Have you ever been asked the question “What do you charge?” This question is either easily answered by the confident freelancer but if you don’t yet know what your rates are this question can be difficult to navigate. I remember watching the game show The Price is Right. They call on people from the studio audience and ask them to give their guess on the price of products. The person who gets closest to the actual price without overbidding is selected to move on to the next round to play other pricing based games to win money. (if you haven’t seen it you must not have had a TV growing up because it’s been going on for 40+ years and is still on today.)I have a confession, that’s what I used to do when it came to setting my prices in my freelance business. I was functionally acting like the contestants on the game show. Someone would ask “how much do you charge?” and I would come up with a price that either was too high or too low for the potential client. You do not have to play the guessing game when it comes to setting your rate as a freelancer. Once you understand what the different strategies are you can create a strategy that works best for where you are in your business.
Here are some pricing structures you can use today in your business:
Cost plus is the type of pricing that we are most exposed to. This type of pricing is popular in the manufacturing world it is the principle in which you take the cost of something then add a certain amount of margin or profit on top of how much it cost. For this freelancer this often involves researching how much your expenses are and then making sure you pull in more income that your expenses. I’ve seen some freelancers use this logic in developing their pricing. They arbitrarily choose a rate like $50 an hour or they say well $500 sounds good and they view it all as profit because they are only giving away time which has no cost.
The problem with this logic is you’re not taking the time to sit back and evaluate what your time is really worth. You can always find a way to become better at your skills, become better at negotiating, the list goes on but you cannot create more time so your time is limited and you don’t want to place arbitrary value on your time and when you really investigated and look at it if you’re arbitrarily sending your pricing you’re not in value in your time in the right manner.
Competitor Based Pricing
I have a confession. I used to price my services based on competitor pricing. A potential client would ask me for a quote I would literally take what they sent to me and I find other freelancers in the market and ask them the same questions to see what they would charge. Then I would run back to the potential client and come up with the number that was somewhere between the quote that I received from others.
The the logic behind making this decision is I wanted to be competitively priced. I didn’t want to be too high because what if they leave me and go somewhere else or I didn’t want to be too low meaning that I’m viewed as the cheap alternative for low quality. The fault in my logic in looking to competitors to set my pricing is I’m assuming that our skill set is on the same level. There is too much of an emphasis being placed on price. It is true if two people with very similar skill set if they would truly equal then maybe you look at price and make a decision but are you truly equal to your competition or are you better or do you go the extra mile for your clients or perhaps your customer service is better than theirs. I expand on how I used competitor based pricing in “Perception is Reality“.
Value Based Pricing
This type of pricing is probably the most complex in a little bit more intricate however when executed properly this is the most rewarding and has the most potential to increase your income. The focus on this pricing method is to set the price based upon the amount of value the client receives from the benefit of your work. Research must be done upfront to understand what is valuable to the client as well as how much money they make per client. The price you charge is then anchored next to the potential the client can make with the service you have provided them.
Questions such as the following can be asked:
- What is the problem you are looking to solve?
- How much does your business generate in 1 year? month? week?
- How many leads to do acquire in 1 year? month? week?
Let’s say I meet with a law firm who is a perspective client. I speak to them and I find out they want a new website and they make $60,000 a month and take in 10 cases a month, so $6,000 each client. In order to get those 10 cases for $60,000 a month they take in at least 30 leads. Knowing this we can assume that a lead is worth $60,000 / 30 leads = $2,000 a lead. If I meet with he law firm and agree to create a new website and a digital marketing plan if that has the possibility of bring in 4 new leads a month then charging $12,000 is appropriate. If this was simply $12,000 someone may perceive this as being high but since we know a lead is $2,000 each, then this translates to $8,000 a month. Of course they would pay $12,000 in order to potentially make $96,000 more than the previous year.
Flat Rate Pricing
This is the pricing method in which you choose 1 rate for your services. There is no specific itemization of tasks and it is simple to comprehend. Flat-rate billing is also known as billing by the project, the method focuses on how much it cost to complete the project and no how long it takes you to complete the project. I like this method because it focuses on the value of providing a solution and not exactly how you plan to arrive at the solution. Clients may be intimidated by higher numbers when it comes to flat rate pricing so if you choose this method also think about incorporating a payment schedule when certain milestones are reached.
For example, you could say it costs 50% of the project rate to begin the work and 25% halfway through and the final 25% at project launch. Since the price is one simple rate it is important to communicate with the client and explain the exact scope work. You do not want to agree on work for a certain price only to receive requests from clients that were not a part of the original agreement; sometimes because a large amount funds were paid at the start of the project clients feel you should just do extra work. You’ll have to learn what work is complimentary and what work will require additional costs.
Developing a flat rate for your services is a process because you have to be able to estimate how long a particular project will take you and your flat rate should take timing into consideration. Lauren Hooker of Elle and Company design raised works off of flat rate pricing for her design ( ) services. She went from charging $1,500 to later charging $6,500 in little over a year. See all about the process on her blog post, My No-Fuss Formula for Pricing My Services.
We all have seen this in action. With this pricing structure, you charge the client per hour for the time you’re working. Setting an hourly rate is not as straight forward as it seems, many people forget that as a freelancer you cannot bill for everything you do. A normal work week may consist of 20 – 30 hours not the full 40 hour week from a standard job. There are times for when freelancing and charging an hourly rate you may feel like an employee of your client. That’s just it, chances are you are freelancing to get away from being an employee. The other downside with hourly pricing is you are not rewarded for your efficiency. Chances are as a freelancer you will get better and faster as time goes on.
If your rate $50/hr and you normally complete a task in 4 hours ($200) and learn to complete the task in 2 hours ($100) does that mean you deserve less? For the freelancer working longer is advantageous, on the client’s side working less is advantageous. It can be difficult to arrive at a win-win situation between client and freelancer. The good news is both parties know what to expect and everyone knows what they are paying and what is being charged.
These are a few of the pricing techniques you can use in your business. What pricing methods do you use or would like to implement in your business?