I'd like to share a story with you. The story revolves around two designers. Each designer makes approximately $5,000 per month. Both designers are equally capable and skilled. Both designers have a comparable portfolio and level of work quality. There is one significant difference between these two designers, however.
One designer works 60+ hours per week and has a large number of clients. The second designer works 20-25 hours per week and only works with a few clients.
Although both designers are comparable, one works far more than the other. What is the cause of this?
The distinction is in the pricing
I know this because both of those designers are me. The first designer was me, in the midst of my freelance career. To make a living, I was mishandling my pricing and working around the clock on a variety of clients.
9 months later, I am the second designer. As a result of implementing new pricing strategies in my freelancing career, my life has changed. I was the same person, with the same skills and work quality, but I reduced my working hours by one-third.
Today, let me share with you some of the changes I made in my pricing system that helped me earn more income in less time.
I want you to remember that it’s not just about the money. It's all about living a better life. As you can see in my example, I still made the same amount of money. Simply put, I worked fewer hours, giving me more time to enjoy life, write, and create meaningful things.
Before we dive into the changes, let's go over some of the most common mistakes designers (and other creative professionals) make when they get started with pricing.
Starting with the only hourly rate
This isn't a bad way for freelancers to price themselves when they're first starting out. You are paid for the hours that you work. If the client's scope expands or the project takes longer than expected, you are compensated for the extra time.
However, this billing method is ultimately limited. When I first started pricing myself hourly, I set a rate of $20 per hour. I gradually increased my rate from $20 to $30, $50, and higher. However, somewhere around the $50 per hour mark, I noticed a significant shift in my mindset.
At $50 per hour, I was beginning to work with higher-quality clients with reasonable budgets. Nonetheless, I was paid on an hourly basis. All of this culminated in one specific project that completely changed my pricing mindset.
Good clients don't care if you finish the project in 20 minutes or 20 hours. Clients care about whether or not the work is completed correctly.
Comparing hourly rates is risky
When potential clients compare rates, they see a price that is unrelated to the value your services will bring to their company. Your service is reduced to a commodity. Someone will always be willing to provide lower-cost services than you. You almost always lose this comparison, and you can't get away from it.
There are only so many hours in the day for deep work
When you run out of work hours, you can't make any more money unless you ruin your work/life balance by working excessively long hours or raise your rates. You eventually reach a potential earnings ceiling when your rates reach the upper limit of what is acceptable in your industry and your lifestyle does not allow for more work each day without exhausting yourself.
Hourly rates discourage efficiency
Your client prefers to have things completed as soon as possible because it saves them money. Naturally, you want to provide the best value possible by working quickly, but the faster you work, the less money you make. Over time, as you master your craft, you will earn less and less for the same results, unless you constantly raise your rates to compensate for your increased efficiency. Then you collide with the ceiling once more.
Hourly rates are simple to comprehend
Your client understands exactly what they will receive from you in exchange for how much they will pay. It's a pricing method that's been around since money was invented, and everyone understands how it works without explanation.
The end of hourly rate story
A client came to me via Upwork at my $50 per hour rate. I was happy as it looked like a great client. He provided all the assets, the scope of work, the site map, and the content upfront. He gave everything to me and then I plugged it into a new website design. I finished the website in 4 hours…
And worst of all, the website looked freaking good.
I had just completed a high-quality website for this individual for a fee of $175. The client was overjoyed that I had finished so quickly, and we parted ways at the end of the project.
That was the catalyst in my mind when I realized something wasn't right. I knew the site I had just finished for that client was far more valuable. I was aware that people were charging thousands of dollars for sites of comparable scope. I knew I needed to adjust my pricing.
After the 4-hour web design project, I realized that billing hourly was doing me a disservice. I was getting better at my craft and working faster. If I could start charging based on the project rather than the time I worked, I would have a huge opportunity to earn more money in less time. That is one of the most appealing aspects of project-based fees.
I eventually sold the project for $2,200. It took me about 5 hours to design the website. And here's the thing: the client was pleased. They were overjoyed about their new website.
With Project-Based Pricing, you estimate the cost of a job based on your experience and educated guesses. It is recommended that you overestimate your costs in case you run into unexpected problems along the way. You make more money if you finish the project faster than you expected.
Clients get absolute certainty with project pricing
But it comes at a cost. The only way to provide that certainty is to include contingencies in your quote. In the end, your client may have to pay more for the same outcome. Clients who are well-organized and helpful are penalized by having to pay for padding that they do not use. Clients who are difficult and disorganized are rewarded by cramming more work into the same budget.
