chapter 5

Demystifying Pricing: Strategies for Structuring Your Project Price Tags

Demystifying Pricing: Strategies for Structuring Your Project Price Tags

Coming up with prices for your web design, development, and ecommerce services can be a daunting prospect. Too high, and the potential client may go elsewhere. Too low, and you run the risk of not being profitable on a project. Sometimes you’ll be put on the spot; other times you’ll get to go away and work up a fully costed proposal.

Regardless of the format or timing, having a really good understanding of how your own costs work, and how best to price up what you do, will be critical to getting that number right. It’s all about pricing in such a way that allows you to highlight your strengths as an agency or freelancer — all while ensuring the client gets good value for their money.

Unfortunately, it's never as simple as just pulling a number out of the air (although some do try). So where should you actually start when trying to arrive at the perfect price? Chapter 3 dove into deciding what you’re worth, but in this chapter I’ll outline different strategies you can use to decide how to apply your newly defined worth to your pricing model.

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Different types of pricing

It’s important to understand the different ways you can go about calculating your pricing. Each has their own positives and negatives, depending on how you operate your own agency or freelancing work. It’s also important to understand that how you price impacts what you need to deliver to the client.

Cost-based pricing

Cost-based pricing is one of the simpler methods. It works by simply adding all the costs of producing a project, and then adding a standard percentage margin.

For example, you might have started with a template that cost $100, added $300 worth of stock imagery, and then spent 20 hours working on it at a cost of $40 per hour. Adding all that up gives you a total cost  of $1,200 to produce the project. Let’s say you want a 50 per cent margin — you should charge $2,400 for the project.

The biggest challenge designers and freelancers have with this is working out their cost per hour. If you’re a bigger agency, it’s easy: you add up all the salaries in the business and divide by the number of working hours. However, if you’re freelancing, you need to take into consideration your “opportunity cost,” which is most likely going to be what you could get paid, per hour, if you were working for someone else.

Clients normally like cost-based pricing because it’s itemized, but they may start questioning how much markup is going into each component.

Clients normally like cost-based pricing because it’s itemized, but they may start questioning how much markup is going into each component.

From your side of things, the main advantage of cost-based pricing is that you can accurately tally up your expenses. By itemizing your tasks and their associated costs, you’ll be able to closely track expenses and remain profitable on each project.

The downside is that it only takes one project to go wrong to reduce your overall profitability, and it’s hard to make it back on future projects priced the same way.

From the client side, cost-based pricing has the advantage of coming across quite fairly, as it’s based on the actual costs of producing the work. The downside comes when those costs (like the number of hours) unexpectedly blow out, and they’re obligated to pay for them when they may not have been in their budget. If you’re going down the cost-based method, give some thought as to how you might address issues of cost changes once work gets underway.

Hourly rates

Similar to cost-based pricing, hourly rates work by having a standard hourly price, say $120 per hour, and then charging based on the number of hours worked. Again, using the example from above, those 20 hours would result in the client being charged $2,400.

The trick with hourly pricing is to work out a rate that ensures you’ve covered all those “non-hourly” costs like stock photos, electricity, and other business overheads. To get a good starting point, see what others in your area are charging per hour and adjust accordingly from there. Again, refer back to Chapter 3 for pointers.

In terms of working with clients, hourly pricing is normally the methodology they most easily understand, which can help get a project across the finish line. However, the downside is that it gives them the ability to compare two quotes purely on hours and hourly rate, which may not be a true comparison between two potential providers.

Another downside to hourly pricing from the agency/freelancer side is that you normally need to record and track your hours meticulously, and then provide itemized statements or work logs to clients to justify exactly what was charged. This can lead to clients questioning elements (“Why did it take four whole hours to update the navigation?”), which can mean you spend just as long justifying your hours as you did working in the first place!

Packages and project pricing

Packages are a form of pricing that works because when complementary items are grouped, they create intrinsic value. For instance, you could bundle a logo design (normally $400) with a website design (normally $2,400) and a business card design (normally $300) for a “package price” of $2,900. In this example, the final price is lower than the sum of the parts, as this helps encourage the client to choose the package deal.

By bundling the items together, it also conveys to the client that there will be a sense of continuity across those designs, which is likely to be important to them, as keeping consistency across different marketing collateral helps send strong brand signals. This means that even if some other competitor of yours offers a lower price for the logo design, the prospective client would have to weigh whether it’s worth splitting the project to save a few dollars, and that’s likely to work in your favor.

As a result, having those projects bundled into a package tends to make them more valuable than if they were done separately, either at different times or by different people, where that brand continuity might not be possible.

Having those projects bundled into a package tends to make them more valuable than if they were done separately, where that brand continuity might not be possible.

The downside to this approach is that some clients may ask you to “unpack” those prices ( “So what if I just do the business cards?”). This is why it’s important to make the bundle seem like the obvious choice, and where the best value lies.

For both the client and agency, the big upside to packages and project pricing is that the price is agreed upon, and both sides know (or should know) what they’re getting out of the deal. The downside comes if one side misinterprets those inclusions.

For example, the client might have incorrectly assumed that the logo design included as many revisions as necessary, which leads to issues where the agency is working more hours than expected, but the client is still unhappy with the perceived delivery of the project. That’s why it’s critically important to ensure that packages and project pricing include clear explanations on what’s included and what’s not.

Value-based pricing

Value-based pricing is probably the hardest to implement, but most profitable when it goes well. It works by calculating the value (either implicit or explicit) that the client receives from the work you do. Confusing, right? Let me explain.

