Over the last year, I've worked with over 150 freelancers to help them develop their marketing strategy. One thing I’ve noticed over and over is that freelancers are baffled when it comes to determining how to price their work.
The Problem
The issue of pricing is deeply critical to the sale, but unfortunately the only pricing model known to most freelancers is the conventional model of charging for time. While it may seem like the easiest and simplest choice, charging or quoting based on time has major caveats. Not only does it affect the viability of the deal, but it also affects the dynamic relationship between freelancer and client.
Paying for time can make sense, but it has its place. For example, when a shop owner hires a barista to serve customers in a coffee shop: the more hours the barista works, the more customers he serves, and thus the more the employer benefits. In such a situation, paying by the hour creates a win-win for all parties involved.
However, for most freelancers, this is not (and never will be) the case.
As a freelance consultant myself and a mentor to fellow freelance agents, one key thing I've learned is that charging by time limits career growth. If anything, it negatively affects a freelancer's ability and motivation to generate repeat business with a valued client. If not handled properly, the issue of pricing is a definite recipe for disaster.
Think "Win-Win"
Alan Weiss, author of Million Dollar Consultant says:
"Charging by the hour or day, is unethical and is for amateurs".
While I probably wouldn't make such a bold statement myself, it does merit serious consideration. Transactions between freelancer and client that don't result in a win for both parties are unethical. In order for your business to grow, satisfaction to remain high, and projects to run smoothly, a 'win-win' mindset is key. So, when is it unethical to sell your time?
1. When your client loses
When freelancers charge by time units - be that by the hour, the day, or the week - clients often fear the possibility of 'budget overrun’. Think from their shoes; you don’t want to hurt your potential for closing a deal, especially if you’re working with a low budget start-up or not-for-profit organization.
Even if a project goes ahead with a fixed timeline, the freelancer may not be motivated to operate in a way that focuses on finishing the project as soon as possible or at the best of their ability. The longer the project continues, the more the freelancer 'wins' and the more the client 'loses'.
2. When you lose
Freelancers lose when the value generated for the client is disproportionate to the amount they're paid for their expertise. You might know what this feels like… it sucks. However, it’s difficult to address this issue without knowing what you’re really worth. The value you provide is all relative to your client.
Here's a simple example:
A freelancer performs 30 minutes of work for a client. This somehow results in an extra $10,000 in revenue for the client, in the same month, as a direct consequence of his work.
But, even if the freelancer has an hourly rate of $150; he only earns $75 - for $10,000 worth of work!
The client's benefit is huge, but the freelancer feels short-changed. Is there anything you can do about this? YES!
The Knowledge Economy
These ‘client / freelancer’ imbalances occur as a result of the age-old mantras of un-skilled labour that originated during the dawn of the industrial revolution. However, what freelancers like us need to realize is that the work we do is based in our knowledge.
What we know - and what we can do with what we know - is highly valuable to those who don’t know what we know… confused yet?
Put simply, clients don't buy your time; they purchase temporary access to your knowledge and expertise. Thus, it makes sense that your pricing model should reflect this.
Pricing for Knowledge and Expertise
Conversations related to costs can be awkward if not handled in the right mindset. The solution: focus on the value you can generate for your client. There are many methods you can use to quote a client a value-based price, but the key is to be clear about your value and seek a definitive mutual agreement - go for that “Win-Win"!
Here is one method I used recently - a case study, if you will:
The Scene. I was working with a micro-business that was generating $1500 in revenue a month. They wanted to find an investor to raise funds for more inventory. The business owner also wanted to mark surplus investment funds for re-developing the website and marketing efforts.
The Goal. Our first conversation was about exactly how I could help them. After some discussion, we agreed on some objectives. My job was to help them improve their pitch for investors, find a developer, and help project manage the web development.
The Value. We then clarified exactly how that would generate value for them. In this case, it was clear that the work I would do for them could help to generate up to $50k in monthly revenues.
The Cut. So I offered to charge them 10% of the value that I was going to help them generate, I.e $5k (based on 50k potential revenue). Thus, my satisfied client paid me $5000. The project as a whole took around six calendar weeks, but my actual time on the project came to approximately 12 hours. But, even if the project had taken twice as long, it would cost the client no more. It was both in my interest and the client's interest for me expedite project completion. "Win-Win"!
In all fairness, it was easy for me to determine the monetary value of my work in this case. My work had a direct impact on the businesses growth, which can be measured by potential revenues.
But a conversation about value doesn't have to centred around money and revenue potential - it's just one example of value. A business in the modern world has much more to worry about than just 'generating sales'; find out what is valuable to your client, and appeal their needs. Want some tips on finding your ideal client? Check out “Game Changers for Freelance Success" with Shannon Fisher.
I also highly recommend the book "Breaking the Time Barrier" by Mike McDerment. A book written in story form as a work of fiction that can be completed in just two sittings. In it, Mike tells the story of a freelance web designer that made $250,000 from just one project.
Alternatively, feel free to tweet me or contact me via my website if you'd like some help with value pricing.
Khuram Malik helps freelancers with marketing and sales. If you're a freelancer that needs help with your freelance career, feel free to connect with him on twitter, or contact him via his website.
