How you choose to price your design or development work can significantly impact the financial success of your business. Charge too little and you won’t cover your operating costs. Charge too much and you’ll never land a client. If you find yourself in either of these situations, your dream of running your own creative business will quickly come to an end.
While the amount you charge a client is an undoubtedly important business consideration, how you determine that amount is even more important. There is no science to pricing and there often isn’t a single formula you can use in every case, but it’s important to evaluate the way you price your projects and determine whether the strategy you’re using is really the best one for your firm.
Throughout this article, I’ll walk through three pricing strategies, examine their benefits and weaknesses, and identify which ones could be most appropriate for your design or development business.
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1. Time-based pricing
Time-based pricing is probably the most commonly used pricing strategy in the creative industry. This is most likely because this style of pricing is extremely simple to wrap your head around. Once you’ve defined the scope of work, you’ll estimate the total amount of hours you believe it will take to complete the project. From there, you’ll multiply the estimated hours by your hourly rate to reach your final project cost. This cost is the amount you’ll share with your client when negotiating final budgets.
Time-based pricing gets a little more complex if you’re working in an agency or with subcontractors. In an agency setting you’ll have multiple individuals contributing to a project — designers, developers, copywriters, account managers, and so on. Each contributor will have a designated hourly rate that varies based on their experience, skill, and respective discipline. You’ll need to work with your contributors to individually track their time spent on the project, which will be multiplied by their rates. If you work with subcontractors, you’ll need to add their fees into your project estimate along with a premium that ensures you still make a little extra on top of what you’re paying them.
You might also like: 7 Tips to Calculate Your Freelance Rate.
The pros of time-based pricing
- It’s easy for you to use — Once you’ve determined your hourly rate, time-based pricing is one of the simplest models you can use. As described above, all variables are relatively easy to track, calculate, and communicate to your client.
- It’s easy for clients to digest — Some clients prefer time-based pricing simply because their estimates include a detailed breakdown of the time and costs associated with individual tasks. Their concerns about costs will diminish as they can see exactly what they’re paying for and what portion of their budget is going where.
- You can identify where you earn the most — Since time-based pricing requires you to measure costs, time usage, and income for every project, you’ll get a clearer picture of where your profit margins are coming from. This information can help identify the types of projects that are most profitable for you, which can influence the direction you take your business in.
- You’ll become a smarter business owner — Conversely, you’ll also be able to identify inefficient and unprofitable areas of your workflow or team. Armed with this insight, you’ll be able to make procedural or organizational changes that increase the productivity and effectiveness of these specific areas of your business.
The cons of time-based pricing
- There is a direct conflict of interest — Time-based pricing leads to a discrepancy between your needs and those of your clients. Your client wants the job to be completed as quickly as possible in order to save money, but the more efficiently you work the lower you end up billing. This is a tough situation to be in and can cause even the most legitimate designer to make some unethical decisions regarding how they manage their time on a project.
- You have an increased risk of client dissatisfaction — The reason clients love time-based pricing – the ability to have a high-level view of all aspects of the project – also has the potential to lead to severe dissatisfaction if the project exceeds that proposed cost or timeframe. Since the total time and cost is visible to both sides, any deviations can cause clients to question your team’s effectiveness and lose trust in your ability to deliver.
- It’s hard to accurately estimate time usage — One of the biggest pitfalls of time-based pricing models is the risk of inaccurately estimating your project. If you quote a client one number and end up severely exceeding that amount, you’ll find yourself in a tough position trying to convince them to pay up. This will get easier the more projects you have under your belt, but there will always be a risk of underestimating the amount of time needed.
- No one likes time-tracking — If you’ve ever tried to keep a timesheet, you know how mundane it can be. You and your team will be responsible for diligently recording every minute spent working on a given project. While you can’t avoid this process if you choose time-based pricing as your primary strategy, you can simplify it by using a time-tracking app.
When does time-based pricing make sense?
Anyone can use time-based pricing, but this style of pricing is most valuable for designers or developers just starting out as freelancers. At this point in your career, you’ll most likely have little to no client work to prove your value to prospects. This perceived lack of experience makes it more difficult to win over their trust and ultimately their contract than if you had many successful design projects under your belt.
