Let me ask you a question, how much does a private jet cost?
Never thought about it, right?
Now before you go on Googling for an answer, let me tell you that according to Bankrate, the price for a brand-new private jet ranges from $3 million to $90 million.
So, let’s say, I’m selling you a private jet for $10,000. What would you think? And, what about if I tell you that the price is $500 million?
Let me guess, if you are like me, for the first case you have probably wondered how can the price be so low, there must be something wrong here. It’s probably a scam.
In the second case, you may have thought this is outrageous. But at the same time, you’d be wondering about what makes it so expensive.
Pricing has this power.
It can instantly change the way you feel about a product or service.
Price your services right and you are set for a successful business, but pick a wrong price, and you are bound for failure. I know this first-hand. For over six years, I had been underpricing my services, and that resulted in a constant rollercoaster.
In this article, I’ll share everything I wish I had known about pricing when I first started freelancing ten years ago.
But first, what exactly is a price?
The formal definition of price is that it is the amount of money for which something is sold. But I like to think of it as everything you have to give up to acquire a product or service.
Now that we have a baseline definition let’s see why pricing is so important.
WHY IS PRICING SO IMPORTANT?
The only reason your business exists is to be profitable. If you remove that factor of profitability, you don’t have a business; you have a hobby. Unfortunately, hobbies cannot put food on your table.
An optimised price will have the highest impact on increasing your profit. It may sound obvious, but you are spending your time, energy, and creativity to provide some value to your client. That’s worth a lot, and you deserve to be compensated fairly.
Another reason why pricing is so important is that it communicates value. You have felt it with the private jet example above. Your potential client may be turned off by a low price and never trust you again. Customers do not believe rates that are too low. This is backed by many studies, including an experiment in the Wall Street Journal by Neil Blumenthal.
Your price can also act as an intentional filter. You know these nightmare clients that we all have when we start our businesses? Well, with a high enough price, they will usually disqualify themselves. This is because these types of clients are often focused on money, not on the value. They are looking for the cheapest option they can get, not the best experience that you can provide.
David Parrish encourages using a pricing policy. He goes on to say that pricing has significant consequences on both short-term income and long-term perception of the business.
The bad news for entrepreneurs is that pricing is really tough to get right. A low price will make you hate your business and your clients. On the other hand, a rate that is too high will guarantee that you don’t have any clients to serve. So how do you balance it out?
You start by learning more about pricing, especially strategic pricing.
But first, let’s see why creative entrepreneurs tend to underprice their services.
WHY DO CREATIVES UNDER-SELL?
There are several reasons, but the most prominent one is “Seller’s Guilt”. Kevin Vaughn puts it nicely. He says: “You may also be overwhelmed with ‘seller’s guilt’, a common problem for young creatives that feel guilty about charging money for an activity that feels more like fun than work. Subsequently, many young artists and creative freelancers across fields grossly undercharge for their time and services.”
Dr Minette Riordan, creative marketing expert and author of The Artful Marketer: A Fundamental Business Guide for Creative Entrepreneurs thinks that it’s mainly because creatives don’t value themselves. She states, “If you don’t value yourself, how can anyone else?”
Jake Jorgovan believes that it’s because many creatives base their pricing off of what other people charge. I agree with this one because I used to do the same. However, this is wrong on so many levels. Market-based pricing is generally driven by two primary factors: the number of suppliers available and the level of demand for the work. Since both are continually fluctuating, and the number of suppliers increasing, the market-rate tends to go down or stay constant over time. Rarely does it rise more than inflation.
WHAT’S THE DIFFERENCE BETWEEN A $100,000 LOGO AND A $10 LOGO?
You want a short answer? The only difference is who you are doing it for.
Two years before I was even born, Paul Rand, the designer responsible for the logo design of some of the most significant corporations including UPS, IBM, and even Ford, priced a logo for Steve Jobs at $50,000. The project was for Job’s new company, NeXT. Jobs accepted the proposal. Steve Jobs was undoubtedly pleased with the outcome; he later labelled Paul Rand as “the greatest living graphic designer.”
The NeXT Logo as designed by Paul Rand
Matt Titone has an interesting analogy about good design. When a CEO expressed frustration and asked why Matt’s company was so expensive compared to other designers he worked with previously, Matt had a simple answer: “The simple answer is that good design is more expensive than mediocre design, just as a meal prepared by a top chef is more expensive than fast food.”
