Ask IttyBiz: How Do I Figure Out Pricing?
Dave Conrey and his mom Michele Morgan of The Right Color have this question.
“My mom and I are wrestling with an issue regarding her home business. I know that you have your startup package for a set price, but what do you tell people once they sign up if they decide to go further? She’s got a complicated price breakdown and I’m trying to simplify it a bit. Figured you might have some insight.”
Ahh, pricing. Strikes fear in the hearts of entrepreneurs and freelancers everywhere. In other parts of the internet, abortion, politics, and religion are controversial topics. With work-from-home blogs, the babykillers hug it out with Dubya, we don’t care. Just don’t talk price.
First of all, there are many out there who think I am the last person in the world who should be giving advice about pricing. Michael, Sonia, Mason, Susan, and many others have told me I’m an idiot for charging what I do. Lately, it’s turning out that they’re right, but there’s piss all I can do about it now, so we’ll move on to my ill-sought advice for Michele.
First off, a definition of terms. There are basically two ways to price:
Hourly: I charge an hourly rate. You give me that amount of money for every hour I work.
Package, or flat: We agree upon a price for a whack o’ services, regardless of how long it takes.
Now, disclosure.
I hate, hate, hate hourly pricing. I don’t mind paying it, I mind charging it. There is no moral issue at play here, I just completely hate the administrative and ethical questions it raises for every goddamn hour of my waking day. I do not work well in long chunks, and sometimes I just want to read a blog post when I should be writing copy and I don’t like figuring out how much of that hour was spent working and how much of it was spent slacking off on Twitter. I don’t like wondering if I’ll get into an argument with the client about how long it really took. I especially don’t like the possibility of screwing someone over, possibly billing for longer than I should have. All things considered, hourly sucks for me as an individual.
I love, love, love package pricing. With a package, everybody knows what they’re getting. In my mind, package pricing is the “benefit” of the feature vs. benefit equation. You tell the client exactly what they’re getting at the end of the day, and how much it’s going to cost them. I heart packages.
The thing with pricing is that there are so many aspects at play. Let’s discuss, shall we?
Psychology of Pricing
Virtually every target demographic is unique, and every individual within that demographic is uniquer. However, statistical trends are a factor. If your target demographic makes ten bucks an hour at the plant, telling them your hourly fee is $250 is really dumb. For many, this is tantamount to attacking their self-worth. (i.e. “Who the fuck are you to be charging $250 an hour?!?! Do you think you’re better than me?”) Keep in mind, these people balk at their heart surgeon’s hourly wage, and you’re not exactly their heart surgeon, are you?
If you told the same person that your package is $500 and they’re happy with what comes out of that, you’re under no obligation to beat them over the face with the fact that it only took you two hours to do.
On the other hand, sometimes it works the other way. Michael Martine charges $120 an hour for blog consulting, and his smallest package is $652. I am currently feeling pretty broke, and I’d have a hard time explaining $652 to my husband. $120, however, we’d all be very happy with. I understand that his time is worth no more or less with either package, but I feel better buying hourly.
Practicality of Pricing
In certain cases, you have to be aware of what people have at their disposal right now. Securing a sale, and therefore the potential for loyalty, is often worth a lower rate. Some people just can’t pay for the full package. My hourly rate is $75, which I knock down a bit for the 2-hour IttyBitty package ($129). I have had people come to me and tell me they will happily pay $75 twice and lose money, simply because they only have $80 free on their Visa.
If that customer didn’t know I had an hourly rate, they might have said, “Oh well. I can’t afford it right now. I’ll come back when I can.” They might do this or they might not, but I’d be pissed if a week from now they discovered someone else who DID post an hourly rate and went with them instead.
Simplicity of Pricing
While there are psychological factors at play for the customer, there are similar factors for the service provider. There is a lot of benefit that comes from simplified billing, especially for people who hate numbers. Like, uh, me.
