If you've been freelancing or running an agency for any amount of time, you've likely come across this debate:
Should I charge by the hour or a fixed project fee?
Here are the advantages and disadvantages of both:
Hourly Rate
Example: You charge $100 an hour. The project was supposed to take 8 hours. The client made some extra requests, it took you 10 hours. You make $1,000.
- You get paid for every hour that you work, eliminating scope-creep.
- The client can make as many changes as they want along the way, so there is less up-front commitment to the final shape of the project.
- Client isn't sure how much they are going to pay for this project in the end.
- As you become faster and more effective with your time, you either need to increase your rate, lie about your hours, or make less money (we don't recommend those last two).
Fixed Project Fee
Example: You will do the project for $800. This is agreed upon up front. The client adds some requests in the middle of the project. You tell them those will cost an additional $200. You make $1,000.
- If you are efficient and quick with your work (or can re-use previous work to get the job done faster), you make the same amount and gain more free time.
- The client knows exactly what to expect with this project, how much it will cost them, and when it will be done. They have peace of mind.
- Every little change request needs to be considered as to whether or not it will affect the project fee. You have less flexibility in what you can do for the client without renegotiating the fee.
- It is easier to say "yes" to little additions that add up to a lot of time in the end (scope creep), which just ends up costing you time but gaining you no extra income.
Value-Based Pricing
This is a specific kind of project-based pricing that considers how much a project is worth to the client. For example, if you can convince them that your work will gain them an extra $10,000 in business, you can easily charge $5,000 for the project, even if it takes you 2 hours to complete. They don't need to know how much time it took you, they won't ask, because all that they care about is the outcome.
- You have the potential to make some seriously awesome money.
- The client gets a strong return on their investment.
- It can be hard to know exactly how much you will add value to their business.
- It can be hard to convince them that you are right about how much value you are adding to their business.
Which Pricing Method Is Best?
You're going to hate this answer, but as with most things in life: it depends.
Assuming that you have your processes down and some experience under your belt, then value-based pricing could be your best bet. If you've repeatedly helped businesses out with your services and you have a pretty good idea of how much you improve their bottom line, then the only hard part is proving those facts during the proposal process. This can be done with testimonials, case studies, and overall professionalism. I've often landed projects as the highest bidder simply because my presentation was more polished and the clients had more confidence in my services than the other bidders.
If you are new to client work, or if you are trying out a new type of service that you aren't yet clear on the quantifiable outcomes, then hourly-based pricing can be a safe option. You can set your client's mind at ease by providing an estimate of the hours that your work will take, and you may even end up working a few hours for free if you find yourself going over that budget.
If you are somewhere in the middle, where you know about how many hours something will take, but will have a hard time proving the exact monetary return on their investment, then project-based pricing is likely your best bet. However, you will still want to track your hours with project-based pricing.
By tracking your hours on project-based pricing contracts, you can set a budget of how many hours you can safely work on this project while still earning your target rate. You can also use this information to figure out what your most profitable projects are, which type of work is most profitable, and further define your ideal client profile.
A Hybrid Approach
The great news about these varied approaches is that you don't actually have to choose just one. What I have done with many clients takes the best of each approach, which maximizes my profitability, gives them peace of mind, and insures against scope creep.
Ready to hear more about this hybrid approach?
Okay, here we go. What I like to do in my proposals is something like the following:
- List out exactly what I will do for them, or what the outcomes of the project will be. The more specific you are here, the better.
- Provide a flat project fee, whether that is based upon value or your time estimate.
- Mention clearly that this proposal includes "up to [x] hours of work."
- When going over the proposal with them, confidently tell them, "These hours should be more than sufficient for the stated project, but I wanted to leave room in case you wanted to have some extra revisions or add additional outcomes to the project." In almost every case, that sounded reasonable to them. This is especially easy to do if you have won them over with your professionalism. The more trust they have in you the more likely they are to agree to this hybrid approach.
Now, if you think about it, this leaves the most upside for you, the freelancer, and the most risk for them, the client. If you come in under budget with your time, you still get paid the same. If you need extra hours for the project, you get paid for those.
So why would a client even go for this approach?
Because it makes sense. Paying you strictly by the hour rewards you for being slow. When you tell them that the hourly budget should be enough for the project, you are giving them peace of mind for how much the project is going to cost them, at a flat rate. This also leaves room for variability in the project. It's nice for them to know that they aren't pinned down as the project moves along.
In my experience, I've never gone over the "up to [x]" hours unless they specifically asked me to by adding on to the project. Your goal should be the same if you want to keep happy clients, and therefore earn referrals.
What is Your Approach?
Do you use one of these approaches? Perhaps you have a hybrid or unique approach of your own that works well. Let us know in the comments!