This ties in perfectly with what Kelly Rae Roberts said about choosing your clientele.
“As creatives, we often think that our only audience are people much like ourselves – people who don’t likely have a lot of money. If you’re constantly pricing your work for that audience, then you’ll likely never be able to successfully raise your prices. Instead, consider that there are other audiences out there that would be more than willing to pay a lot of money for your original work – people who likely have more money than you!”
Now you may be asking, how do I price my services then? It all begins with your minimum acceptable rate.
HOW TO DETERMINE YOUR MINIMUM RATE
First, let’s be clear, your minimum rate is not the rate at which you would charge your clients. It’s the rate that ensures you are not working at a loss. If you have to go below your minimum price for any project, you may have to consider refusing the project.
Brad Weaver says that you need a basis for all your pricing calculations, and I believe that basis should be your minimum rate. He says that most people use an hourly billing rate based on guidebooks, blog posts, and what their friends charge. This is unwise as it does not reflect your reality. Your friend may be happy living at half the amount you need to take care of your family.
Consider this, Sofia lives in Manchester, UK, she charges £25/hour. Alex lives in London and is starting his design consultancy. If Alex uses Sofia’s rates, he will be underwater in no time. Why? Well, it’s not just about the location. Alex has a wife and two kids, a mortgage and parents back in his home country to take care of. Sofia, on the other hand, is single and lives with her parents.
See the difference? This is why when creatives ask me about what hourly rate they should use; I can never tell them a specific number unless I know the full story.
Patricia van den Akker believes that your cost price is the foundation of your business. And, you really need to know your “break-even point” where your expenditure will equal your income.
My primary business involves converting designs into functional websites. When I started, I wanted to earn $1,000 per month from online freelancing, and I was charging around $250 per conversion. So I had to do four each month. That’s a lot, and it began to really burn me out as I also had a part-time job. So I learned to do the math backwards. I want $1,000, and I can easily handle two projects each month. So I decided to price my service at $500. But even that was not enough because I was making a huge mistake: I did not account for the extras.
According to Lauren Bowling, you should always account for the “extras” in your pricing – including taxes, credit card fees, and add an additional admin fee if you feel the client is going to be extra stressful or extra boring. She goes on to say “Imagine you’re a famous actor or actress and ask the “how much would it take to get me out of bed?” question if it’s a project you don’t feel super excited about. I’m willing to bet there’s a certain dollar amount that would turn your head!”
Instead of trying to make a profit on each project, you should instead aim to build it into your minimum price. That way you can be consistent, and it also protects you from projects that you have underestimated.
Dr Riordan advises to write down exactly how your time is spent over the course of a week, and then review this against your business goals.
If you spend a lot of time managing clients, it will not make a lot of sense to exclude that from your pricing. Same goes for meetings. If you have many meetings for a project and you need to travel to and from the client’s, you need to factor these as well. But you’ll never truly know unless you measure.
This method of calculating pricing based on your costs is helpful to set your minimum rate, but as David Parish adds, it doesn’t in any way indicate a maximum. For that, we need to look at pricing from the other and. That is from the client’s point of view instead of our own.
If you are looking for a tool to help you determine the minimum amount you need to support the lifestyle that you desire, you can use the Freelance Hourly Rate Calculator, but remember this is your minimum rate, not your actual prices.
Now that you have a minimum rate in mind let’s look at the different types of pricing models available to you.
TYPES OF PRICING MODELS
Hourly pricing is the most straightforward model to use, which is why many creatives opt for this pricing model for the duration of their whole career. It works perfectly well as long as the clients are paying for your labour and not your expertise. Especially when you’re getting started, pricing hourly isn’t such a wrong way to price your services. Jake Jorgovan mentions the same in his article Unconventional Pricing for Creatives. He says “You are compensated for the time that you work. If the client’s scope creeps or the project takes longer than anticipated, then you are compensated for that additional time.”
Rob Harr, from Sparkbox, says that his company chose hourly pricing because they were “haemorrhaging money and constantly over-delivering, constantly trying to find ways to use that work to springboard into the next thing. When we shifted to hourly, we shared the risk of what we were building with our clients so that if we ran into problems or they wanted to change scope, we could do that easily.”
