Marketing tips & resources to take your small business to the next level with less effort and more results (& formerly Compelling Marketing Blog)
WordCamp Raleigh celebrating all things WordPress was a lot of geeky fun this past weekend–I’ll post some highlights in upcoming posts. But for all who missed it, I’ve posted my presentation slides on easy and relatively fast ways to create quality blog content that helps turn visitors into prospects and customers below.
Enjoy!
In this series about hourly rates and pricing strategies for freelancers or small businesses, we’ve looked at:
9 Reasons to Stop Charging Hourly Rates
4 Reasons Why Hourly Rates are Bad for Clients Too
Charge What You Deserve–Project Fees & Flat Fees
Should You Be Paid for Performance?
But now you may be wondering…Are hourly rates ever a good idea?
The answer is yes—hourly rates can be a good approach when there are too many unknowns about a project. For example, if the prospect is being very vague or you haven’t done anything similar before.
In cases like that, where the time required and/or extra expenses you’ll incur are far too difficult to predict, charging an hourly rate may be the safest approach for you.
But most of the time, you’ll find it much easier and more profitable to use one of the other pricing strategies above.
There are two final alternative to charging hourly rates–performance pay and retainers. Like the name implies, performance pay means a good chunk of your income is based on the results you achieve–whether it’s called a commission, royalty or some other name.
In theory, it’s a great idea—the more the client benefits from your work, the more you make. But it’s much more complex than project fees or package pricing.
Pros of the Performance Pay Approach
Cons
In my opinion, the cons of the performance pay approach far outweigh the pros unless you’re working with someone who has a proven track record (although no one is failure-proof) and who you’d trust with your first born. Of course, it’s still smart to “trust, but verify” as they say.
Retainers are arrangements where a client pays you a set amount every month for specific services.
Pros of the Retainer Approach:
Cons:
Personally, I’ve always felt the cons outweigh the benefits of the retainer approach because you’re essentially at the client’s beck and call…making it hard to plan your time and putting you at risk of doing more work than you originally expected.
However, it can work in a situation where you’re doing the same exact projects month after month…and you’re good about drawing the boundaries when necessary.
Finally, we’ll look at whether hourly rates are ever a good idea.
Service packages take the flat fee pricing strategy a little further and up the perceived value by combining your service with other relevant services and/or products–usually for a bit of a discount.
Packages also allow you to give prospects several options to choose from instead of just one–which means they’re much more likely to buy because you’ve doubled or tripled the odds of finding one that suits their budget.
So what should you include in your packages? Consider any add-on product or service that complements what they’re hiring you for. Especially ones that won’t take much of your time– such as an information product, critiques, access to calls you’re doing anyway and email access to you (which most will rarely take advantage of).
All of these can significantly boost the value of the package to your client without chaining you to your desk for more work.
Another tip…only offer two or three packages per service–any more than that will make them procrastinate about buying. And if you create three options, be sure to put the option you want most people to buy in the middle, because that’s the one prospects naturally gravitate toward.
Now that we’ve discussed service packages as a pricing strategy, we’ll cover two more ways to escape the dollars-for-hours noose.
Photo was taken by MarcinMoga/Lolek and posted on Flickr under a Creative Commons Attribution 2.0 Generic license.
Previously, we talked about the pitfalls of hourly rates for freelancers and self-employed professionals and why your clients should hate hourly rates as well. Now let’s talk about a popular alternative…the flat fee or project fee.
But first, I want you to think about this…If you buy a home in a new development, is the builder quoting you a price based on the hours everyone spent working on that home, plus the materials–or is he quoting a price based on what other similar homes in that area are worth?
Of course, he’s going to go with the latter because it should cover all of his labor and other expenses and still allow him to make a profit. (Although that point may be debatable in the current real estate market!) So essentially, what he’s charging is a project fee–one price that covers the whole shebang.
You can use the same concept for pricing your services as well. And it’s a fairly simple pricing structure to transition to. If you don’t know what the true value of your services are (industry pricing guides can be quite helpful in this regard), you can start by just estimating the hours it’ll take and calculating the fee based on your hourly rate.
But then, you should add on to that “base” number to cover any expenses you expect to incur as well as premiums for rush jobs or what I call “the PITA factor”—when you suspect a client will be super high maintenance. In the end, you add it all up and present one total price to the prospect.
Note that while you won’t be required now to track your time, you should still do so to see how close or off your estimate is and help you refine your prices for the future.
In short, if you’re still stuck trading hours for dollars like a car mechanic, moving to project fees may be the easiest first step toward getting paid based on the value of what you do–rather than the number of hours you work.
Next up is a pricing strategy that takes project fees to the next level and gives prospects more options to say “yes” to.
Photo taken by Brock Builders and posted on Flickr under a Creative Commons Attribution 2.0 Generic license.
Last time, we talked about the 9 Reasons to Stop Charging Hourly Rates. But those only focused on why hourly rates are bad for YOU. Before I get into the alternatives, it’s important to consider how hourly rates are bad for your clients as well.
Because for them, hourly rates mean…
While it’s good to give them an immediate heads up that these items will add to the cost, in my experience, they often suffer a bout of amnesia about those warnings when invoice time comes.
But it’s also easy to fall into the trap of not wanting to seem petty–so you don’t mention it. Then one change becomes two and soon you have a whole series of little creeps, which can quickly add up.
But the real downside to the running meter is they’re less likely to reach out to you with a question or additional comments. While your first reaction may be “Good!” I usually find that answering their questions can prevent big problems or provide helpful insight for the project.
Besides, the more they think of you as an adviser who cares about their business, the more likely they are to work with you again. And in my experience, very few clients go hog wild pestering you non-stop anyway.
Finally, all of the above are good points to make when a prospect asks why you don’t charge hourly rates. In fact, here’s some wording I use on my website:
For one, hourly rates lead to unhappy surprises at invoice time when the bill turns out to be much higher than the client expected. I prefer to give a project price so you know from the start how much it’s going to be.
Also, charging by the hour inherently means the longer a writer, designer or whoever can drag a project out, the more they’ll make. Which, with the wrong person, can mean your project is both expensive and late. With a project rate, if I spend more time than expected, I eat the cost. So it doesn’t pay to miss the deadline.
Other wording in my proposals and estimates:
My fees are always based upon the scope of the project, never upon units of time. This way, you’re free to contact me with a question worrying about a meter running.
Of course, you’d want to put these thoughts into your own words, but hopefully they’ll give you some place to start.
Are there any other downsides you think I missed?
