On selling our most valuable resources: our time
#6 - What is the right hourly rate? Shall we sell deliverables, results, or time?
Hi!,
Whether you are a CEO, employee, or freelancer, you probably value your time. Our today’s special is about time.
Welcome to issue #6 of Odoo Trailblazer, our journey to become the #1 Odoo partner.
Sorry for being a bit late. I’m actually off today but wrapping up my newsletter in front of Mt Fuji, Japan's tallest peak, at 3376 meters.
About 80% of the US small businesses are in the services sector. Simply, it means they sell the time of employees, freelancers, or subcontractors to their clients.
As I’ve been growing a service business very quickly across different markets and cultures, I had to answer many questions myself:
What is the right selling price per hour?
How many hours per month could I expect to sell?
How do I track employees’ time?
What rules or metrics to use in a business?
Shall we sell our deliverables and results or our time?
I’m still learning about these topics, and today I’m sharing with you my current understanding and opinions on the topic.
Agenda
Shall we sell time?
Tracking time spent
Invoicing & commercial terms
Billing ratio: how many hours per month should I expect to sell?
Billing rate: how much should I sell for 1 hour of consulting?
1. Shall we sell time?
A common debate among service businesses and freelancers is if they should actually sell their time.
Many would say that time is their most valuable resource, so they should use their time to sell something more scalable such as selling training, product, etc.
The theory is that if you build one training or one app, you spend time once and then sell it many times.
This is actually a much more complex business model.
You need to spend time creating your product, marketing, maintaining and supporting it. Many of the products you may try to create will not work, and none of them will work forever.
The reality is that most people or organizations that try to create products with time would make more money selling services.
2. Tracking time spent
In Port Cities, each employee is tracking how much time they spend on each task and activity using the Odoo Timesheets app.
Why?
Invoicing: for many of our contracts, we invoice our clients based on the actual time spent by consultants, so we need accurate and real-time tracking.
Cost: even for the projects that we sell at a fixed price, we need to know how much time (remember that time is money!) we spend on each task or deliverable.
Time management: it’s very useful for any employee or professional to know where they spend their time. It helps to identify the real time spent on each activity, so we learn to estimate tasks better, commit realistic deadlines or efforts, and identify tasks that we should stop doing.
How?
To track our time at Port Cities, we use the Odoo Timesheets App
Our employees track their time every day, by blocks of 30min to 4h, so it is precise enough, but not too time-consuming.
We log our time spent against a specific task so we know the cost of each deliverable for each client.
We use it together with the Odoo Project app: for each customer engagement, we create a project and then 1 task per deliverable.
Common mistake:
Many service firms don’t track the time of their employees. At best it seems to work while they are less than 5 employees because the owner still controls everything, and in the worst and most common cases, they don’t realize that many projects or clients cost much more that they bring in.
3. Invoicing & commercial terms
Another debate among service professionals is whether they should sell hours or deliverables (the actual work produced). Ultimately, you sell the same, but it is more about how to market it and how you share responsibilities with the clients.
Let’s compare selling hours with deliverables.
Price perception
Deliverable: it is easier for the client to know what they will get for a given price.
Hours: it is easier to assess if the price is fair. E.g. $3000 for 1h obviously seems too expensive, but it is hard to know if $12,000 for a “custom analysis report” is expensive or cheap.
Marketing & flexility
Deliverable: it is easier to market the results of what you’ll deliver to the client.
Hours: you sell something more abstract (the time of an expert) but offer more flexibility. You could later work on items or activities that were not defined when you created the contract.
Responsibilities
Deliverable: you usually take all responsibilities, so if the collaboration with the client is ineffective or you disagree on the definition of the outcome, you’ll pay the extra cost to deliver.
Hours: you don’t take contractual responsibility for what will be delivered, which could be negative for the client. Additional terms may be added to reduce customers’ risks.
In practice, at Port Cities, we sell both hours-based and deliverable-based projects.
When is a deliverable-based price better for the client?
When;
We are able to define the requirements in detail
The budget approval process is complex or needs to be done upfront
Little scope changes are expected
4. Billing ratio: how many hours per month should I expect to sell?
So, what is a good billable ratio? It really depends on your industry and your business.
The billable ratio is the number of billed hours / total available hours, of your team or a specific consultant. In one specific month, the billable ratio of a team member will be “the number of hours he invoiced to client” / 160, assuming the staff worked 4 weeks, 40h per week.
If you sell coaching or some legal advice, you will not sell a lot of hours, and you’ll likely have significant non-billable time. So a billable ratio of 50% may not be that bad in this case.
If you sell long-term consulting engagements requiring full-time staff, you may reach an 80-90% average billable ratio.
Even in the same industry, it may vary a lot. In IT consulting, some firms may sell a team of full-time developers for 12 months, while others may provide ad-hoc advice to SMEs. The first will expect a much higher billable ratio.
Typically, an Odoo consulting firm should aim for an average billing ratio of 70-80% for its consultants. A bit less for project managers and a bit more for developers.
Finally, the billable ratio to aim also depends on your commercial terms.
If you sell full consulting days, you would expect more than if you sell per hour.
Do your services include non-billable time? Such as administrative or commercial time spent by your consultant.
All these parameters and questions are critical because they impact the target to set for your team and the computation of your selling price.
5. Billing rate: how much should I sell for 1 hour of consulting?
Most freelancers and small services agencies sell at a very low price at the beginning, often because their math is not right.
Let’s start with the profit formula per consultant per month:
Profit = Revenue - Expenses
Revenue = billing ratio * available hours * billing rate
For example 75% * 160h * $100 = $12,000
From here, we can already conclude that a business with a billing ratio 33% lower will need a price 50% higher.
What are the expenses? This is where most mistakes happen.
Expenses = compensation costs + sales costs + overheads
Compensation costs = gross salary + other benefits + social security and company costs. People often forget some benefits or taxes.
Sales & account management costs = it’s safe to say that it is about 20% of your revenue because either you’ll have significant marketing costs or senior profiles involved in the sale process.
Overheads: it is your management costs, HR, accounting, legal, and office costs. I would assume it is at least 10% for most services businesses.
Let’s do the math:
Revenue = 75% * 160h * $100 = $12,000
Compensation costs = $ 5,500
Sales costs = 20% * $ 12,000 = $ 2,400
Overheads = 15% + $ 12,000 = $ 1,800
Therefore, Net profit per staff = $ 2300, or an EBIT margin of 19%.
Of course, we should aim to have low overhead costs and a high billable ratio, but we should also be realistic.
Conclusion
At Port Cities, for a long time, we’ve also made some mistakes, such as:
Too low billable ratio targets
Too low billable rates
Underestimate overheads & sales costs
But we have learnt from those mistakes. Today we aim to increase our net margin and investment in sales & marketing. We also aim to reach a billable ratio of 75% and an EBIT margin of 20% within the next two years.
Finally, I encourage all consultants and freelancers, but especially the Odoo community, to set the right price or billing rate. It's better for the ecosystem if Odoo partners are stronger.
However, please remember that this topic is critical and complex, and we are still frequently assessing it.
Thank you for reading.
See you next week!
Follow us on LinkedIn for more updates: Gaspard (Founder & CEO), or Port Cities (our company page).
To know more about Port Cities and how we help companies to use Odoo (business software): https://portcities.net