Pricing is damn hard. If anyone tells you they have it all figured out ask them again in 6 months and it’s likely they’re doing something just a bit different then last time you talked to them.
I get asked about pricing all the time and to start our Pricing Series we’re going to take a look at the ways you could be pricing your services.
This is where pretty much everyone starts. It’s where I started my pricing. We look at our job and figure that we make $40 an hour so when we work on stuff for our clients we just charge that hourly rate to them.
In my opinion this is about the worst pricing model. Well actually the only thing worse is working for nothing.
Hourly turns the freelancer in to some sort of robot in that it’s about how many hours you put in not how much value you produce. You are simply there to type for you client and that’s about it. The times I’ve had clients try to argue down an invoice is when I’m pricing hourly and they want to know what I spent each minute doing.
Hourly would also mean that as you get faster at something you get paid less for the same work. You have no incentive to do things fast and all the incentive in the world to drag them out. Clients looking to keep costs low have the incentive to tell you everything will take as little time as possible and ride you to be faster.
It’s an adversarial relationship from the start, not a partnership.
My friend Morten wrote an awesome post on how to figure your hourly rate.
Daily is similar to hourly but abstracts the unit of time out to a larger chunk. My day rate might be $800 and for that you get all my time for the day.
This has the advantage of putting the focus on results more since you aren’t getting an accounting of what I did every second just that the goals for the day were accomplished.
Weekly pricing abstracts the units of measurements even further than daily or hourly. This larger unit of time helps your clients focus on value and results instead of each second you were doing something for them.
Unlike flat rate pricing you don’t have to worry so much about scope with this method. If you wanted to A,B,C at the beginning but after 2 weeks C is obviously a terrible idea and D is a great idea. Just do D if it fits into the week.
One of the cons to this is that if a long weekend is coming up then it’s possible a client will want a discount. Really you shouldn’t be working 40 hours a week anyway on the project since you have some business admin stuff to do. Skipping the business admin still gives the client the value they expected and means that you don’t have to offer a discounted rate.
I don’t discount 4 day weeks in my weekly rates I just do the business admin on the weekends.
See my previous post on weekly pricing.
Flat Rate per Feature/Requirement
Flat rate pricing is the second most commonly used plan I’ve seen around. The client wants A, B, and C and you quote a flat rate to do that based on the fixed scope.
I’ve made lots of money per hour doing this (like $500+) and I’ve also got a project going right now that has me under $50/hour for the work we’re doing.
If you estimate properly you should be hitting your effective hourly rate (I’ll talk about that later in the series) or pretty dang close.
A second issue with this method is that if you get half way through the project and decide that item C is a terrible idea you need to go back to the scope document and build out a new contract. You end up wasting a bunch of time deciding what the scope is and you will have a different idea of what the original scope was than the client did.
Wasted time is death to freelancers and small business.
You might think that flat rate pricing and value based pricing are the same things. You would be wrong though. When I hear people talking about flat rate pricing they mean that they always charge the same price to whomever comes along.
That means a Fortune 500 company would pay the same amount as the local eco-dairy. Even though they have drastically different means with which to pay you.
In it’s simplest form value based pricing means that you take in to account the monetary value you bring to the table.
Can you replace a $50k/year expense for a $15k up front cost even if it only takes you 2 weeks to build the replacement? You just saved the client $35k so you brought tons of value to the table and $15k is a valid price.
Rebranding a major national brand could increase their revenue by hundreds of thousands of dollars so charging $50k or more is a valid price.
Giving the local eco-dairy a new logo may make a $10k difference in their sales (maybe) so charging them $3k for a logo is a valid price.
Value based pricing takes into account how much additional income your work will bring the client and charges them a flat rate for your services based on that value.
Really any client should be looking at your fee and expecting that they are going to make 3x – 5x based off the work you do. If they aren’t judging your work as an investment (that will make them more money) and instead look at it as an expense (something that just costs them) it’s a pretty good sign to run away.
Conversion based pricing won’t work in every industry in fact I’ve only heard of it used in Real Estate and eCommerce.
For Real Estate it might mean that you work on a squeeze page to get users into a sales funnel for a small fee per registration. Then for users that convert to paying customers you get paid the big bucks.
On an eCommerce site you typically measure the current conversions and revenue from the site. Then you start your work and get paid X% of the increase in sales revenue from the site for 18 months.
For clients both of these mean that they have little risk if you suck. If you don’t get more leads for the Real Estate agent they don’t pay you anything. If none of the leads you bring in convert to real customers they pay you very little.
The eCommerce customer doesn’t pay you anything if you suck and don’t increase their sales. If they make more money you make more money.
There is of course risk with this pricing model. If you do suck then you don’t make money. If the Real Estate agent is an ass and doesn’t serve customers then you may not make much money since they can’t convert the leads you send into paying customers.
If you’re awesome though and make a online store an extra $500k in a year you can get some serious cash.
Contract or Retainer pricing is really just a modification of the billing cycle of one of the above methods. In this instance you price your services on an ongoing monthly basis. Then you provide those hours, or that conversion work each month in return for the pay.
Some people discount the time because it’s being purchased in advance and is guaranteed income. I don’t really think you should or need to do that though. Typically you could book the time out at full price if the client didn’t take it, so why discount the time?
If you’re interested in a great guide to getting long term contracts then my friend Eric wrote a great book called The Freelancer’s Guide to Long Term Contracts
That’s it for our look at freelance pricing models next time we’ll talk about how I think you should price your services.