Freelance: Hourly versus Retainer Client Billing
We talk to and work with many freelancers, and one of the most interesting topics is how the industry bills for time.
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 (unbillable) time needed for marketing and client outreach to sustain a constant inflow of work.
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 cashflow – 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 like ClientSpot makes 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.