In my case, for example, my family can live quite happily on $3000/month. I offer a $1000 package. (No, it’s not listed on my services page, and that is a conscious choice.) I will technically lose money on this package, but I liked it for the simplicity factor. When I actively offered this package, I liked knowing that I could sell three of these babies and be good for the month. My invoice ends up reading, “Marketing: $1000”, and that’s it. I will gleefully take a pay cut if I can also take an administrivia cut as well.
Fairness of Pricing
A common argument is that one or the other method of pricing isn’t fair. Both sides raise good points, and it really does depend on your definition of fairness and your level of empathy.
If you charge by the hour, and bill 10 hours, the customer might feel like you should’ve had it done in 5. Assuming they’re not a jackass, they’ll pay it, but it’ll leave a sour taste in their mouth. Sour taste does not equal repeat business. At the same time, I’ve undercharged on every hourly gig I’ve ever done, because I want to make sure clients know I’m being fair and not gouging. This is an incredibly fast and easy way to go broke,
If you charge a flat rate, thinking it will take 5 hours and it takes 10, many people think that’s unfair for the service provider. I think it’s unfortunate, but I wouldn’t call it unfair.
If you think of a package price in terms of hours, somebody is always going to get screwed over, but frankly, it doesn’t really matter that much. Yes, with much thinking and deliberating, you can get your estimate to really, really close, but it’s very difficult to do.
Bottom line for Michele
I don’t know a lot about Michele’s business model, but here’s my thought. Give a few package options, and also give the option of an hourly rate. It’s probably the easiest way to go.
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For the record, I would like to state that I didn’t call you an idiot.
I called you a frikkin’ retard. Sheesh…
I love the whole packages thing for several reasons, one of which is that a client is paying for end results, not time, which is as it should be. Sometimes it does take more hours than anticipated, but if you figure it out correctly, then most of the time it should actually take less time so you’ve got some room to breathe if you hit a snag.
The best thing I like about it is that it’s easier for clients to accept the idea of payment in advance, which is the only way I work. Even hourly consulting has to be bought in advance. I state my prices so that nobody is wasting the other person’s time. I’m not worried about other’s prices, because I do not compete on price.
Competing on price is freelance suicide. But I digress… I still have an hourly rate for stuff that doesn’t fit nicely into any package. And to scare people off (it’s not really all that much, but does keep people away who think they should pay the same price as some dude in the Philippines).
What I did to create the packages was figure out how much time goes into common tasks for what I do and calculate the cost at my hourly rate. Then I discounted that by enough of an amount to make it attractive for a client to want to pay for a package in advance. Each bigger package is also a bigger discount. This strategy seems to be working: my most expensive package is the most popular.
HAHA! It’s funny - I wrote this post a few days ago, and didn’t remember the idiot comment. I had to use ctrl-F to find where I’d said that, and “idiot” came up three times. Wow. We use that word a lot here. We’re very idiot friendly.
And I couldn’t use the exact words each and every person used. That would take too much time, as many people were quite eloquent in describing the full depths of my idiocy. I had to generalize. Thank you for your efficient clarification. :-)
Also for leaving an intelligent and reasonable comment which, quite honestly, I did not read because I was busy coming up with a retort.
Thanks for giving Mom the plug, Naomi. The biggest thing about working with her on this project is she’s basically reinventing her business, adapting in a way that allows her more fluidity and freedom from being a local only designer. Essentially, we’re working on exactly what you recommend, some set pricing backed by an hourly rate. Now we just have to figure out what those packages will be, and then how to implement them, which is only one of many tasks ahead. It makes my head spin when I think about how much we’ve got to do, most of which I’m doing for free, of course, being my mother and all.
Anyway, thanks again Naomi. Glad we could contribute.
@ Dave - Don’t say that on my blog! Then my mother will think I’ll work for her for free. Sheesh. :-)
Thanks for the question. These are fun!
Well, I don’t really work for free. She gave us money to help buy our home and now I’m working it off. I should be even sometime around the year 2054.
See? That’s much better. I will work for my mother when she helps us buy a house. (Mom, stop laughing.)
