Pricing Strategy 101: Discover the right way to charge what you’re worth
Whether you’re a freelancer or running an agency, figuring out what to charge for your services is one of the most difficult issues in the creative industry. There are all kinds of hotly debated pricing strategies to choose from but which one is right for you? We talked to a range of people from different disciplines (web design, development, illustration, content strategy, branding, etc) to find out how they approach pricing and ensure they run a healthy, profitable business.
Low pricing
“A lot of people fall for the mistake of thinking that offering the lowest price is the only way to win work,” warns Leon Brown, an education content developer from Liverpool. “All markets have buyers with different characteristics, which a pricing strategy must reflect. Going for the lowest price is an option, which will be attractive to customers who put price above quality and who don’t need or can’t afford the highest quality.”
Brown stresses that it’s important to be realistic about pricing. “It’s very easy to guess a price, then later find out that the quote will lose you money,” he explains. “If you have costs to pay out to deliver the work, then you at least need to make sure that what you are getting paid is more than you are paying out. Similarly, you don’t want to be giving your time away for free. You need to make sure you identify the break even point as a mixture of costs and time expenses; or time and materials.”
If you opt for the lower pricing model, one way to remain profitable is to identify what can be cut out to reduce costs. “This is how Alan Sugar was successful with Amstrad,” Brown argues. “He sold hi-fi systems and other technology goods that cut out expensive components to keep their costs down. They were good enough for the average person who would otherwise not have been able to afford or make an impulse purchase for the prices being charged by his competitors.”
Hourly pricing
Chances are that such a model doesn’t really suit your work and the services you offer, as they’re more difficult to grasp and you probably don’t make physical products. So another option is to track your time and bill by the hour.
Ever since she started out as a freelancer, Saskia Videler, content strategist and host of UX and content strategy podcast Efficiently Effective, has tracked the time of all her processes. “I decide on a project price by estimating the total of hours all the tasks will take, based on earlier projects,” she explains. “Of course you’ll have to also try and evaluate what kind of client you’re dealing with: high or low effort? Will they be on time and accurate in their feedback? Try to account for that margin.”
Shirley Wu, a freelance software engineer who builds data visualizations, bills by the hour for pure implementation work, which keeps her on track and makes sure her coding is efficient. If the work includes data exploration and prototyping, however, she bills the whole project.
“When I charge by the hour, I feel like I have to be 100% efficient — there can be no wasteful actions,” she argues. “That really impedes creativity, because a lot of times when I’m exploring or prototyping, I’m just trying out ideas that may or may not work out. I can have the freedom to experiment. A lot of times it doesn’t work out, but for the few times it does, it’s really worth it.”
Freelance illustrator and designer Paddy Donnelly, meanwhile, advises to constantly re-evaluate your price: “After you complete each new project, you’ll have learned new skills, had new design experiences and grown as a designer, so why shouldn’t your daily rate reflect that? I’ve definitely charged too little in the past. However, that’s all part of the learning experience as you develop your freelance career. The client’s budget also plays a huge role in how much I charge, so this is something you should not be afraid to discuss with them before the project starts.”
Freelance UX and UI designer Laura Elizabeth started out in a similar way. “My pricing has changed a lot over the years,” she remembers. “I started with hourly. £15 per hour to be exact. Then I went up to £20, then £25, then £40. It took me a long time but I finally realised that billing hourly was making me miserable. I was constantly worried about going over the allocated hours and losing out. I had clients ask me how I could bill five hours for something that, in their mind, would take less than one. So I stopped billing hourly. Or, I stopped billing hourly at least publicly.”
Donnelly agrees: “Recently, I’ve been moving towards a more value-based pricing model for projects. As I develop more as a designer, the specific number of hours it takes me to create a finished design becomes less important. My clients are paying for the result, so should it really matter if it takes me one hour or eight hours?”
And so it comes as no surprise that a lot of designers and developers warn against hourly billing. Check out software consultant Jonathan Stark’s book, Hourly Billing Is Nuts, as well as his accompanying podcast Ditching Hourly, for example.
“Avoid — as much as you can — pricing based on any unit of time,” recommends consultant front-end architect Harry Roberts. “It seldom works out in anyone’s favour (yours or the client’s). Something you can deliver in an hour may be worth everything to someone else (saving them from a DDoS, recovering lost data), so being paid merely for the time you spent is not at all representative of its value. Similarly, billing your client your full day rate for an unproductive day (and we all have them) is verging on immoral — they don’t want a day of your time, they want what’s in your head. Thus, aim to price based on deliverables and value and not based on length of time worked. Remember: time rarely correlates to productivity in this industry.”
Also check out our 10 expert tips to get the most out of time-tracking.
