Pricing shouldn’t be scary, it’s just a part of business. Let’s dive into two of the business models that exist: Market Pricing and Perception Pricing. We’ll walk you through both of them and help you pick the one that best fits you and your industry.
A quick glance at a site like Upwork will show you how varied prices range across different regions. If you dive into the economics of it, the cost for a nice meal in North America could often feed a family for a week in Southeast Asia or some parts of Europe. As such, the market rates in comparison to international freelancers can be quite alarming.
That said, recognizing that most clients are looking for services from people in their region, you need to understand the local or national market. It’s here where you may lose a deal based solely on the pricing strategy you’ve taken. If two freelancers are both offering the same services and both are considered equal in terms of skill and experience, but one charges $100 an hour while the other charges $20, there’s no way the one charging $100/hr will win the project.
If you’ve just left the comfort of a traditional office, this structure may make most sense to you. And if you’re a solopreneur who spends the majority of your billable time hammering out the goods, it’s a great option. Think graphic designers or transcriptionists, rather than consultants or marketers. In this case, you’ll also have to research based on external factors, such as location and experience level, rather than just bare-bones cost of goods and target profit margins.
Value-driven pricing is when you base a product or service’s price on how much the target audience believes it is worth. For example, if your client is a company doing hundreds of millions per year in revenue and they want you to redesign their website, the right design, messaging and execution could result in a significant return on investment. As such, you want to ensure that what they pay for the website is commensurate with the value you deliver. If you’ve become a force in your freelance niche, this pricing model is best for you. Within this model, you’ll leverage your unique skills to command a higher rate. Be prepared to have case studies or demonstrable experience to back your quotes. A hefty social media following doesn’t hurt either, since you can also promote yourself as an influencer.
With either pricing model, you will have to consider five important things. Be sure to check off the following:
- DEMAND Pricing according to the demand and the economy. If there isn’t much demand or if there is an economic slump, you’ll want to make certain you aren’t pricing too high.
- OVERHEAD Keeping your lights on is a critical component of pricing. Calculate your yearly utilities, wif, heat, rent/mortgage, marketing and insurance costs. If your project is one month, divide everything by twelve and you’ll know how much your overhead costs.
- BILLABLE TIME Knowing how long certain tasks take you is extremely important. You should always be able to estimate a baseline or reference point for your project pricing, whether you bill per hour or not (more on that in just a bit!).
- BILLABLE EXPENSES Regardless of your area of expertise, there will be supplies, equipment and necessary expenses related to your project work. Record those! And bill them appropriately to your clients. It’s their domain name, ad space, or photo rights after all.
- PROFIT Consider your talent and expertise when it comes to pricing your services. But bottom line your profit is what you are charging over and above your expenses. Determine the yearly salary for your needs and then begin to calculate your desired profit goals (typically 10%-20% more than your salary).
Co Tip: Whether you’re a writer, consultant, or web designer, pick the business pricing option that makes the most sense for your work. Test the waters early on by trying both pricing structures discussed. Your business is going to evolve, so if your first option does not work out, give the other one a try! But no matter which option you ultimately decide on, your pricing needs to sustain your business and allow you to earn each and every penny you’re worth.
How to charge your client
Whether you choose to price your services via the market or perception, it makes sense to keep an eye on the clock while you work and know how much time you spend on your work (or writing emails, making phone calls, tweets etc.). And all the while time flies by, your business depends on the price tag attached to those seconds, minutes, and hours. You have a few choices, and it comes down to you in making the final decision. The question really comes down to two different roads to take. Let’s explore the pros and cons of both.
To be frank, hourly pricing is simpler. And it is something you are already going to do while you are working on all your projects (elbow nudge). Hourly rates are also useful if you are doing a small, short-term project. It could also benefit you if you are working with a client over a long-term period or on an ongoing basis. When project goals and timelines are unclear, choose to charge hourly – that way your client will be forced to respect your time and consider clarifying the project. Get paid easier for items outside the original scope of the project by billing an hourly rate.
Pro Tip: Use And Co's free time tracking feature to never lose track of how much time you spend on a specific project.
But clients may be wary of the rate if there is no project ceiling. Ask the client about budget expectations before you quote an hourly rate! If the project proves to be very demanding, your hourly rate typically needs to be adjusted and that may result in negotiations which will be very challenging – hourly rate adjustment is a much harder sell. If you are fast, then your hourly rates do not take this into account! It may be difficult to raise your hourly rate, especially if your clients are coming from referrals. Clients will mention your hourly rates to each other when they refer you! Lastly, if your client does not understand the work that you do they may see the activities listed on your invoice and be confounded why it took you so long to do something that seems simple.
PER PROJECT RATE
By charging per project, you can tailor your rate to the project and the client. Further, you can predict income much more easily by billing per project as you won’t be estimating the amount of time it takes you to do something. You have the flexibility to include packages for different services you offer which allow you to vary the rate. Charging per project allows you to increase your rates easiest and test out your market’s tolerance for higher rates.
A per project policy for rate intuitively shows your clients that there are multiple factors going into your pricing. Further, charging per project maximizes your income because you become limited only by how quickly you can finish the work. You’ll find productivity incentives soaring and ways to do things quicker as a result of per-project rates. And that allows for extra time to search for new clients, which means more work and more profit!
It can be a challenge to calculate a project rate though. And that could take time which is a precious resource. And the more time you take, the higher chance you’ll have at losing the project to a quicker bid. Again, go back to the five necessities aboveǿ demand, overhead, billable time, billable expenses, and profit! If you are the type of person who is nervous to ask for more money, per project rates cause you to lose out on money in the long run especially if scope creep becomes an issue.
Overall, many freelancers use a combination of the hourly rate and per project rate. For example, you may choose to set a project rate for the work outlined in your scope and contract agreement, and then you charge an hourly rate for any work required outside the original set of terms.
Defining feedback loops in your project schedule is a must, that way you avoid project fuzziness throughout the entire working relationship. It is also recommended that you stick to the schedule agreed upon between you and your client.
Ultimately, make sure that your rate is high enough to allow you the flexibility needed in your new freelance life. And with regard to fully embracing your freelancing pursuits, make sure that you don’t let any client treat you like a full-timer aka long hours or rough tone. Communicate your point of view and your client will understand.
Whichever kind of rate you choose to use, AND CO's free invoice templates can help you invoice more easily.
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Learn how to turn your passion into a business:
- Establish a business entity
- Draft bulletproof proposals
- Acquire clients
- Price your services right
- Manage client expectations
- Run projects successfully
- Market your business
- Get paid faster
- Understand taxes as a freelancer