The most common mistake in deciding on a vendor

Three years ago, I decided to hire a vendor and we agreed on the hourly rate. Everything went fine until the first checkpoint. I wanted to know how much was done on the project and I was shocked to find out only about a third of what I expected was done. For this vendor, the hourly rate was reasonable. But for the amount the vendor got done per hour, the value was abysmal.

My mistake was in being lulled to think that this vendor could work at about the same rate of speed and production that I could. Boy was I wrong and it cost me.

It’s so easy to fall into the trap of comparing hourly rates of vendors and nothing else. For example, let’s take the task of hiring a bookkeeper. Let’s say your last bookkeeper worked for $30 per hour and you needed him for two hours each week. Now you want to find another, and you’ve found one for $30 an hour. Great, you think, problem solved.

The problem comes later when you discover your new bookkeeper is twice as slow as the last one. Now your bill has doubled. Not such a bargain anymore.

How many times have clients compared your hourly rate with other vendors, only to say “you’re too much.” It happens to me all the time when I have to resort to hourly billing rather than a package. My fee is not quite three times as high as the ordinary web designer. The problem is I get three to four times the work done per hour that other web designers get done. But explain that to a new client, and they give you a double-take. I don’t blame them. In this economy, trust is lower than it ever has been, and the pride we all have in not wanting to be cheated is stubbornly protective.

Besides the obvious answer (don’t bill by the hour), what are some things you can do when you find yourself selecting or selling your services and comparing or being compared?

  1. Be sure you ask or point out that knowing an hourly rate is worthless if you don’t also know how much one vendor can do per hour compared to the other. No two vendors are alike in this area.
  2. Get or give a range on a project so that your decision-maker can choose more intelligently.
  3. Ask what will be billed and what won’t be. For example, do you get or offer free phone calls and free email access? (I do.) Are there extras like phone support or warranties loaded into the rate that make it unequal in comparison? You might not be comparing apples to apples if one vendor includes more than the other.
  4. Will you or the vendor bill for mistakes or learning curve time?
  5. How does experience and education factor into the rate?
  6. Are the service levels equivalent?

Return on investment is a term most accountants are familiar with, but not all entrepreneurs are. This is an equation that compares all project costs including your time and expenses with the expected revenue that completing the work will pull in. For example, if you invest $1000 in a website, you should expect to get at least $10,000 in business from it over time. Simplistically speaking, your return on investment (ROI) for that project is 10 to 1.

A bookkeeper is typically considered overhead cost, but a great bookkeeper can generate a return on investment by showing an owner how to save money by reducing expenses or increasing income. She can get her ideas from looking at the books and asking good questions.

When you begin to think like a million-dollar business owner, your decision-making will become more sophisticated. One step is the move from comparing hourly rates to making decisions based on return on investment instead.