Value pricing
Ben Parizek, partner and creative director at Barrel Strength Design, and, in a past life, a teacher of economics, agrees: “At the most personal level, your hourly rate is the price at which you are willing to sell your free time,” he argues. “Pricing should not reflect how hard you work, it should reflect the value you are able to create. If you can’t create value, you don’t want to have a price that tempts clients to think that you can create value for them — those relationships always end badly. When relationships end badly, you’re negatively affecting your most valuable sales tool — the recommendation — so it’s in your interest to get pricing right, scare away and say ‘no’ to clients and projects that aren’t a good fit for your expertise, and encourage what you do best.”
Value pricing can be scary at first, however, and a lot of us tend to undervalue ourselves.
“I’ve been looking into charging by estimating the value of my work for the client’s business, and have started reading How to Measure Everything by Douglas W Hubbard to help me figure out the worth of my work,” explains content strategist Saskia Videler. “It teaches you to work with all the data you have or are able to gather. That way you would be able to calculate the financial impact your work would have and thus the worth of your work for your client. I just haven’t had the guts to really experiment with this.”
It took designer Laura Elizabeth a long time to get out of the ‘time = money’ mindset. She joined the Double Your Freelancing Rate course and learnt how to price on value, not time.
“It made a lot of sense,” she enthuses. “If the client is making $100k from your work, billing $25k is a no-brainer. But I had another issue: I was doing design work. And some of my work didn’t directly create a ROI. Sure, I could optimise websites and keep track of conversions, but I was mostly getting rebranding projects. How could I measure that?”
Elizabeth adds that you can rightly argue that a new brand identity will increase trust, make you look more professional, legitimate and increase your brand’s perceived value, but it can be difficult to measure.
So she now keeps it simple and asks herself two questions:
- How much do I think this project is worth to the client?
- How much is this project worth to me?
“If I could go back, I wouldn’t think about what other people are charging,” Elizabeth says. “I’d simply ask those two questions and, if the answers lined up, that’d be my quote. If it turns out the amount of effort for me is larger than what I think the project is worth for the client, I’ll politely decline.”
That way you communicate to the client that you aren’t an expense but an investment, which makes it more likely that you’ll attract clients who are happy that they paid what the project is worth to them.
“And finally, I don’t overthink it. I’ll come up with a cost that gives me sufficient leeway to be attentive and ‘go the extra mile’ for my clients. I’ll pop it into my proposal, quickly add 10% just in case, and hit send.
Thomas Cornwall, head of service design at digital business transformation company Rainmaker, agrees. He admits that confidence matters but that the key to charging what you’re really worth is about solving a valuable problem in the right way for the right client.
“Those are the three critical factors,” he explains. “The more valuable the problem, the more it’s worth. The better you solve it, the better you can demonstrate why you’re worth it. The more valuable it is to a client, the more they’ll be willing to pay. A Fortune 500 global brand will obviously pay more for a new website than a local restaurant will.”
As a first step, Cornwall suggests you define your most valuable work. To do this, take a piece of paper and draw four columns. Then add the headers:
- Activity I’m good at
- Fulfilment index (0–10)
- Value to the market (0–10)
- Profitability index (0–10)
“Let’s say I’m good at cleaning. I enjoy it, so it’s about 8 on the fulfilment index. The value to the market is low, say 2. And it’s not very profitable because I have to do the cleaning. So I’m never going to be able to charge what I’m really worth if I do that.
“Now let’s say I’m good at sales copywriting. Again, it’s about an 8 in terms of fulfilment. The value to the market is quite high, say 6. And it can be very profitable, say a 7, if I charge a commission for my services. So I might choose to pursue that and think about other ways I can improve to create more value, such as 24/7 email access or faster delivery.”
“Charging what you’re worth means being a master of your craft and a master of communication. It’s not easy, there are no ‘secret overnight hacks’, but you can double or increase what you’re charging now by five or ten times, if you follow the right process. After all, perception is reality. And reality is negotiable.”
Presenting value-based pricing to a client can be a challenge, especially if they don’t know much about your work and the value is subjective rather than directly measurable. Jen Hood, creative director and co-founder of Californian branding and design agency Hoodzpah, always aims to give the client a reference to base the value on.
“Many times our clients have not dealt with a designer before and have no reference for quality industry pricing,” she describes their approach. “So when I send the price, I’ll show them how the cost will be paid off in terms of their own product. For example, a hotel bought a set of spot illustrations for use only on tote bags at one localized event. When they returned to license the work perpetually, the price was going to be significantly higher, as they have 18 properties with a very large potential audience and therefore the value is much higher.”
