Project Pricing 101: How Should I Price Projects?
Tldr;
- Getting to the nitty gritty of hourly, fixed-fee, retainer, and iteration pricing
- Pros and cons of each pricing model and when to use them
- How does tracking time fit in?
- The only guide you’ll ever need to learn how to price your projects
To Begin…
Change orders, invoices, revenue streams, pricing models, and pricing in general are not really things that developers want to hear about. In one ear, out the other. Yet, if you don’t get your pricing right, you’re going to run into a little trouble. But, learning how to price your projects is critical to the future success of your business.
But don’t worry we have your back. We will walk you through the various pricing models, pros and cons of each, when to use each model and basically everything there is to know about pricing. Basically, think of this as Pricing 101 — everything and anything you need to know about how to charge your client.
Time and Materials
Basically, just as the name sounds, this model refers to charging your client by the hour (plus materials). This is by far the most common and most used form of pricing for individual freelancers and enterprises alike.
In layman’s terms: this form of pricing model is totalling up your operating costs (labour + overhead) and adding on a market-driven profit margin before breaking it down by the hour. You want to do it this way, otherwise you might not get a profit, which basically means you’ll be losing money.
Pros: you get paid for what you work! (if you track time accurately).
Cons: clients aren’t really fans. Basically, you can’t give them the specifics like fixed pricing can. With this model it is possible that unexpected costs could occur. Which ultimately means it’s hard to build client trust, possibly impacting future revenue.
Best Time to Use: when should I use time + materials pricing? Like I said, it’s the most popular model making it ideal for freelancers working on technical work such as app development where often things go wrong. However, if you’re thinking long term with a client, there may be other options to help build a long-lasting client relationship.
Tracking Time? Tracking time by the hour? Well, you’re probably going to need to track your time. Tracking your time means you can bill your client correctly, break down the details, see how long you’ve worked and send invoices (if you’re using Hourly). If you are billing by the hour, you want this to be as accurate as possible!
Fixed-Fee
Another crowd favourite for pricing projects is fixed-fee pricing. Often this pricing model isn’t as easy as tracking by the hour. But, clients do love it and there are quite a few pros.
Fixed-fee is when the client is directly charged a specific amount for the entirety of a project. Which basically means that you will have to come up with a price, estimate time, and resources to ensure you have enough individuals to complete the project in the required time.
For example, if you were working on project that requires app development you will need to know all the nitty gritty details up front. Such as, staff required, estimated hours needed, and ensuring that you are still making a profit. This requires planning or previous experience doing a similar project for another client. Otherwise, you might end up in trouble seeing as a simple miscalculation could mean you don’t make a profit.
Pros: clients love this model, but why? Because they can budget around it. They know from the get-go what they can and can’t afford. Another advantage is that cash flow is always predicable.
Cons: clients are the winners in this situation, but with great preparation and accurate time tracking you can ensure that you’re still getting the bang for your buck.
Best Time to Use: This approach is great for routine work for companies and clients like it as they have a price right up front. But if you’re working with a tricky or technical idea/client this type of pricing could run you into trouble.
Tracking Time? But that’s why tracking time comes in handy. It’s essential in ensuring that the fixed-price, is just right. Time tracking can help you in estimating future projects — due to the predictions it can make. Not only that, but you can ensure you’re remaining on budget or underestimating how long something is going to take.
Retainer
If you’re using this pricing model it means you are friendly with the client. Retainer pricing is when a client gives you a constant stream of revenue but in return expects continuous results. This ongoing relationship basically means that you will be receiving the closest thing to a regular pay check.
An advantage of this type is pricing is the ability to increase efficiency and profit. Basically, if you can reduce the amount of time it takes to write code; you won’t be penalised by the client. Which means that ultimately you are paid the same amount regardless of how long it took you.
Pros: Income is always predictable. This model also allows you to build trust and relationships with clients. Which means you can often reduce costs as you now know what is expected by the client. Allowing you to scrap time usually used getting to know the client and put it towards increasing efficiency.
Cons: You’re responsible now! Which basically means if there’s a problem, you’re the solution. From now on, you’ll need to keep an eye on the prize. If you’re working on a retainer this means that there’s usually a long-term relationship. Longer term often means larger scope — but if you don’t be careful you might lose site of the original concept. Bored? Yes, you will probably get bored. Working on the same project often derives some boredom. That’s why it’s important to be continually innovative.
When to Use: This pricing model is great if you decide to work with an agency for an extended period.
Tracking Time? I bet you thought that with this pricing model you probably don’t need to time track. Yet, you were wrong. Time tracking with this pricing model is essential for working out whether you’re making or losing money. It gives you an idea whether your costs are higher than the payment you are receiving.
Not only all the above, but time tracking allows you to show your client how much you’ve done during the retainer period. Basically, this helps you negotiate increases within the future as you have a record of all the contributions you’ve made.
Iteration
The iteration pricing model is known as ‘pricing per the stint’. Basically, it’s a spin off the retainer pricing model just mentioned. This new pricing model was born from the agile iterative approach. It requires a more close-knit relationship in which clients and creatives work together to ensure goals are met and products are built.
The idea of this approach is where a client provides payment for a period of your time. In which, at the end of this period (i.e., 1–2 weeks) the requirements of the project are rethought.
If using this pricing model, it’s important to keep in mind how many “iterations” it’s going to take to complete the task. The advantage of this approach is that it allows for working through multiple iterations of the same development. For example: take an app, if an iteration pricing model was used a new release of the app could be delivered with new features every iteration. With each iteration allowing the team to determine if it’s matching the client’s expectation. If it’s not, lets change our approach for the next iteration.
This can be extremely beneficial for ensuring clients expectations are met and it’s flexible in allowing for changes to the design or development of a project without sacrificing too much.
Pros: It’s very flexible, which means you can often change things around! You also aren’t locked into anything. Which basically means that if it’s not working between yourself and the client after an iteration you can say bye-bye.
Cons: There’s no old ball and chain. Meaning the relationship isn’t long term. At the end of the iteration, the client can end the relationship. If they do, that means no more money. Using iteration pricing often means that planning is essential. As, you never known when unexpected iterations could come about.
When to Use: The iteration pricing approach is great for companies that are large in scale with teams working on multiple projects. As it’s flexible and you aren’t locked in.
Tracking Time? With iteration pricing you won’t be exactly tracking time, for billing but more predicting if you’re making money. Tracking time is integral in understanding what price to charge for what project. Analysing your reports and time-sheets can further help you to understand whether you’re making money or whether you need to adjust future iterations with clients.
In the end…
Basically, no matter what pricing model you decide tracking time is important. By accurately tracking your time you ensure that you stay profitable, predict future projects, stay on top of budgets and impress clients. If you think it’s for you, check out Hourly, free for 30 days.
