Something I'm asked often is, "how much should I charge per hour for (insert any service here)?" If you were to ask me this, you'd probably be a little surprised by my answer, which is usually,
"You shouldn't charge hourly..."
What? It seems so standard to charge hourly rates for most freelancing services, right?
Well, lets peal back the pricing dilemma to better understand why hourly pricing is not ideal.
People are naturally terrified of setting prices. It's obvious when I see how many entrepreneurs/freelancers undervalue their services.
They might be...
- Afraid of looking arrogant
- Trying to give themselves a buffer on their performance (when you charge a lot, you need to be confident you can deliver a lot).
- Generally indecisive
- Out of touch with the market and the value of what they offer.
Pricing is hard. It's ok if you're overwhelmed.
If you're reading this, you likely feel a little uncertain of how you're charging your customers. Freelancing can be an amazing opportunity, but if you aren't pricing your services correctly, you will be doomed from the start.
Hourly rates are a result of having a worker's mindset.
Great entrepreneurs who build businesses whose earnings grow exponentially year after year understand this.
The Problem with Hourly Billing
Here are the three big reasons why I don't like to bill hourly whenever possible.
1. Hourly Billing Punishes You for Getting Better and Faster
Imagine that your site has just crashed.
You head to Upwork and higher someone to work on your server.
They charge you $500 for the job. You know the value of getting your site back up, so you gladly pay it.
Then, 10 minutes later, they call you and inform you the site is back up.
Now, are you mad that you just paid them $500 for 10 minutes of work?
Not if you're a sane person!
You knew the value that they brought and getting the site up faster helps you start making money again more quickly.
This freelancer gets it.
They know that they are good and they know they can do quality work fast.
If you freelance, your rates should always be going up as your skill set and resume grows.
Let's say that over the course of 2 years, you can now do work twice as fast.
If you charge hourly, you're now providing better work but making less!
You could of course double your prices to compensate (which would still mean you're earning the same amount as you did 2 years ago by the way, probably even a hair less with deflation) but now you might be losing sales to competitors just because of price.
Congratulations, you're better and your pay is worse.
On the flip side, if you charge on a project basis, you can now do twice as many jobs in that same amount of time.
2. Hourly Billing Limits Your Earning Potential
Keep the example above of the 10 minute, $500 project in your mind please...
Now, tell me this, what are the odds that you'd hire this same person out of all of the candidates if they said they charged $3,000/hour?
Probably zero!
But guess what, you just did (essentially) and you're happy and the freelancer is happy.
The freelancer couldn't get many jobs for $3,000/hr, but they can get tons of jobs at the $500/project offer they gave you.
Why? For some reason, most people don't think logically when hiring. They are often uncomfortable with hourly work. They don't like the idea of trusting someone they don't really know to work at a reasonable pace. They fear that the freelancer will milk the clock of the cost of the project will quickly get out of control.
"Most people don't think logically when hiring. They are often uncomfortable with hourly work."
Paying $500 for the desired solution is just more appealing on the surface. Ironically, the hourly option is often more cost effective for the buyer, but that doesn't stop them from choosing the project basis.
If the freelancer charged a "reasonable" rate of say $100/hour, they'd have made a whopping $16.67!
10 mins @ $100/hour = $16.67
$500 > $16.67
Sorry, that was a bit patronizing, but it seems many freelancers don't actually understand simple "greater than" math when it comes to pricing their services.
3. Hourly Billing Puts You AGAINST Your Client
Not only does hourly billing punish you for getting faster (as mentioned above in point one) it creates an uncomfortable dynamic between yourself and the buyer.
They want you to go fast and might even try to micro-manage the project.
You want to do the job right and you also want to make money.
The buyer might be apprehensive of you and assume you might try to milk the clock or spend time on things that aren't within the scope of the project.
As a freelancer, you might be tempted to work more slowly (this is unethical in my opinion, but it happens) or spend too much time on things that don't really need done.