Hourly pricing works well when you are comfortable talking about money every week or every billing cycle. Personally, I was having a hard time with that.
Your hourly rate should be high, and you should increase it regularly as your experience and expertise continue to grow. This concept is shared by Ilise Benun, founder of Marketing-Mentor.com. She also advises using longer increments such as a day rate. But she points out that if you are looking to do more high-level strategic work, it will make sense to try a strategic model.
However, hourly pricing has some huge downsides. Jason Blumer says: “When you charge by the hour, you and your client begin your relationship with diametrically opposed desires. You want to bill more hours; they want you to bill fewer hours. That is a sucky place to start a relationship.”
Hourly pricing is not a long-term solution for most creatives unless you choose to be known as just another freelancer. With this model, you can only become more profitable by raising your rates, and those rates have a ceiling.
Finally, it leads to nickel-and-dime decisions – this is when your client can refuse to meet with you because it will cost them too much money. Their every decision can start to revolve around how much that would cost, and this leads to a sour relationship.
Although I hate hourly pricing, I still use it with a couple of clients that I enjoy working with. With these clients, I have a relationship that goes back a decade. We trust each other, and we understand the work as well. These are the clients that will never come and ask me why a specific task has taken so long.
To be clear, these are never the end clients. They are agencies, and they have their clients, and I’m being paid to do the work for the agency instead of their staff. Why? Usually, because I’m the less risky option and I have my team to meet tight deadlines.
The only thing good about hourly, in these cases at least, is that I can bypass the proposal phase altogether, and get to work. If I have to go to a dozen (or even hundreds) of meetings, that’s not a problem. I know I’m being paid decently for it.
PROJECT PRICING (ALSO KNOWN AS MILESTONE PRICING, OR FIXED-BID, FIXED SCOPE)
This is the most common pricing model used by freelancers and consultants. With project pricing, you charge a flat fee for the entire project. You can decide to receive payment at different points in time. The mainstream practice is to charge 50% at the start, and 50% when the project is done. But that’s just one way of doing things.
You can (if you want to) charge hundred percent upfront. Or break the project into multiple milestones.
Project pricing is a very attractive model to clients, and therefore freelancers, and consultants often use it to win business. In this case, the risk is shifted to the service provider. If a project goes outside of the scope and is not managed correctly, you risk losing your profitability on the project.
Karl Sakas, from Sakas and company, points out that if you are not good at scoping, you’re going to underestimate the work, and this wipes out potential efficiency savings. He also says that you have to delegate scoping to skilled people.
One of the worst problems I’ve had with project pricing is the issue of scope creep. Early in my career, I was terrible at managing projects, and additional features would eat up all my profit and I would end up hating the project. Benjamin Smith had the same problem, he shares the following in a post on Millo: “Time and time again, I worked over the hours we agreed upon and just let it go because it was easier than having to go back and tell my client they needed to pay more.”
One of the easiest ways to get project pricing to work for you is to mark up the project and consider every possible thing that can go wrong. And even then multiply this by a factor of two or three just to be sure. The issue is that when doing so, you’ll come up with a price that is usually much higher than your competition. This is where value-anchoring comes to the rescue.
Value-anchoring is when you walk your clients to see the value of the service you are providing, and you associate a real monetary value to it, then when you reveal your price, you show them how the price is only a fraction of the actual value they’re getting.
For example, let’s say I have to build a custom reporting screen for a client. I would first show them how much this screen is worth to them. This can be the number of hours they’d have to spend to do it manually. To assign a value, we can say, “Your executive assistant has to waste hours to get the data from various sources and compile it in an Excel file with charts, this is costing your company around $100 each week, over a month, that’s $400, and in a year $4,800.”
Based on the following, I can estimate that my solution will take a couple of hours to build, and when I present a price of $200, it looks like nothing compared to the value of the project.
Now, many creatives confuse value pricing with project pricing. They often believe it’s the same pricing model. Value pricing is based on the fact that clients don’t care how long it takes you to do the job. They only care about the results that your work will create.
So, if a project has a potential value of $500,000, charging a fee of $50,000 even if it takes just a day to complete, makes perfect sense. That’s the essence of value pricing.