Wow, it feels good to know I’m supporting an idiot friendly blog. :-)
Thanks for the advice Naomi. I always start off projects with a flat-rate package or bid, but after project launch if clients want me to continue with ongoing work it inevitably ends up being billed hourly.
I usually end up with monthly retainers at a discounted rate, as it saves the headache of collecting and I know how much work I have ahead of me each month. Does anyone have any ideas for converting ongoing consulting from hourly to packages?
So far I’ve been charging my rates according to what it takes per hour (I know you HATE them Naomi) but that was the only way I could raise my pay enough to end up working as a full time freelancer. I suppose it gave me some sort of measures and now that I have achieved this goal I’m ready to go the next step.
It was actually the “frikking retard” (sorry Michael, not my term) that opened my eyes finally to creating packages which is what I’m mulling over right now. I think that ultimately packages are a great way to boost our income as you so said, we only need x amount per month to pay the bills. Thanks to Michaels lead I have some sort of idea on where to start in terms of finances.
The hardest part for any freelancer that morphs into packages from hourly rates is to come up with a realistic figure I think.
As a freelancer this is exactly what I ultimately strive for, but I also don’t see to give up hourly rates depending on the job at hand.
Wow, yeah you and I have had many conversations about this.
I think the other thing that I feel about flat vs. hourly (which I think came up when we talked about this) is that there are only so many hours in a day. So while I can set $x per hour, I’m capping my income ultimately. With package pricing, I can estimate how long it will take me, but I’m charging with the services are worth…not necessarily what my TIME is worth.
Might be a small distinction, but it’s easier to make better money when it’s packaged. It’s also a LOT easier to manage my time. Hourly has put me in many situations where two clients want 30 hours the same week, with little warning.
I’ve started packaging my SEO services, and it really is loads easier.
I also like packages, and do have several that I offer for my services, but some situations do demand hourly charges.
For those who do need to charge hourly, I strongly suggest retainers. The link that more fully explains the way it works is under my name.
I think the trick with packages is to look like an good bargain to the potential customer but actually pay you far more than you could earn hourly. Sometimes that’s because you are “packaging” something or repeating/reusing work you have done before; another way is through “insurance” offerings - for example I offer low priced unlimited email support in certain situations. A specific client could get tremendous value, but spread over hundreds of customers who seldom need much attention, I make out very well.
When you can combine both (the insurance aspect and repackaging/reuse), you can really make an incredible hourly income while still offering great value to the buyer.
@ Anthony: your retainers sound like a valuable solution but how would you propose this for month by month jobs?
We charge per piece, by package, flat fee and per hour. Basically, we’re covering all our clients desires and needs.
Since you brought up the price debate, I’m going to toss out something that I really hope to get some feedback on, as it’s a real quandry for web content writers and freelance writers at large:
Should you post your rates on your site or not?
Now, there are pros and cons, and I’ve written some up here to explore the issue. And I’m still sitting on the fence.
The big question? Charge more and get less work, or charge less and get more work. It all comes out to the same in the end, but there are so many factors at play that it’s crazy.
Credibility with higher rates? Low perception with lower rates? I don’t know what to do. I really don’t.
Personally, I *hate* looking for a provider and not seeing rates. As a buyer, I want to know before I contact the person what I’m getting into. As a provider, I *hate* posting rates, because I might shoot myself in the foot no matter what I do.
And with stiff competition (albeit, often not very good competition, which is where we win out every time), posting rates becomes… a huge quandry. Help.
@monika
Not sure what you mean by month by month, but if you mean they may or may not need time from you next month, that’s exactly what my sort of retainers are meant for. They entitle the client to a discounted rate whenever they need it.
If you meant something else, realign my brain.
@james
I never think about competition. There are people who charge $30 an hour for doing exactly what I do and also people at $275.00 and higher.
“It all comes out to the same in the end”
Not really. With low rates, you have less free time.
