As an independent worker, learning how to properly price your service is MUST. Since starting my consulting business back in mid-2016 I’ve experimented with a number of different pricing methods. In fact, just last month I started experimenting with a completely new way of pricing my services.
Pricing is a tricky topic. There are loads of ways you can price your services and the pricing method you choose depends on a number of factors like the nature of your work, your costs, the time required, industry and the purchasing power of your clients.
To this day I use a variety of pricing models depending on the client's needs and budget. This is why one of the first things I do when someone approaches me to get help with consulting is book an introductory call. On this call, my goal is to understand the client's needs so I can give them a few options that suit their requirements and budget.
In this post, I’d like to discuss the different ways you can price your services and the pros and cons of each.
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PRICING OPTIONS
Below I’m going to discuss three common ways of pricing your service: hourly billing, value (fixed) pricing and retainers. These are by no means the only options so please feel free to do your own research if these options aren’t appropriate for your business.
Hourly billing
This is probably the most common way independent workers price their services. It’s a simple exchange of time for money. e.g. If you charge $100 per hour and work 10 hours you make $1,000. Simple!
I get asked all the time “What’s your rate?”. Basically, they’re asking, how much I charge per hour.
The advantages of hourly billing are:
- It’s simple. Because it’s the normal model that most people use to charge, everyone understands this model.
- It’s less restrictive than to other pricing models like value pricing and retainers because the client doesn’t have to commit to a larger fixed cost or ongoing monthly retainer fee.
However, hourly billing can be bad for you (the independent worker) and the client:
- It encourages inefficiency. In order for a freelancer to earn more, they have to work more hours. But this isn’t necessarily the best thing for the client. A higher quality freelancer/consultant should be able to do the job in fewer hours but would end up earning less. If you can do a good quality job more efficiently then this is a massive benefit to the client but hourly billing misaligns the incentives of the client and the freelancer.
- It’s risky for the client. When starting a new project, you usually begin by making an estimate of how long the work will take because the client needs to know how much they’re going to have to pay. However, it’s often hard to know how long a job is going to take (especially with more creative pursuits). You might estimate a project will take 10 hours. However, if it ends up taking more like 15 hours, then the client’s cost has now gone up by 50% and they’re not going to be very happy.
- The client has to make a purchase decision every time they need you. For example, if they want to call you for some advice they need to ask themselves if the call is worth paying for. In order to deliver a higher value service to the client, you need to eliminate these barriers.
- It creates a natural cap on what you can earn. Because there are a finite number of hours in the day you can only earn so much at a given rate. This means the only way you can earn more is to increase your rates. But again, this is only going to get you so far. For most types of work, you’re never going to be able to charge $1,000 – $10,000 per hour.
Value (fixed) pricing
With value (or fixed) pricing, you quote a fixed fee for a project and regardless of how long a project takes the client knows exactly how much they’re going to pay. I learned about this pricing model from Jonathan Stark who teaches people how to price their service in terms of value.
For example, if you consult to a company and are able to help them increase sales by $250,000 per year, then it’s not unreasonable to charge 5-10% of this i.e. $12,000 – $25,000. Why not? The client is happy because they’re $250,000 better off, right?!
The benefits of value pricing are:
- It removes risk for the client. As mentioned above, hourly billing misaligns the incentives of the client and freelancer/consultant. And because it’s hard to estimate how long a job will take, there’s more risk for the client. Instead, with value pricing, the client knows what their financial commitment will be upfront and even if the project takes longer than expected they’re not going to get a surprise bill further down the line. In fact, a lot of clients are more than happy to pay a little bit more if it means they don’t have to deal with this risk or make a
- It forces the freelancer/consultant to prioritise value (instead of time). So instead of dragging out a project to earn more money a freelancer or consultant is rewarded when they can deliver more value (increase sales/productivity or costs saved) in an efficient manner.
- It increases your potential earnings. By removing the income cap that hourly billing creates, a freelancer or consultant can potentially earn a lot more with value pricing.
- Work with fewer clients and better clients. By adopting value pricing you attract higher quality clients (who prioritise value instead of time) and can get off the hourly billing treadmill.
