price.
This price isn’t a cost of inputs or time/materials, but is completely focused on the value delivered to the client through the results.
For example, a problem you solve could create $250,000 worth of revenue in 24 months. Yet, you may only charge $250 an hour to do it. You see the issue? The true value you are providing could be $250k+ in the long run or perhaps recurring revenue yet you charged them $250/hr for a handful of hours. You and your business will suffer from leaving money on the table for the results you are providing.
Another unhealthy aspect of time-based pricing is that you will instantly put against the client. It makes the relationship about the meter running and not about the results. This will make the client rush you and make some businesses to “run the clock” (unethically) to make things fair. The result for the business is forgotten and the client will not ever be pleased since the needle they wish to move won’t budge at all.
Beyond these two issues, you will be limiting yourself when billing hourly.
Why? Well, at a certain point hourly becomes ridiculous, at what point does an hourly rate sound insane? $750/hr? $1,000/hr? $2,500/hr? $5,000/hr? — as you can see, your hourly rate is bound by the gravity of “reasonable” just because of a number.
This creates an issue when you start driving big number results for clients and yet you are stuck charging a tiny percentage due to the hourly rate.
Once there was a woman who asked a designer to create a logo. The designer thought for a moment, then flipped over a napkin and drew a concept that the woman loved. He said “that will be $15,000” to her. She was shocked and said “but that only took you 10 minutes!” which he replied “yes, but it has taken me 10 years to be able to do that in 10 minutes.”
You see, this classic story shares the problem that comes with knowledge workers and expertise. Just because you get better, more effective, and faster, that doesn’t mean you should suffer financially for it taking you less “effort” or time. You should be compensated for your compounded expertise and the results it delivers to the client. Whether that’s revenue for them or simply a solution they absolutely love.
Time will punish you, your business, and your expertise.
The good news is that you can break free from this.
