Creative entrepreneurs struggle with pricing more than any other group I know. We all seem to struggle and second-guess ourselves while working on a client quote. Many of us are looking for a system to either simplify the process or give us confidence as we bid. The debate seems to center on questions of hourly vs. project pricing schemes. We wonder when an hourly rate is most appropriate and when project based pricing will give us greater flexibility and profitability. We\u2019re looking for guidance and a way to balance the two in our minds. We don\u2019t realize that both systems actually begin with an understanding of time and how the time you invest in a project translates to profitable pricing.<\/p>\n\n\n\n
Effective pricing begins with time. Regardless of whether you bill your clients by the hour or quote a project fee, you need to understand how much time is invested in an average project and the base rate you need to charge per hour to cover your costs. Your business has an overhead (or burden) rate \u2013 the amount of money it takes per hour to pay all the bills and keep things running smoothly. This isn\u2019t profit \u2013 it\u2019s just the minimum amount per hour to get you to the \u201cbreak even\u201d point financially. You calculate this burden rate by dividing your total monthly expenses by the number of productive hours you work each month. (Pro tip: Hours you spend marketing or doing administrative work do not count here. Just hours doing work you bill to clients.)<\/p>\n\n\n\n
Total monthly expenses \/ total hours doing client work = hourly burden rate<\/p>\n\n\n\n
Your burden rate is the lowest amount you can earn per hour of billable time without losing money. It does not include any profit\u2026 just expenses. But it is the absolute lowest you can go when billing a client before you\u2019re in big trouble.<\/p>\n\n\n\n
Now, let\u2019s talk about profit. Profit is the amount of money you want to earn per month after all of the bills are paid. This is the money you pay yourself or put away for later investment into your business.<\/p>\n\n\n\n
The difference between your burden rate and your internal hourly rate is profit.<\/p>\n\n\n\n
Calculate your internal hourly rate<\/strong> using a similar formula \u2013 one that combines monthly expenses and monthly desired profit and divides the total by productive hours you work each month.<\/p>\n\n\n\n (total monthly expenses + desired monthly profit) \/ total productive hours = internal hourly rate<\/p>\n\n\n\n Not sure how this works? Here\u2019s an example. Let\u2019s say your total monthly expenses are $1,000 and you want to generate $2,000 per month in profit. You typically spend 15 hours per week on client work which means you have 60 total productive hours in a normal month.<\/p>\n\n\n\n ($1,000 + $2,000) \/ 60 hour = $50\/hr<\/p>\n\n\n\n This number is your \u201cinternal\u201d hourly rate because it is intended for internal use only. This is not necessarily a number you quote to your clients. It is just the amount you should bill for each productive hour in order to earn the level of profit you desire. You need to understand your internal hourly rate in order to price effectively \u2013 in either an hourly or a project scheme.<\/p>\n\n\n\n The lovely thing about hourly pricing is the simplicity. We all understand how it works\u2026 you bill $X for each hour of work you do for a client.<\/p>\n\n\n\n You can sell the client prepaid time blocks (10 hours @$X\/hr, etc.) or you can simply provide the work and send periodic invoices. You can even create some kind of retainer system in which the client pays you a set amount each month in exchange for X amount of your time.<\/p>\n\n\n\n As a creative entrepreneur, you don\u2019t have to worry about estimating time when billing on an hourly scheme. You also don\u2019t have to struggle with scope expansion or holding a client accountable to the initial project plan. You simply do the work and get paid for it.<\/p>\n\n\n\n Of course, there are drawbacks to hourly pricing as well. The big ones include talking about your hourly rate with clients, scheduling issues, and client estimate requests. Let\u2019s look at each of these\u2026<\/p>\n\n\n\n Discussing your hourly rates<\/strong> can cause problems with clients due to the perceived value of money. Quoting an hourly rate to a client opens the door to a discussion of value that can get petty.<\/p>\n\n\n\n I\u2019ve found that most clients have an opinion about what I \u201cshould\u201d charge for my work, and it often isn\u2019t exactly the same as mine. Instead, it is often based on what they pay in-house creative employees or what they earn themselves. This can create an awkward situation\u2026 especially when you quote an hourly rate that is significantly higher than what the client makes in his role.<\/p>\n\n\n\n Scheduling issues<\/strong> arise with hourly clients. When you book a big project, you typically block out time in your calendar to do the work. This is pretty straightforward, but something surprising happens in an hourly scheme. The client often comes to believe you are available quickly for their additional requests. After all, they pay you for your time\u2026 they ought to be able to use it when they like.<\/p>\n\n\n\n Time estimates<\/strong> can be difficult to navigate when you\u2019re billing hourly. It\u2019s natural for a client to ask how long something will take to complete. In an hourly pricing scheme, however, this estimate is tied to a monetary value. If you casually answer 2-3 hours and then discover the work takes 4 or more, the client may respond with a concern. Your time estimate became a promise in their minds, and they expect your billing statement to keep that promise.<\/p>\n\n\n\n Project pricing (for purposes of this discussion) is defined as setting a complete price for a project when quoting based on the scope you set with the client during the proposal process. In this scheme, the client is not concerned with the number of hours you spend doing the work. The amount you bill isn\u2019t based on time at all (from their perspective) but rather on the deliverables you provide. Project pricing:<\/p>\n\n\n\n Project pricing is often the most profitable option for creative work. However, there are a few concerns associated with it. Problems arise when you (a) fail to consider how long something will take, (b) estimate time incorrectly, or (c ) allow scope to expand without charging for it.<\/p>\n\n\n\n When you fail to consider how long something will take<\/strong> you give up control of your own profitability. It feels safe and easy to simply charge what others are charging for similar work, but this is a big mistake. When we arbitrarily set a dollar amount without calculating the time required to do the work, we nearly always lose money.<\/p>\n\n\n\n Incorrect time estimates<\/strong> are equally problematic. You quote the project price based on a time estimate that seems accurate. But, then you discover that the project requires much more time than you thought. Oops! Not much you can do to correct an issue like this\u2026 unless your client is surprisingly gracious.<\/p>\n\n\n\n Scope expansion<\/strong> happens inside creative projects. The issue comes when you fail to charge for them. Clients ask for \u201cjust one more thing\u201d often. Your profitability depends on your ability to respond with a quote for additional fees.<\/p>\n\n\n\n Unfortunately, there is no \u201cright way\u201d to price your creative work. Evaluate the situation and make a decision based on your comfort and the client’s needs. Just make sure the pricing scheme you use is communicated simply, clearly, and confidently.<\/p>\n\n\n\n\n\nThe case for hourly pricing<\/h2>\n\n\n\n
The case for project pricing<\/h2>\n\n\n\n
How should you price? You decide based on the situation<\/h2>\n\n\n\n
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