“So I framed the price in these terms to them: if you post only one of these designs on one of your property Instagram accounts, which has around 20k followers, and 50 people rent a room because of it (that’s a mere 0.25% of the audience), then you will have recouped your cost. That turns a very large number into a very large value. Try to speak in the client’s ‘value’ language to create mutual understanding. To do this you have to understand their product, and do a little research on how their company makes money and perceives value. Sometimes a company values visibility more than return profits from a campaign. So ask the potential client what their main company goals are — growth, profit, reaching new demographics — and frame the price value accordingly.”
Sam Dungey, general manager at Ocean Design, says that value billing was absolutely the right way for the New Zealand agency. “It gives us freedom within a framework,” he explains. “We are often asked to provide a rate sheet to clients, but ultimately we bill on the value of the project.”
“There are some pitfalls of value billing, though nothing that clear communication and good management tools like Streamtime do not solve. A couple of things I see being confused or causing issues have been the overlap of productization and value billing. In many ways you could argue they are the same thing, but at least in my view they serve different purposes. The second component has been where the ‘value’ alignment is missed with the client, have they truly understood what they are getting? As often said, many people ‘know the cost of everything and the value of nothing’. To make a value billing system work well there needs to be a respect for the service.”
Fixed pricing
You may want to complement value-based pricing (for the higher-paying, more exciting projects) with fixed monthly retainers. Seamus Holman, founder and creative director at design and development studio Gridwork, uses support retainers for clients with ongoing needs like hosting, software updates, design iterating, analytics analysis, SEO, content strategy, and editing.
“The mix is different for each client,” he explains. “I am very intentional about not including any fixed number of hours on retainers anymore. In the past that required tracking, reporting, prorating, or needing to bill extra. All those activities generated negative energy and were impossible to scale beyond one or two retainers. Instead, we offer things like unlimited questions via email, one full day per month, unlimited bug fixes, font licensing, CMS updates, performance monitoring, and SEO tracking.”
“Project work is sporadic. We need to do sales and admin to line them up and they demand a level of focus that is hard to sustain day in and day out. It would be too stressful to be completely reliant on that income for keeping things running during a slow season. The balance of projects and retainers has made me happier, more efficient, and financially stable.”
It’s similar for UX designer and strategist Christopher Cashdollar, who has become more flexible and creative with his pricing model over the years. “No single pricing model fits me because I take on very different types of engagements and I like to diversify my cashflow,” he describes his approach. “This means I like to make sure I have a mix of ways money comes in. Fixed price projects as well as hourly gigs are both happening at the same time in my studio, sometimes even for the same client. I’m a small business owner with a family and a mortgage. Aberrations in my cash flow are worrisome. Often I’ll take a fixed fee project and request monthly invoices instead of invoices based solely on milestones.”
Cashdollar advises against presenting or agreeing to a pricing model based on milestones unless you are absolutely certain your contract has a level of protection in it to ensure phases don’t get stretched out beyond what you’ve agreed upon.
If Cashdollar can scope the time and effort for a project clearly, he’s more likely to put together a fixed fee cost. This ensures he’s as efficient as possible in completing the work.
“If a project has a ‘grey zone’ around it; meaning the duration or deliverables aren’t crystal clear, I’m more likely to put a time and materials contract in front of my client and that hourly dollar amount is at the highest point in my range. If I can’t be certain when a project will end, I need to ensure I’m compensated appropriately.”
In the end, good pricing helps communicate to clients where you specialize and what type of behaviour you need from them to succeed at providing a high-quality service. “While your rate is one factor, there are many more things you can consider to raise or lower the perceived cost of a transaction,” Ben Parizek points out. “Do you prefer to spend time with family on weekends? Triple your weekend rate or only choose to offer services that don’t require emergency work on weekends. Do you need a certain amount of time to get a project set up in your workflow to do it well? Consider an up-front setup fee or the commitment from a client to give you an extra two weeks of time to onboard them into your workflow.”
In fact, as Cashdollar points out you should always ask for a percentage of the project fee to be paid upfront. “This might come as a surprise to some of your clients but it ensures that they’re committed to the project and willing to commit funds immediately to reserve your time.”
Also, take the time to share why you need specific things from them to succeed. Don’t shy away from uncomfortable conversations either. “That might mean asking for more money that you have in the past or demanding a higher rate when offered a price lower than you’re used to. Respect yourself and your time first. Negotiation is an inherent part of this business.”
This also means you need to be ready to turn down the work if a client isn’t willing to let you put yourself in a good place to deliver high-quality work. Or as digital consultant Justin Avery puts it: “Someone once told me if one third of clients turn you down because you’re too expensive, you’ve found the right price.”
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For more on this topic, check out Brad Weaver’s excellent book Creative Truth: Start and Build a Profitable Design Business and Dan Mall’s ebook Pricing Design.
Originally published at streamtime.net on August 17, 2017.