I for one don't like this. It can create tension and leads to clients getting all up in your business.
Project (Results) Based Pricing
Hopefully I've convinced you that hourly pricing sucks for entrepreneurs.
Saying something sucks isn't constructive, so here is what I recommend you do instead.
Charge on a per project basis.
What Is a Project?
A project is simply the completion of a set of goals/tasks.
Projects can be broken down further into "milestones" or "benchmarks." These are common in development projects.
The beauty of milestones is it allows buyers the flexibility to manage a project step by step. This typically results in much better quality in the end. If the quality of the first milestone isn't met, the buyer can withhold payment until it is completed as agreed upon.
Since the project is organized into pieces, the buyer has the flexibility to fire the freelancer if the work didn't go as planned (perhaps it was delivered too slowly, communication was poor, etc) and they won't have much difficulty transitioning the project.
Here are some examples of projects you might complete...
- Write 2,000 word blog post on the benefits of walking everyday ($300)
- Create a 3 step sales funnel in Clickfunnels ($2,000)
- Create an infographic showing facts about crime rates in different countries compared to the United States. ($400)
Here are some examples of projects with milestones.
- Project: Ghost write a Kindle ebook on tiny homes (writing)
- Milestone #1: Create book outline ($1,000)
- Milestone #2: Write Chapter 1 ($200)
- Milestone #3: Etc.
- Project: Create software for house flippers to analyze profit potential
- Milestone #1: Create non-functional mock up ($1,000)
- Milestone #2: Create off server functional software ($2,000)
- Milestone #3: Etc.
In the milestone type project, payment is only made as each milestone is reached. There is no large upfront sum paid and there is much more flexibility for both parties.
So, what should you charge for a project?
Ok, I said I was gonna make it easier for you, but it is still tricky.
Here are some principles to follow that will help your pricing decision.
1. Your project price should be more than what you'd make if you decided to charge hourly
So, let's say that you have been charging $100/hour and you can complete the task on average in about 3 hours.
Your project basis should be more than $300.
In the example above, I'd recommend charging between $400-$500.
2. Your project cost shouldn't be the "cheap" option among your competitors.
I've gone so far as to say this...
If you're the cheapest option in a service based business, you're in the wrong business.
"Being the 'cheapest' is a fools approach to pricing."
Being the "cheapest" is a fools approach to pricing.
Companies that succeed at this (McDonalds for instance) succeed based on economies of scale.
You don't have economies of scale as a freelancer like McDonalds does.
Being the cheapest is also never permanent. Someone else will come in with the same idea. If you're in the US, competing on price with people in countries like India and the Philippines is foolish. They can work for pennies on the dollar.
Have some respect for yourself and appreciate the value you bring to the table. If you feel your value is so low that you need to be the cheapest, get out of the industry OR start working for free to build experience and referrals.
Seriously! I have found many times working for FREE has a better long term ROI than being the cheapest.
Also, cheap prices brings cheap, high maintenance clients.
3. Understand the Value of the RESULT of Your Work
Never forget, you don't sell a service, you sell a result.
If you're a writer, you sell content that will drive traffic for a website which will make them sales.
If you're a designer, you help a client look better and get more results.
If you're a software developer, you make something that might earn someone passive income for a decade.
"You don't sell a service, you sell a result."
Don't sell your service x time. Sell your result. Period.
When I hire someone, my budget is based on how valuable I know the work will be. I'm not worried about anything else.
4. Be Ok with Rejection
The big fear of pricing is usually, "what if I lose the client?"
Yes, what IF you lose the client?
Is it the end of the world?
Is it better to work for less than you deserve just so you can avoid a little rejection?
Be prepared to walk away from deals or have people walk away from you because of your price or their offer.
When you work for a lower rate than you deserve, you run the risk of being labeled. This is especially true if you work on a freelancing network like Upwork.com.