You can circumvent this problem by pricing your work using the time-based approach. This will allow prospects to review your estimate line-by-line so they can see exactly what they are paying for and how much time the project will take. Clients will feel more confident working with you when they have all this information in front of them.
2. Fixed pricing
Rather than billing your clients by the hour, fixed pricing – also known as project-based pricing – allows you to offer them a flat fee that covers all work associated with their project.
However, just because you aren’t billing hourly doesn’t mean you don’t need to know the amount of effort necessary to complete your projects. Like other pricing models, fixed pricing starts by assessing scope and determining your minimum price — the amount needed to break even on a project. Once you’ve established your minimum price, you can decide on a percentage value of that amount as your premium that will ensure you finish the job with a profit, while also keeping a little wiggle room in case of any changes in scope.
Once you’ve completed a few projects that are similar in scope – say an email marketing template or simple ecommerce store setup – you’ll be able to rely on the same fixed fee over and over again for new projects of the same type.
The pros of fixed pricing
- A great solution when working on simple jobs — Fixed pricing is perfect for repetitive client projects where every feature and requirement are easily identifiable. This can be extremely beneficial when working with clients with low budgets or as their agency of record, where small, frequent requests are common.
- Bigger margins on smaller jobs — Flat fees for small projects allow you to mask the short amount of time needed to complete them, resulting in healthier margins for your business.
- It’s also easy for clients to digest — Not all clients fully understand pricing models used by freelancers or agencies. Fixed pricing allows you to simplify the concept of pricing by presenting a single number that covers the entire project, rather than overwhelming them with individual line items. Clients will look at your flat rate, compare it to what you’ll be delivering, and make the judgement on whether they want to work with you or not.
- Eventually it’ll be easy to price projects — Once you develop an understanding of the costs associated with a typical project, it’ll take you next to no time to put together estimates for your clients. However, this is only true for smaller jobs that share a similar scope to one another.
The cons of fixed pricing
Rewards quantity over quality —As seen with time-based pricing,fixed pricing naturally encourages you and your team to focus on getting as much done as possible in the predetermined timeframe. This can result in unintended creative limitations just to get the work out the door, which can negatively impact the quality of the final product.
Nothing to account for scope creep —The set fees of fixed pricing do not directly account for changes in scope or for projects that require extra features. You can try to combat this by offering premiums for additional features not normally considered in your typical project, but this won’t cover instances when your work goes over the allotted schedule.
It takes time to get it perfect —You’ll probably need to run through a few projects before you discover the sweet spot for pricing your work on a per project basis. As you build up more experience over time, your estimates will become more accurate and you’ll be more able to firmly position your price point in the market.
Clients assess you primarily on cost —When you offer a client a cookie-cutter price for a project, they will assess your value against your competitors on that price alone. If your price is too low, it can have a negative effect on the perception of your value. If your price is too high, it can lead to a client abandoning you for a cheaper alternative.
When does fixed pricing makes sense?
Fixed pricing is best suited for experienced designers or developers (or agencies) who have a decent amount of consulting experience under their belt. That way, you’ve had time to experiment with different pricing points and can identify your minimum acceptable price to remain profitable.
Regardless of whether it’s your primary strategy, you should rely on fixed pricing for jobs that aren’t overly custom or technical in nature. While not ideal for complex projects like full websites, it works exceptionally well with small or repetitive projects such as email templates, banner ads, and sometimes even simple landing pages or website setups.
Fixed pricing is also a great strategy for add-on requests. You can charge clients a flat fee when they request additional iterations for review, features that fall outside of scope, or require extra resources to complete a project. I know some agencies that will charge an additional $300 - $500 for every extra revision period above what was initially covered in their statement of work — a great way to safeguard you from overrun costs.
You might also like: 5 Questions You Should Ask Your Clients Before Every Web Design Project.
3. Value-based pricing
Your client isn’t just hiring you to create a logo, landing page, or write a few lines of code — they are hiring you for your expertise and value you can provide their business. So it makes sense that your pricing strategy reflects that.
Where time-based and fixed pricing strategies are based primarily on the tangible product you deliver to a client (and the amount of time associated with that delivery), value-based pricing requires you to think about your consulting service on a deeper level and create your estimate to cover the intangible benefits your client receives from your services.