Value pricing is great for everyone, but it’s not without its disadvantages:
- It’s riskier for the freelancer/consultant. I mentioned above that the fixed fee reduces the risk for the client as it removes time from the purchase decision. This is because you’re the one taking on this risk instead. In a worst case scenario, you may end up working more than you expected and earning less than you would have had you billed by the hour. To manage this risk, you need to make more accurate estimates of how much time is needed and factor this into your pricing. This gets easier with time and if you track your time you can get better at estimating the length of time a project will take. In general, I estimate how long a project will take and add 50%. This is my way of billing for risk which like I said, a lot of clients are willing to pay for.
- You don’t get paid for changes or “scope creep”. Because you’re charging a fixed fee for a fixed list of deliverables, it’s hard for the client to make changes to the project. To manage this, you need to conduct thorough due diligence at the start of a project to scope what the client needs. This will help to reduce “scope creep” where the client continuously asks you for more work and changes beyond what was initially discussed.
Retainers
Finally, we come to retainers. This is where you charge a fee every month for ongoing work and support. It’s a bit like value pricing but on an ongoing basis. For example, marketing agencies and design firms will often sign up a client and charge a retainer to manage their marketing or design work on an ongoing basis.
Personally, I don’t use a lot of retainers as my work is more one-off in nature and lends itself more to hourly or value pricing.
The benefits of a retainer:
- Create a consistent income. If you have a few clients on retainer you can create a nice sustainable source of cash flow. And clients are often happy to pay a retainer which is usually more flexible than paying a full-time salaried employee to do a job.
- Fewer sales work each month. Because you have this sustainable cash flow, you don’t have to chase new clients each month to pay the bills.
The disadvantages of retainers:
- You can become dependent on a few big clients and if they suddenly decide they don’t need your service any more, this could result in a big drop in cashflow.
- Lower client turnover. Depending on how you look at this, it could also be a good thing. But lower client turnover means you don’t get to work with as many people (which I enjoy). I’ve also talked to freelancers who get “stuck” working with someone they don’t like and find it hard to get out of the relationship (because they depend on the income or have committed to a certain time period).
HOW I BILL FOR MY SERVICES
So, those are some of the ways you can charge for freelancing, consulting or coaching services. Now let me tell you a little bit more about how I use a variety of options depending on the client's needs.
Hourly for smaller projects
If a client comes to me and they don’t have the budget (or need) for a big consulting project, I’ll charge by the hour. This is usually more cost effective for the client but means we’re a little more restricted by time.
To ensure I can still deliver high value I request a 3-hour minimum commitment. I’ve found that 1-2 hours is usually not enough and I don’t want the client to be left high and dry. Yes, they could always start with 1-hour and purchase more. But I’ve had a few clients who have tight budgets and try and cram as much as they can into a 1-hour session (as that’s all they can afford) and are left unsatisfied as calls can be so rushed. Usually, these aren’t people you want to work with anyway, so I use the 3-hour minimum to filter out the really budget conscious people.
If a client needs much more time than this I’ll encourage them to sign up a fixed scope, fixed price project which lowers the risk for them and ensures I can deliver more value.
Value (fixed) pricing for bigger projects
For clients that need more support and training for their teams, I’ll send a proposal with a fixed fee. I don’t commit to big projects on an hourly basis as it’s hard to estimate the hours required and I’d rather not make promises I can’t keep.
These projects usually have a fixed list of deliverables and a fixed time frame (e.g. 8 weeks). This means me and the client know exactly what’s going to be delivered and in what period.
With my fixed price projects I like to go a step further and offer a 30-day support period. This reduces the risk for the client even further as they have access to me even after the project is over.
Payment plans
Just recently I’ve started offering a payment plan option. This is where I’ll charge a fixed fee for 3 months which in total is higher than the fixed price option. Because the client is paying a higher fee I give them more flexibility and a longer support period. So if they want to change the scope or add to the project deliverables, they can.
The payment plan option is great for higher value clients who have the budget to pay for more support and flexibility. It also means I can spread out their payments (which clients appreciate) and creates a somewhat sustainable source of income for me.
SUMMARY
I hope this has given you some insight into the different pricing methods and at the very least you’ll consider alternative ways of pricing instead of just charging by the hour like everyone else.
I know pricing is a sensitive topic that a lot of people get nervous about. Please let me know if you have any questions in the comments below!