We talk to and work with many
freelancers and virtual assistants, and one of the more
interesting topics is how businesses in the industry bill their
clients. Two of the most popular approaches are billing by the
hour and billing on a monthly retainer. This article explores
the pros and cons of these strategies.
Billing by the Hour
The main advantage of hourly
billing is that it is simple. Work 10 hours, get paid for 10
hours. It's also an easy way to get started with a new client
who may not yet be willing to commit to a long term
relationship. For those just starting out part-time as
freelancers or virtual assistants, hourly billing can be
attractive for this simplicity.
On the downside, hourly billing
puts a cap on your earning potential. There are a limited number
of hours in the day, so at some point, you're out of hours. Even
a "normal" 40 hours per week is difficult to bill for - unlike
being employed where just being in the office is something
you're paid for, as an independent businessperson, you need to
actually be doing client work to get paid for it.
Another drawback is that there
is no commitment from clients for regular work. One month you
may get 40 billable hours of work from a particular client, and
the next, zero. This means more non-billable time needed for
marketing and client outreach to sustain a constant inflow of
work.
Retainer Billing
Retainer billing is an approach
where a client commits to purchasing a fixed amount of time and
pays upfront typically. For example, a virtual assistant might
offer a minimum 10-hour monthly package at a reduced hourly rate
of $30 versus the normal hourly rate of $35 or $40.
The benefit for the client is
twofold: some level of assurance that their work and priorities
will get the hours they have paid for, and typically a reduced
rate for that work. For the service provider, the benefit is
predictability of cash flow - retainer payments are usually
received in advance of performing the work, so you know exactly
what's coming in, and can actually "fill your practice" in a
relatively reliable manner.
Another common feature of
retainers is that they tend to be "use it or lose it"
arrangements. This is very common in other industries (like your
local fitness center). If your client doesn't take advantage of
their retainer hours available, they will expire at the end of
the month.
What seems to happen in
practice is that most clients use most of the hours they've
purchased, but just enough do not that it offsets the discounted
rate. In other words, your average hourly rate would be roughly
the same as if you didn't offer retainer discounts. So you get
the benefit of predictability at little to no cost in income.
A drawback of retainer billing
is that you do need to commit to being available for the hours
that are being paid for that month for your clients. So time
management becomes a key skill - you don't want to overbook
hours and be unable to perform the work. But this is what is
commonly referred to as a "high class problem".
Another concern about retainer
billing is that it can be more complex to manage - you need to
keep track of how many hours are left and when they expire for
each client. However, software products for time tracking and
project management like ClientSpot make retainer client
management easy by tracking hours remaining and expiration
dates, and providing a simple report to let you and each client
see how much time is left on the retainer.
The Bottom Line
Depending on your situation you
will most likely use a combination of some hourly and some
retainer billing. If you're looking for more stability and
predictability, you'll want to focus on attracting clients who
are comfortable with a retainer arrangement over time. For
clients just starting out with you, hourly might be the way to
go until trust is established.