Scopes creep will be your ultimate downfall
If you can't nail down a very specific scope and get the client to stick to it, forget it. Some projects, such as a startup app, require the ability to change and adapt as they go. If you price that on a fixed quote, you'll find yourself having to revise the quote at every slight change in direction. By the end of the project, everyone will be pulling their hair out.
Efficiency is rewarded in project pricing but at a cost
You make more money if you finish the job faster. However, incentivizing speed can lead to cutting corners and lowering quality. I despise such pricing because I take pride in my work. I never want to feel cost-constrained, unable to explore and discover better design solutions without consuming my entire profit margin.
Everything changed when I shifted the focus of my freelancing away from the amount of time I worked and toward the value I delivered. It completely altered my earning potential and earnings.
Time is not money.
The Holy Grail of pricing strategies is Value-Based Pricing. Value-Based Pricing disregards the actual cost of the job in favor of determining a price based on the perceived value your client will receive from the project. Some customers will be willing to pay a premium for that perceived value. Value-Based Pricing is the most advanced pricing strategy and should be used with caution. However, when done correctly, Value-Based Pricing will yield the highest profit.
Value-based pricing is a pricing strategy that bases your services on the value your deliverables will provide to your client. It is a fixed fee, similar to project pricing. The distinction is in how you arrive at and justify your fee.
As an overly simplistic example: the project you design for your client could result in $200K in new sales. You charge 10% of that ($20,000). Any wise client would be willing to invest $20K in order to earn $200K.
It makes no difference how long it takes you to finish the job. The time and effort you put in is no longer factored into the pricing equation.
Allow that to sink in for a moment.
When you use value-based pricing, the price your client pays has nothing to do with how long or hard you work.
Disconnecting your earnings from your time represents a significant paradigm shift. Selling time is so deeply embedded in nearly all service businesses that it can be difficult to comprehend all of the implications of how this strategy changes.
That artificial ceiling of hourly billing has vanished. Efficiency is now rewarded, and not at the expense of your client.
The goals, outcomes, and overall value of what you create now define, lead, price, and justify your services.
It sounds fantastic in theory. But how do you go about doing that? It is more difficult than it appears to apply this method correctly.
Your client must share their project goals and key performance indicators (KPIs) with you because you must tie your service proposal directly to these outcomes. This is important for any project, regardless of how it is priced, but with value-based pricing, it becomes a critical requirement very early in the discussion.
Your client must be willing to reveal the monetary value of the work you are hired to create. How much will your client earn if you design a new e-commerce experience that increases conversions by 1%? What is the value of each new member if your goal is to increase sign-ups? This type of value projection may be difficult to calculate. Even if projections are available, will your client freely share that type of information with you? Will they be truthful if they share it? (They will be incentivized to make the value appear lower in order to lower your price.) It is critical that they tell you the value voluntarily. You cannot value it yourself; otherwise, your price justification is meaningless to your client.
The project objectives must have measurable outcomes. What if the goals are more emotional, such as developing a brand identity that is more appealing to younger generation? Some objectives are difficult to monetize. How can you price something if you can't convert it to dollars and cents?
Each proposal must be well-researched and one-of-a-kind. A project worth $10,000 to one client may be worth $1,000,000 to another, even if the effort and deliverables are nearly identical. This is both a massive benefit of value-based pricing (assuming you get higher-value clients) and a huge disadvantage.
How I price — a hybrid approach
Anchoring of value and price is assumed. If your client is unwilling or unable to share the information needed to calculate a value-based price, you can conduct your own research and make some educated guesses about what the project is worth to your client. This cannot replace the necessary discovery process for true value-based pricing, but it is adequate for "faking it" for your own internal pricing strategy.
What is the size of the company? Generally, the larger and more successful they are, the more they’ll be willing to pay. You wouldn't charge the same price to Samsung as you would to a local repair shop, would you?
How critical is this project to the success of your client's business? An e-commerce company may invest all of its resources and time in developing a fantastic website. It literally means everything to their company. In comparison, a brick-and-mortar store may view a similar website as a small, secondary revenue stream. That client will not be willing to invest as much of their resources in it, whereas the first should do whatever it takes to make it a success.
When deciding on a quote for each client, you can use these assumed value clues to anchor your hourly or project price. Let's say your base hourly rate is $100, but you've determined the client is large and successful, and the project is extremely important to them. For this project, you could raise your rate to $125 or even $150.
“Give them options to choose from, so they can choose from options that you provide rather than choose options between you and another service provider.”