@ James - yeah, that’s a tough one… I haven’t even thought of displaying prices because I usually work for very different people. I hope none of my customers read that, but the thing is : I don’t charge a broke musician the same price I charge a huge company with loads of money. Of course, most of all, their needs won’t be the same, but also sometimes it’s worth (in my opinion) lowering your incomes in order to work on interesting projects, build a great portfolio, and please yourself. I also work for social organizations alsmost for free, but that’s again another thing.
But I was nevertheless thinking yesterday of creating a web package for a basic website, so that people can have something affordable and know how much it’s gonna cost from the start. I was thinking of a collaboration with organizations that help people build new companies (we have that in France), and get them an interesting discount for our first project together.
Anyway, now it makes me wonder if it’s worth displaying that future package on my future website… (yes, I’m kind of in the middle of changing everything ^^).
And just so you know, I calculate my prices this way : I try and figure out how many days the project is gonna take, multiply it by a daily fee I’m the only one to know, and multiply it by 2 to cover taxes and extra hours. And most of the time, it’s still not paid enough for the actual time I spend on things. I might end up multiplying it by 3…
@ Anthony - I agree about the free time thing !
@ Anthony - I disagree. High paying jobs usually involve more work. There is the expectation - understandably - that if you pay more for something, what you get had better be damned good. That means more work for the provider.
Also, with higher-paying jobs, you’re more likely to run into clients who are high up in the hierarchy, which usually means they are people who love control, have trouble delegating, are extremely picky and enjoy having others jump through a few hoops before they say they’re satisfied. Many of them like to get more involved than they should, as well, because of the inability to say that they didn’t have a hand in the perfection. Different types of clients completely.
Exactly. I don’t know about you guys, but I’d rather make more money than do more work! I display my rates to keep away the unqualified (not that they’re all that high). Like I said earlier, competing on price is freelance suicide. Don’t compete on price. If clients make price an issue then you haven’t done a good job of presenting value. Plus, I just love it when they expect me to cave on price and I simply say, “that’s fine, I’m sure there are others out there who will work for that. Good luck.” I can hear them blinking over the phone.
@ Michael - I’d rather make more money and work less at the same time, which doesn’t happen in the writing world. More money equals more work, 9 times out of 10.
What’s your take on posting rates on the site? I know you do, but do you recommend it to others and why?
@james
Nope. It’s simply a matter of how you value your time. There are people who do exactly what I do who charge 1/4 as much and others who charge twice as much. I’m sure the low priced guys get lots of work, but what I get isn’t any harder.. in fact, it’s easier: one of the reasons I can charge more is that I can usually do it more quickly.
And Michael is dead on: if they don’t like your price, they are welcome to go elsewhere. As I tell so many : “I didn’t come knocking on your door looking for business, did I?”
@james
“because of the inability to say that they didn’t have a hand in the perfection”
Back in the days when I did custom programing, that was always an important thing to handle. I would try to leave out some important feature in the mock-up stage and if necessary steer the client to seeing that was “obviously” needed so that they could suggest it.. most of the time I already had the code in place anyway, just switched off, but it made them feel good to be “involved”.
Client management is much more than just doing *your* job.
And therein is the problem. Most writers have to actively go knocking on doors. We’re talking bananas and apples, and for some businesses, people come to them. That’s great. More power to you. But while we have about 50% of our clients seeking us out, we have to go looking for the other 50%.
With stiff competition, no one is in the position to get cocky, y’know?
@james
Raise your rates and perhaps you can live on those who do seek you out..
By the way, James, most computer consultants have to go looking too, and I bet I have much more competition than you do..
@ Anthony - Actually, I never said my rates were low… ;)
Can’t say much–working on an hourly project now, and don’t want to waste *too* much time here (not that time here is ever a waste, but you know what I mean, Naomi)–but there’s a book I want to recommend. It’s called “What to Charge: Pricing Strategies for Freelancers and Consultants” by Laurie Lewis.
