Secret Ingredients: How Selling Hours Can Hurt your Bottom Line, Company and Brand

All companies, service-based or product-based have secret ingredients they use to help set themselves apart from their competition. Companies that are in the mode of creating assets are very good at these secret ingredients. What do I mean by secret ingredients? Coca-Cola has a distinct flavor and no other company has the exact recipe that Coca-Cola uses to create their world-famous soda. KFC has a recipe for their chicken that is unlike any other. Just the right amount of spices and seasoning set it apart from its competitors and make it unique. Technology based companies create software and scripts that perform actions for their clients. They keep the software and scripts private as that is what helps to separate themselves from every other technology service-based company out there. This all makes sense, right? Another term for these “secret ingredients” could be intellectual property, patents, or assets. In any case, these are private property of the company and is what helps to make that company valuable. Service-based companies need to adapt these practices to help build a stronger brand, one that is built on a solid foundation.

Keeping Your Cards Close to Your Chest

In poker, it is important that you keep your cards close to your chest, and not show what you have on your face. The same is true for service-based companies. When starting out, many small service-based companies that may be made up of one or two people, decide on an hourly rate and price their contracts accordingly. This seems completely backwards to me. This is giving your client too much insight into the operations of your company. While transparency is helpful to build trust, you do not need to give away everything!

Example 1

When negotiating contracts, if you proposed that a job would take 100 hours to complete at a rate of $X per hour, you have given away exactly how you operate. The client now has control of negotiations, simply because you have laid everything out on the table. From the client’s perspective, their perception may be that 100 hours is too long to wait for the finished product. They may negotiate that the project be completed in 60 hours. At this point, if 60 hours were agreed upon, you have just lost 40% of your revenue for that job. Sure you could work over 60 hours to complete the project, but then you would be losing even more money as you are only being paid for the first 60 hours.

Selling Hours Can Create A MisPerception

Once you begin negotiations by selling hours, a misperception can take place. If you negotiated low in order to gain a new client, you have put yourself in a tough position to raise your prices later on for another project. If you negotiate too low, then you run the risk of going over budget, thus losing more time and money.

Make promises you can easily keep and over deliver just the right amount

There is an art to negotiating, and one of the major points to make sure that you can deliver what you promise. On top of that promise, you can then over deliver just the right amount of extra to “wow” your client. Once your over deliver too much, you have set the bar and the standard that the client expects from you. On top of that, if you came out of negotiations with a lower price than expected, you have created a big hill to climb. In other words, don’t go overboard on over-delivering, but do just enough to keep them hooked on receiving your services and products.

Hours may have been taken into account when creating the price, but many other factors are used as well. The added value that the client or patient is receiving is a big one. Although subjective, it is one that can help with overall profit margins. People want to buy high quality, high value products and services. Within your niche market in your industry, there are people willing to pay more for a product or service with a perceived higher value than their competitors. By not capitalizing on this, you are leaving money on the table.

Not All Services Are Based On Selling Hours- How to Adapt Your Business to Use Other Revenue Models

It is certainly clear that not all service-based businesses use a model based on selling hours. Herb Cohen, world-famous negotiator, gets paid a small percentage of the very large fee that his client is after. He may work only a week in negotiating for his client, but the fee associated for that negotiations is based on the amount of money that he is able to gain his client. Heart surgeons perform life-altering surgeries that can take anywhere from two hours to 10 + hours. Yet, they do not charge their patients based on the number of hours that it takes them to perform that surgery. Former President Bill Clinton is said to receive $1 million dollars per speech that he gives. His speeches are less than an hour long, yet it is the value and the brand of Bill Clinton that allow him to receive that much per speech. Best selling author and businessman Marcus Buckingham is highly sought after for his work with corporations on strengths and weaknesses. His company reportedly brings in $75,000 per talk.

What is it then, that these examples are doing differently than selling hours? They are selling value, and showing their clients how that added value will benefit them tremendously. Herb may negotiate on behalf of his client to sell a business for $200 million dollars. If successful, Herb’s firm will receive a very small percentage of that price. The client can see that having Herb on his team will give him the negotiating power he needs in order to sell his business for the price he wants. The heart surgeon is able to save lives through their surgeries. The value of having a new take on life is worth more than an hourly fee that the surgeon could charge. This added value is surely calculated into the overall fee for the surgery performed.

Think about your business and how you currently have your revenue models set up. If you are selling hours to create your contracts, are your profit margins where you want them to be? Is your service perceived to be of as high value as you want it to be?

Online Services Can Result in a Larger Profit Margin

Many service-based companies are created online. The great thing about an online business is the fact that automation can play a large role, thus reducing costs and increasing profit margins. Just as a product has a life-cycle, an online service also has a life-cycle. Once the upfront costs are paid for, the cost to produce that online service drops tremendously and the profit margins increase. Can you think of an online service that you could add to your business as another revenue model?

Ideas to Get You Thinking

This post is not meant in any way to offend or upset anyone. It is simply to bring about awareness that they are other ways to sell services that may result in a higher profit margin and a stronger business model overall. If you use a unique revenue model to your niche within the service industry that helps you to win over your competition, leave a comment and let me know. I would love to hear from you and your thoughts on this subject.