In the book Breaking the Time Barrier, the authors say the following:
“Our clients don’t care about our costs. They care about the value we create for them, so that’s what we should be asking them to pay for.”
This happens all around us, even with commodity products. Maybe you’ve seen a product on an advert, or in a store, and if that product solves a severe problem you have, you feel that you need to get the product, and you completely ignore the price.
When Shanna Skidmore, a business strategist, saw a perfect pair of boots on a stranger, she immediately wanted it. She relates the story in one of her articles, she says:
I learned a valuable lesson about pricing that day: people buy what they want (what solves their need or what they perceive to be the best value). Price doesn’t really have that much to do with it.
In fact, this pricing method can work spectacularly well if you are in a very competitive industry. Instead of focusing on how to be the lowest price, you can look for new ways to create more value for your clients and then charge for the value that you create, and not the actual service.
In his article on A List Apart, Jason Blumer shares a little-known secret: you can charge not only for your creative work but for the client experience around the work you deliver. But he also warns that you can’t charge more for crap.
Some business owners feel that it’s wrong to be charging two types of clients different rates for the same task. That’s understandable, but let’s consider a designer who does artworks for facebook advertising. Her first client is a solo business owner who only makes $60,000 per year. Her adverts if done right will increase that yearly revenue by an estimated amount of $10,000. Her second client is an international e-commerce store with an income of $60,000 per week, and in that case, the advert will also increase weekly revenue by $10,000.
Does it make sense to charge both these clients the same amount for the artwork? Does it make sense to charge the e-commerce store $500 for an artwork that will increase yearly revenue by $520,000? Of course, there are many more factors at play in this a scenario (such as the landing page, the website copy, etc.), but overall, I think you would agree that it doesn’t make any sense for her to charge these two clients the same amount.
There is nothing unethical or wrong about charging one client more than another. Try to remember that the client always has the decision to hire you. Just because you present a price doesn’t mean that they have to accept it.
However, to be effective at value pricing, you will need to understand how your clients see things, and what they value in your work. You will need to be able to ask tough questions, and have difficult conversations.
If your prospect sees you as a trusted advisor and expert, they will have no problem sharing business insights. Sometimes, you may need to sign an NDA. In fact, I would urge you to consider signing an NDA before getting into these types of conversations. It feels safer and leads to more trust.
For maximum stability, the retainer model is the best option. While it can be hard to get all of your revenue from retainers, it’s certainly something to strive for. The retainer model provides you with the reliability of both work and income. It is especially useful when you work with large clients who always need ongoing work.
I was recently talking to one of my friends who owns a design company, and he shared that he was considering shutting down his company. His main reason was that he could no longer deal with the feast and famine cycle. This was affecting his health and relationship.
I wanted to understand more about his struggle, so I started asking him about his process, his clients, and his service. Soon, the main issue was more than evident. He was only working with one-off clients. Which meant that once a project was done, he’d have to move on to the next and so on.
This is the worst way to operate a service business. In his case, I advised him to look for clients with potential retainer deals instead of his current targets.
But what exactly is the retainer model? In short, it’s when you have a deal with a client for a long-term relationship. The client pays you a monthly (or weekly) fee for a pre-agreed amount of work. For example, an e-commerce store doing social marketing will be in constant need of social media services. It’s not a one time project; instead, they need the assistance every week. In this case, a social media expert can propose a fixed set of deliverables each week for a whole year. As long as the client is getting his return on the investment, he will keep the service provider close.
With retainers, you will need to protect the relationship, and sometimes that means concessions or over-delivering when you sense that the relationship is at risk.
There are many forms of retainer agreements. At its core, a maintenance agreement can also be considered to be a retainer. In some retainer types, if the time is not used, it is rolled over into the next period. But, there are other types where any unused is lost. Your chosen type depends on your specific services and/or clients.
ALTERNATIVE PRICING MODELS
Emotional pricing is one of the alternative pricing models that is a hundred percent based on how you feel about a price. This pricing strategy is surely not for beginners as it requires expertise and experience in the field. But, it’s fantastic for pricing services when you honestly have no clue what to price, and you need a number real fast.
It goes like this. Let’s say you have to design a website for a client. What would you say if he proposed $50? At this point, you may say, “I’d slap him across the face.” So, how would you feel if he paid $500. You may say that it’s not worth it for this amount. And, now how would you feel if he paid $1000?