It’s awesome. She has so many ways of looking at this question that I just can’t say enough about how useful and practical her advice is. I use her rate estimate worksheet suggestion to determine how I will charge for a project, and it’s been invaluable to me. Seriously, get this book.
That said, if I can work on a project fee, I’ll take that over hourly any day. That’s not to say that I don’t work hourly–I have to. Some clients just want an hourly rate, and nothing else will do.
Hope that helps! Now, back to work for me!
@ James - Oh shoot, I was beginning to think I could afford your translation services :P
@james
“Actually, I never said my rates were low… ;)”
True enough. But you did say:
“Credibility with higher rates? Low perception with lower rates? I don’t know what to do. I really don’t.”
I and others say we *do* know. Higher is better. Ideally I’d like to work one hour every decade for a nice seven figure fee.. :-)
I like the idea I saw here of having a posted per-hour rate, but also a flat-package fee that’s discounted.
You get to tap into the best of both worlds:
By publishing your rate you lay out your personal price bracket, and establish whether a potential customer can reasonably afford you. Higher rates can increased perceived quality.
By offering a discounted package rate you not only lock in a fixed amount you know will come in for the project, but you also make the customer feel better (getting a deal) while they still recognize your higher rate. Plus they feel better knowing there will be no extra charges outside the package.
Of course, this is academic for me at this point until I start making some additional sales :-) This is just how it feels from the outside.
One other note - when I looked at Michael’s packages, the 4-digit price tag definitely caught my attention at first, but the fact that he had multiple packages made me stop thinking about cost for a minute and begin sizing up the different packages, their features, benefits, etc … and before long I wasn’t thinking about price anymore.
Maybe there’s a middle ground?
@ Dave - most people don’t have the time or energy to size up that sort of potential, though. A four-digit price tag can make them say, “Too expensive - CLICK! I’m gone” before even knowing if Michael has something more affordable.
Then again, not posting any rates comes to the same. “I have to email this guy? CLICK - I’m gone.”
I’d really like to know the middle ground. It seems like an all or nothing situation with serious implications on both sides.
Hmm … I have an idea -
Maybe send an email out to all of your clients asking them which method they prefer?
Knowing what your current customers like might give you a good idea, as long as enough respond to make it statistically useful.
I’m really just a beginner as I’ve only been freelancing full time for a few months, but I’ve just realized I’ve recently tried a new financial approach on my new clients which usually works well.
When they ask (often, sadly, really quickly) how much a website/logo/businesscard etc. will cost, I tell them the truth : I have worked for very different clients, and am thus able to adapt to their needs and budget. It makes them feel in charge (and they are, in a way) and free to choose how much they want to spend, so they focus on something else.
Then, when they decide they want to work with me, it’s always time to give precise numbers and talk serious business. I start by offering them very basic services for the price they intended to pay, but we usually end up far higher than that ’cause I’ve proved that they can trust me.
Any idea how that would be doable online, though ?
@ Joohliah - How about a page that says just that? Instead of a “Rates and pricing” page, put up a page that says “Set Your Own Rate!” Then explain that the client tells you how much they have to spend, and you tell them what you can do for that price. Then you also suggest other additional things, with their rates, that you could offer if they decide to increase their budget.
Don’t know how it would work though, but I see exactly what you mean. It’s much the same thing with us, often.
@ James and Joohliah - As a rule, I try not to be too nice to James in public because he is French Canadian and as such, has an ego the size of Quebec. However, on this one I have to say that his idea is totally fucking brilliant. Seriously… very good. As far as the question of how it would work, I think the only people it would turn off are the wishy washy ones — uh, me — who were afraid of being embarrassed.
For them, I’d say give examples of stuff you’ve done. I.E. Here’s a logo that 100 euro would buy you, and here’s a logo that 50 euro would buy you. That kind of thing. So they knew the ballpark. I wouldn’t want to go in saying I was looking to pay ten bucks when everyone else was paying $1000, so having a gauge would be good.
Oh, and don’t get used to it James.
(Jon has a bigger ego… Come on. He’s a friggin’ rock star. Schmoozer.)