If you were to make changes to a client’s website resulting in their sales doubling from $5,000 a month to $10,000 a month, then you’ve created $5,000 a month in extra value, equating to around $60,000 per year.

In that case, you might feel that in return for making an additional $60,000 per year, charging the client $6,000 to make all your website changes is an appropriate investment.

The hard part — and you can probably see where I’m going — is trying to work out your likely impact before you’ve actually done it. That’s where experience and past results come in, and clients will often pay you a higher price than a competitor if they believe it will result in more value in the end. But you need to make sure you can back it up with evidence, forecasts, and past success.

To help with this, some agencies and freelancers charge based on performance after the fact. Using the above example, they may take 10 per cent of every extra sale generated, allowing them to earn $6,000 for their work, but spread out over the year.

Be warned though: performance pricing (which is a variation of value-based pricing) is highly dependent on other things outside your control, like what other marketing the client is doing or whether their products are actually any good.

Performance pricing is highly dependent on other things outside your control, like what other marketing the client is doing or whether their products are actually any good.

The upside for agencies and freelancers is that if you get value-based pricing right, you have the opportunity to make a better profit margin than other pricing methods, while at the same time making a client feel they got great value for their money.

The downside is that if you’re doing something for a client who doesn’t see huge value in your work (“My boss just told me to sort this out”), it can be hard to convey the value you’re creating for them.

How to choose your pricing method

Picking one of the above pricing methods can be tricky, as each has their own pros and cons. Normally, you won’t have to explain to a client what pricing method you’ve used, but be warned that you will probably have to answer the more generic question, “How did you come up with that price?”

In answering that question, hourly and cost-based pricing are easiest to explain, as the elements can be itemized. Packages and value-based pricing get a bit harder, as it’s the combination of all the smaller parts that make up the whole. With value-based and package pricing, you’ll be relying more on past experience, case studies, and proven success to justify your pricing.

In that sense, when you begin your freelancing journey, you’ll probably start with either cost-based or hourly pricing, and transition to packages or value-based pricing once you start to prove yourself and have a bank of testimonials and case studies to call upon.

Adjusting prices after quoting

One of the most difficult conversations to have with a client is when you need to adjust a price after quoting. This can come about because the client has taken months (or years) to respond to your initial price, because something has changed in your workload, or because some other third-party factor has changed (like the cost of stock photography or some other input).

In my experience, the best approach in these cases is honesty. Being proactive and saying, “I’m sorry, but the cost of XYZ has gone up since we last spoke” will normally be received well, particularly if you’re willing to adapt and show flexibility on your side as well.

If they still resist your requests for an adjustment, then you’re probably getting a good sense of how flexible that client is likely to be after signoff, too. In that case, if there appears to be no willingness on their part to respond to reasonable price change requests, you’re probably better off cutting your losses and walking away.

Discounts and other incentives

One of the more challenging scenarios to handle is when your prospective client asks, “Can you do it any lower?” In those circumstances, when you feel like you’re being pressured into some kind of discount, you’ve got a couple of options.

If you really need the work, chances are you’ll have to offer something, but always try to make it a trade-off, rather than just a discount. For example, offering a five per cent total discount if the project is paid upfront or reducing the number of revisions allowed is a better approach than simply slashing your price the moment someone asks. If you decide to cut prices without a trade-off, you’re telling the potential client that the original price was inflated to begin with.

The other tricky situation to deal with is when a competitor’s price has come in under yours, and the client is asking you to match it. Again, if you are going to match it, be sure to provide a trade-off. Otherwise, outline why your price is more expensive (experience, better imagery, etc) and stick to your guns!

In my opinion, if you’ve come up with an original price that’s higher than the competition, and you believe in your work, then I’d always advocate for holding firm on your price and work, to show how you’ll deliver more value than the competition.

How do you know you’ve got the right price?

So you’ve priced up a project, sent it off to a potential client, and you’re beginning to wonder, “Did I get it right?” That question has a two-part answer. The first will be answered relatively soon, when you find out whether the client agrees to the price. If they do, the good news is that you didn’t go too high.

Answering the second part of that question won’t come until after the project is complete. That’s when you’re trying to establish whether you ended up making profit on the work, and whether the client feels like they got what they paid for. If you’re a bigger agency, you can determine this through client surveys or third-party services that will call your clients for you. If you’re a freelancer, your best approach is to simply ask, and be willing to listen to the good and the bad.

Regardless of which pricing method you use, the key to long-term client satisfaction with your prices and work is whether or not the client believes they got great value for what they paid.

What if you get it wrong?

Even the most meticulously-calculated prices can go wrong once work gets underway. A seemingly laidback client is all of a sudden requesting dozens of tiny changes at every step, or is expecting deadlines to be brought forward due to changes on their end.

Whatever the cause, dealing with “scope creep” after a project is underway can be tricky. Always try and counter the potential issues during the quoting phase, by limiting the number of revisions or including surcharges for “urgent” work. When you can reference those original terms (in a nice way), and outline to the client that they are now asking for more than what was quoted, you’re at least giving yourself a decent shot at finding an amicable solution.

You’ll find more ways of dealing with payment issues in Chapter 9 of this guide.

The final word

The most important part of pricing is learning. Every one of us who’s ever priced a web project has gotten it wrong. Use that feedback to work out what signs you missed, and how you can adapt for future prices. Happy quoting!

About the Author

Craig Somerville is the Managing Director of Reload Media, an Australian Shopify Experts agency with a proven track record of getting great results for their clients. They also maintain an extensive partner network, working alongside and collaborating with hundreds of different web design and development agencies across the world.

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