Yesterday’s topic was boring. Today let’s discuss a fun topic: Money! 💰
We’re going to talk about how you can set and structure your pricing so that the work you do results in a win-win: You get paid what you’re worth and your clients receive great value.
Almost every freelancer you talk to will have their own point of view on the ideal pricing structure. What works for me might not work for you. And that’s okay. Just consider this field research that will help you make the best decision for your business.
We’re going to begin by reviewing the pros and cons of two different pricing models. Then I’ll share some of my experiences on the importance of smart pricing decisions.
Hourly pricing 🕐
Hourly pricing is a great place to start, and it’s usually the method that most new freelancers are comfortable with. I give you time, you give me money. Easy.
Hourly pricing will certainly make sure that you get paid for your time. It’s also easy to start with a specific rate and slowly increase it every few projects. With hourly pricing, you’ll always know exactly where you stand.
But hourly pricing comes with a few major downsides as well:
First of all, from a client’s perspective, they may not feel 100% confident that you are billing for the correct number of hours. No matter what you do, the possibility might exist in their head that maybe, just maybe, you could have completed their project just a little quicker.
Charging an hourly rate doesn’t provide much incentive for you either. As your skills grow, your workflow becomes more efficient. A project that used to take 10 hours now only takes six. Should be paid less because you’re more efficient?
Heck no! You’ve completed the exact same workload.
Hourly pricing works, but over the long haul, it tends to leave clients wondering about the value they are receiving and it might eventually lead to you feeling like you’re not being fairly compensated for your experience.
Project-based pricing 🧰
The next pricing model to consider is “project-based”. Project-based pricing can be determined by one of two things:
- an estimation of the time required
- an estimation of the value you are providing
Here’s the truth about project-based pricing: The first few times you try, you’re gonna screw it up. Royally. 👑
More than likely, you’ll underestimate the amount of time it will take you to complete a project or you’ll allow scope creep to take over. We’re optimistic that way. It’s ok, really, we all go through it. Good project-based pricing is the result of experience, so don’t give up on it too soon.
Once you get good at project-based pricing, you’ll see that it offers you and your clients some really specific advantages.
The cost is fixed, which means your clients know in advance what their outlay is going to be. All of the sudden instead of worrying about their next invoice and keeping tabs on your progress, they’ll leave you to get the project done.
But for you, the freelancer, there’s an even better advantage. Once you’re good at estimating the amount of time involved in a particular project, you’ll have an incentive to be more efficient. Working smarter means increased profit margins and projects that are delivered faster.
Before we sign off for today, let’s talk about smart pricing and how you can tie that into your chosen pricing model. This is what makes for a successful career as a freelancer — if there was a secret sauce, this would be it.
The secret sauce🥫
There are plenty of freelancers out there who perform a similar service as you. And of course, they’re looking for work just like you are. There’s a temptation to compete on price in order to get the business — this is what is known as the “commoditization trap” and you want to avoid it at all costs.
Never price your services based on what the competition is charging. That results in a race to the bottom.
Instead, set your pricing (project, hourly, or a hybrid of both) based upon the unique value you are providing to your clients.
Take a close look at the problem you are helping your client solve and ask yourself, “What is this really worth?” For example, say you’re developing a website for a business whose average new customer generates a $15,000 commission. If you can demonstrate how your website will increase the conversion rate, perhaps attracting one or two new customers each quarter, think about how they might perceive that value. What do you think your client would be willing to pay for the benefit of landing those new customers?
Of course, your skill level needs to remain in line with your rates. The technical requirements of a $10k project are usually much greater than, say, a $1k project.
Don’t overvalue your services and overpromise on what you can realistically deliver. But at the same time, undercharging for your experiences is one of the fastest ways to put yourself out of business.
If you’re not sure where to even start in terms of your rates, here’s an article on how to figure out what you should charge (there’s also a link to a salary calculator in the article).
Now that you understand the basics of pricing, the next lesson will dive into how to land your first few clients.
Founder of The Fearless Freelancer®