I thought *I* was the rockstar!
Oh wait, I guess *I’m* the one you get for 50 euros.
@ All: Damn do I love you guys! You come up with some killer ass ideas that can help us all become the next rockstars (at least those who aren’t yet.
@ Anthony: that’s exactly what I meant. Sorry for the confusion.
@ James: I know where you are coming from as I feel the same way. But I think Michael’s approach coupled with your new kick ass idea sounds like a plan that might work to connect with most potential clients.
@ Tiffany: thanks for the book mention. I’m looking at excerpts right now and might purchase it as a reference.
@James - Okay so I’m kinda behind in the conversation, but in response to the question you posed in your first question: If I don’t see prices on a website for any sort of service or product, the probability of me purchasing it goes way way down. If I see a price and it happens to be too high for me at the time but otherwise I really think the product/service provider would be a good fit for me, then I file it away for some later date when I can actually afford it. I don’t provide any services, so I can’t really say anything from a provider point of view.
@ Allison - Thank you! I’ve been waiting for someone to give feedback on that one. (Note to self: Don’t ask for feedback here. It’s a bar, not an office) It’s the buyer’s view I was looking for, as well as provider opinions.
@ Monika - Yup, you’d know. And you’re new. Been doing this for a few years now and I still don’t know. Some days, I think “post!” and other days, I think “Oh man, my reputation! What would my colleagues say!”
I think my own idea was a good way to go, honestly. I’m going to try that.
@allison
Same here: if I don’t see at least some indication of price instantly, I’m gone.
Of course the other side is that when you offer a lot of different options, too much pricing can be confusing. I recently put a shortcut on my complicated pricing page that says “If you don’t want to read all this, Click Here.” and that page just offers some quick and simple options for those who just need some simple thing right now. That’s been working very well, even for those who do intend to look into other packages/rates later.
[...] that is already chock full of great content. Subscribe to it right away! Naomi Dunford shares her strategy for pricing her freelance services and the reasoning behind it. Really well done as always. Related PostsA Crash Course On Writing [...]
Yeah, you could get carried away with bundled services and packages and end up looking like a Microsoft licensing page.
Oh and another thing… make pricing as easy as possible to understand. I get that you might have a lot of options, and if it’s hourly wage that’s more or less easy to understand what that entails, but if you are offering a package then tell me exactly what I get from that package. And if you have multiple packages that do similar things, make sure it’s obvious what the differences between package A and package B are, and why someone might value the higher priced package more than the lower priced one. I don’t mean that you have to write a whole essay about each of the packages, but bullet points in a clear and concise language that your target audience would understand would be enough.
@ Anthony - That sounds like a good idea too, for those who have a lot of options and don’t want to overwhelm potential customers/clients!
Have Olympic pricing strategies, too. A bronze package gets you this. A silver gets you that. A gold gets you the works. As Allison said, make it clear what the client gets for his or her money.
@ James - Yeah, I might try the “Set Your Own Rate!” page :) When my website is done :/
@ Naomi - 50 euro wouldn’t buy any logo. And i guess 100 euro wouldn’t either :( But I can see you point with the examples, thanks for the hint :)
I kinda like the package idea too though… I have to give all of it some more thought, loads of interesting stuff here, thanks everyone ! :)
I’ve been wondering how I should present prices on my website too, as I work to better define my business in a bunch of ways. I like to quote each project individually since websites can be so vastly different depending on the client’s needs. But, I would like to give some examples or ranges. So thanks for the great discussion!
Hope this isn’t too off-track: If you bill hourly, Timeslice might help you simplify your time tracking: http://www.timeslice.us/
I use it also on projects that I’ve done as a fixed quote, because tracking helps me improve my quotes and keep me on track if I’m spending much more time on a project than I’d estimated. Perfectionist tendencies do that to you sometimes even if the client doesn’t ;-)
[...] How do I figure out pricing at IttyBiz. [...]
Excellent post and follow up comments.
Thanks.