You can go on with increments until you find your sweet spot.
Variable pricing is when you increase or decrease your prices depending on the demand, or period. For example, if you are always overwhelmed towards the end of the year, you can set your price for this period to be higher by a certain percentage point. And if you don’t have much work during certain months, you can lower your prices just for these months.
Although this is not a pricing model on its own, you can use this method to improve your prices. Let’s say you are booked out, instead of just saying no, and proposing to call the client when you have a slot available; you can add the client to a waiting list that they can pay to join.
I have successfully used this many times. You see, often clients believe that they need something done right now. However, when asked why many won’t have a reason, that’s when you can propose to do their work in a couple of weeks or months. If they say yes, give them the option to pay right now and book their slot.
“I Need This Job” Pricing
I learned about this one from Amy Delouis. In her own words, she states: “Of course there are stages of every career where you accept a rate lower than you might otherwise because you are trying to gain experience, try your hand at a new skill or tool, or secure work in a down market. I would warn that you don’t want to do this very often, or you are likely to get stuck at the lowest rates (and bring everyone else down with you.)”
Ken Carbone explains this concept in great detail in his article The Case Against Paying Designers By The Hour. Simply put, it’s when you use the client’s language and things that he understands to justify a price.
Let’s take a concrete example to illustrate the concept. Say you’re responsible for developing the brand of a taxi company with 50 cars. Each car makes an average of 96$ per day, so that’s $4,800. When you quote the branding for $5,000, you can mirror it to being just one day of revenue.
WHEN IS THE PROJECT DONE
Although this section is not precisely about pricing, it is very closely related because if you cannot agree on when a project or task is considered done, it directly affects your relationship with your clients and also your profits.
You, as the service provider, want to complete the project as soon as possible so that you can get paid and start the next project. The client, on the other hand, wants to ensure that the project is really at a hundred percent before handing you the last payment. They fear that if they pay and then find out that you missed something, they wouldn’t be able to get you to complete it, so they want to be absolutely sure before the money changes hand.
We’ve talked about scope creep, but what exactly is it? John Spacey defines scope creep as follows:
Scope creep is the uncontrolled expansion of a project’s scope. This occurs for a variety of reasons including low-quality requirements, project management lapses or circumvention of project management controls by stakeholders such as the project sponsor.
So, to avoid this phenomenon, it’s crucial that you set the “done point” of your work. You need to be clear about what’s included and what’s not. This ensures that your client knows exactly what to expect.
In an article on Artrepreneur, Tammi Heneveld shares how she handles such cases. “Absolutely everything has to be set in stone before I even begin actual work on a project. I want the client to know exactly what they can expect from me,” Heneveld emphasises. She stresses the importance of not only itemising individual deliverables but also outlining in clear terms the scope of her work.
Be transparent and detail your deliverables together with your clients, you’ll be ahead of most service providers when it comes to managing scope creep.
RAISING YOUR PRICE
Now that you have a good idea on how to price your services let’s see why you’ll need to increase your prices regularly.
There are many reasons for raising your prices every year, but the most prominent ones are:
- You have evolved over the past year, you are more skilled and experienced, and you deserve to be compensated accordingly.
- You know much more about your niche or market than you did the previous year. This means that you can help your clients in more meaningful ways.
- Your lifestyle and cost of running your business increase every year, and you need to adjust your prices to keep up.
As seen in the introduction, people often associate price with quality. When you have a low rate, your prospects can subconsciously think that you provide low-quality work. Tara Gentille, a business strategist and creator of the customer perspective process, says:
People often think that low prices equal more sales. However, when you set the price too low, you essentially position your product or service at the “bargain basement” of the market. By doing this, two things happen: you associate your brand and product with low quality, and you attract the wrong customers.
Ian David, an artist, felt somewhat embarrassed when his customer told him that his art pieces were too cheap. I’ve felt the same way early in my career when one of my clients jokingly said, we can have Umar do that task, he’s cheap.
Jessica Hische provides a quick litmus test to know if you’re pricing your services correctly. She says that if your client readily accepts your proposal, it probably means your prices are too low. If they try to negotiate, you were probably spot on. And if they outright decline and tell you that the price is way out of their budget, you still have the choice of working something that is within their budget or simply walk away.
