The more I talk with other business owners, especially creative business owners, the more I hear the same sentiment echoed back to me: Pricing projects is hard. Part of the reason is because most service businesses or agencies don’t put their pricing on their websites nor do they outline how they price a project. So in this blog we’re going to break down two of the main pricing structures that most agencies use and some of the differences between them.
First up, hourly pricing.
Up until recently, hourly was the main player when it came to design and professional services. And honestly, that makes sense. For much of the economy, hourly pay is how businesses operate whether you’re in retail, hospitality, construction, you name it. For this reason, it’s a relatively easy pitch to make for your pricing. If your work takes 20 hours, you bill for 20 hours. If the work takes 23 hours, you bill for 23 hours.
And there are definitely some pros to this pricing structure.
Pros
As a designer:
It’s easier to price new services because all you do is track your hours and then charge based on that. You’ll need to include some rough range of how long you think the project will take but if it ends up taking longer or shorter, you charge accordingly.
Scope creep (when a project expands beyond the original project description) is easier to keep in check because you are billing for your time. If a client asks for more, you charge more because it takes more time.
You are able to bill more easily for each round of edits or revisions the client asks for; there is no awkward conversation about needing to pay for an additional round of edits.
As a client,
You know you are being charged for the exact hours that are being worked.
You can save money if you don’t have as many revisions to the designs.
I did say that hourly was the standard pricing structure, up until recently. That is because there are some large draw backs to hourly pricing for both designers and clients.
Cons
Hourly rate punishes efficiency because the faster a project or task is completed, the less it costs. So there is little incentive to become more efficent.
As a designer:
It can be hard to anticipate how much income any single project will bring in as projects often can be faster or take longer than initially planned.
It doesn’t take into account how valuable your design is to the client.
If you were wildly off-base with your initial estimate, your client eats that cost. I know this may sound like a pro but it’s a good way to have a very upset client.
As a client:
It’s easy for projects to end up costing a lot more than originally planned for once you get started. Either you ask your designer to stop wherever they are when they hit the proposed limit, or you spend more.
Revisions, edits and feedback can add up quickly.
The alternative to hourly pricing is project-based pricing. We also call this value-based pricing.
So if hourly means you track and charge for the hours you work, project-based pricing means that you set a price up front based on the deliverables, timeline, and scope off work.
Pros to project-based pricing
As a designer:
As your skills increase and you become faster with tasks, you are not penalized financially.
You know how much each given project is going to bring in at the start of a project.
You can quote projects accordingly to the scale and scope of your client.
You are able to offer a wider range of pricing depending on your client’s needs.
You’re able to learn on the job as you offer new services without fear that your quote is way out of line. If the new service is a lot faster than anticipate or a lot slower, your income stays the same.
As a client:
There is no pricing surprise. What you’re quoted at the start of the project is the cost.
It’s easier to price compare two quotes. With hourly, it can be difficult to know how two agencies compare because the hourly rate is only half of the equation.
Cons
As a designer:
Quoting projects can be more difficult, especially early on in your career or when launching a new service and you don’t know how long a project is going to take you.
As a client:
Projects may be less flexible as projects are quoted based on a set timeline and set of deliverables.
So what do we recommend? At the end of the day, both pricing options have their place but we choose project-based pricing. This is because it allows us to offer new services that we want to learn without taxing our client as we figure things out. We are able to quote a price that we feel is fair to us and our client, and we can create ranges that are quite drastically different.
Of course we have an example:
Imagine creating logos for two clients. The first client is a mom and pop cafe with an annual revenue of $100k. The second is a mid-sized organization with an annual revenue of $2M that is going through a rebrand. Both logos ended up taking about 20 hours of work. Let’s assume you bill at $100/hour, a pretty standard designer rate.
But these two clients do not value their logos the same. $2,000 for the small mom and pop restaurant seems fair as they are planning on using it for all of their catering needs, but they are still just a two-person team and $2,000 is an investment. It’s roughly 2% of their annual revenue.
For the multi-million dollar organization that logo means a lot more to them and will have a much larger reach. It will be seen at conventions, on social media, on billboards. $2,000 for them is a rounding error and a mear 0.1% of their annual revenue.
This is why project-based pricing has become more popular in recent years. It allows you shift the question from “How much time is this going to take me to make?” to “How much value does this bring to my client?” In this scenario you can continue to quote the small mom & pop $2,000 for their logo, but you can also quote the mid-sized organization 2% of their annual revenue or $40,000.