Unfortunately, these benefits aren’t always inherently obvious, and pinpointing them can be an awkward experiment of self-assessment — especially when first flirting with value-based pricing.
One approach that can help is to think about the direct business outcomes associated with your work when initially scoping the project. These outcomes could be increased profitability for their business or greater efficiency among their team — regardless, you need to communicate those outcomes to your client in order to back up the higher price point associated with value pricing. Communicating value-based prices isn’t always simple, but when done properly it will give your client context about the price points you have chosen for their work.
You may also want to consider how badly you need the project when determining what to charge with this model. Dan Mall, Art Director and author of Pricing Design, states that value-based pricing is less about benefits for the client, and more about the timing of the project.
Perhaps this month, I’m booked up, and it would take quite a sum to persuade me to take on anything new. Next month, however, work may dry up, and I may be willing to do the project for much less. Same customer, but the timing changes things. For me, value pricing is even more than pricing the customer. It’s about pricing the moment.
Despite offering a flat rate, value pricing is unlike fixed pricing since your estimates are based on variables like need, timing, and experience. This allows you to position yourself based on the value of your services as a consultant, not simply the time you spent working for a client.
The pros of value-based pricing
- You’re assessed on quality, not dollar signs— Value pricing shifts your client conversations from the costs of each line item to the value you can provide their business. This change causes clients to focus on the quality of your end product and the impact it has on their business, not the overrun charges for that extra day of development or the additional round of QA.
- Clients love price certainty — The certainty that accompanies value-based pricing helps remove any fear of underestimation or overbilling. Clients will be more at ease knowing that the price of their project will remain unchanged when they receive their bill.
- You can experiment with pricing — Since your pricing premium is based on value and timing, you have room to experiment with your margins. This practice is extremely important when first using value pricing so you can determine the sweet spot for your client work.
- Your earning potential is higher — Plain and simple, value-based pricing will often allow you to make more on a project than most other pricing strategies, and more revenue for your firm is never a bad thing
The cons of value-based pricing
- It is difficult to cost out “value” — Pricing on value is more of an art than a science. It takes time, experimentation, and an assessment of your current situation to determine what is appropriate for your current project. The process of assessing value can be intimidating at first, but over time you’ll get the hang of it.
- Old habits die hard — If you work in an agency and are considering switching to a value-based model, you’ll need to work diligently with your internal stakeholders (account and project managers) to ensure company-wide adoption occurs seamlessly.
- You risk undervaluing your services — When first starting to use value-based pricing, it’s easy to charge too little for a project. Since your premiums are based on your assessment of the potential value you’ll provide a client, it’ll take a few attempts and pricing experiments for you to be fully comfortable defining what price tag you put on your value.
- It can be challenging to justify higher rates — When you use value-based pricing you’ll often issue higher prices than you would have with other strategies. This is directly against your client’s goal of driving costs down. To make your price easier to swallow, leverage every tool at your fingertips to accurately spec out the project and communicate these details to your client. Don’t forget to remind them of the impact the project will have on their business!
When does value-based pricing makes sense?
Everyone can and should use value-based pricing, but it’s most appropriate for established freelancers or agencies who can rely on their experience to justify the higher price points. Build trust with your new clients by referencing your case studies and demonstrating the impact your services had on the businesses of former clients. When they see the results your design or development work created for others, they will be more willing to sign off on your contract. But that doesn’t mean you shouldn’t experiment with value-based pricing early on in your career — the sooner you start, the quicker you’ll become comfortable using this pricing strategy.
You might also like: Grow Vol. 1 — Value-Based Pricing | Deciding How to Charge Your Clients.
Price for what feels right
Pricing is a subjective process — there is no strict formula for deciding what or how to price your projects. The strategy you end up choosing will often be based on the client you have, the project you’re working on, and the stage you find yourself in your career. And even if you find yourself moving back and forth between pricing strategies given your situation, that’s okay too.
That’s why it’s invaluable to have a strong understanding of the strategies available to your business and in what circumstances they can add the most value. Use this knowledge to evaluate every project that comes your way to identify the pricing strategy that is most appropriate for you and your client.