Lauren Bowling is a staunch believer that you should always be raising your prices until the point that one of your clients says no. She points out that you will never know until you ask. I’m of the same opinion. I’m always testing my prices, especially with new clients.
Once again, Patricia van den Akker reminds us that to charge higher prices; we will need to provide excellent customer service throughout the entire selling process. You will need to be able to show your creative genius and expertise to achieve these higher prices.
Over the years, I’ve gathered pricing tips that I have used successfully or have seen others use. Below are some of the best tips I’ve collected.
1. Show your prices clearly on your website (especially if you are not always booked out)
If your prospect does not have any idea how much your services cost, they will tend to assume the wrong amount. On the one hand, they may think you’re too expensive and never contact you. But on the other hand, you’ll have some people who will significantly undervalue your services and will waste your time when they cannot really afford your services. Best way to avoid this is to give them an idea of how much you cost. Be confident, and show your prices with pride.
2. If you can’t show your prices, provide ranges and minimum project values
You can say things like a CMS Website costs between $5,000 to $20,000. Or you can say: minimum project amount must be over $10,000 on your request a quote page.
3. The customer is almost never buying your services for the sake of your labour
For this tip, David Parrish writes it much better than I ever would: “It’s often the case that there is a difference between what you think you are selling and what the customer is actually buying. In purchasing your goods or services, customers are also often buying into a ‘lifestyle’, a ‘feelgood factor’, a ‘talking point’, a ‘community’, or a ‘story’.”
4. It’s not about the money, rather about the conversation and the promise
Most clients are not looking to hire you just based on price. Some would, but you’ll mostly try to avoid these prospects. Instead, most of your clients are willing to pay you to solve their problem. The question is: have you had enough conversations to show them that you can actually solve their problem?
5. Keep your finances organized
Use a proper accounting tool for your business, and keep your personal finances separate from your business accounts. This can really help in the long run.
6. Keep an emergency fund with at least nine months of living expenses
This can really save you if things go sour with any client or something bad happens to you. Also, if you are looking to close new clients when you are desperate, you’ll have a much lower probability of having these people as clients.
7. Take yourself on a “money date” once a month
This tip is shared by Shanna Skidmore. This is where you can have a good understanding of where you are in your business and how well you are doing financially. You’ll be able to identify tough times ahead or see your pipeline and future cash flow in more details. This can help you stay sane during stressful times because you know what to expect next.
8. Don’t make any assumptions about scope
Just ask. Really, it’s that simple. Instead of assuming which feature is included or not, have a deep conversation with your prospect before sending your proposal.
9. Experts can charge more for their services
Contrary to what many “gurus” might tell you, your experience does affect how much you can charge and still get happy clients. So work hard to gain expertise with a particular type of client, service or style. When you’re an expert, clients clearly see that hiring you is their best option, the money is irrelevant.
10. Provide two or more options in your proposal
They need to make a comparison, so when you give them a proposal for one solution for $50,000, you’re forcing them to go away, either mentally or actually physically, to compare this to a proposal from another firm, or to think about … Well, what did I pay you before, or what else could I do with this $50,000? So when you put three options, three or four … I talk about three in the book. Three is always better than two. Four is just as good as three. When you put options in front of your client, you’re changing the question from, “Is this worth $50,000 in value?” to the question the brain is wired to answer, which is, “Which of these is the best value?” And there are other reasons to provide options, but that’s the big one.
11. Try doubling your rates
You will have to deliver accordingly, but you knew there would be work involved, right? Chase Jarvis says that “Chances are that the clients you ditched needed ditching, the clients you carry forward and the new clients you land will pay those fees happily and will better understand the value you bring.”
12. Have a secret base price for your offers
This tip is put forth by Benjamin Smith. He recommends having a base price for everything. He points out that you don’t have to tell your customers this base price, but you do need to know the number for your personal benefits and evaluation.
Just as the price of a private jet gives an idea about the value of the plane, your prices tell a lot about your perceived worth. And while you can potentially choose your rates out of thin air, it’s always better to be strategic about it.
Don’t look at what others are charging, instead find your rates, and then find the clients who are willing to pay those rates. Not the other way around.
Hourly rates, project pricing, and value pricing are all viable choices at different stages of your business adventure. Choose wisely, and you will be prosperous.