If you are a web designer/developer who currently bills per hour, I hope I can persuade you to change your pricing method to value based pricing.
In this article, I discuss both of these methods in detail and without the fluff so you can just get the nuggets and practical understanding to make an informed decision from there.
On a serious note, if you apply what you will read about today, you can really earn more, work less and be a more fulfilled freelancer - and I don't just say this half-heartedly.
Enough fluff, let’s get straight to it:
Billing By The Hour
I’ll start with this pricing method first because it’s the most popular.
I am well aware that there are many web designers/developers out there who make a very good living by using the hourly billing method, but in my opinion, value based billing is far better than hourly billing.
To explain why, these are some common truths about hourly billing:
- There are times when you argue over invoices and timesheets which wastes time for both parties (yes, there are software programs to track this, but even that can be disputed by a client).
- Feeling like you have to be “micro-managed” by the hour. Clients would often want an estimate of the total hours before the project starts. They would then make a decision to go ahead with the project based on the estimate and not the final cost.
- There’s no incentive to stay up to date with the latest technologies, software or tools to make your job easier because if you do, you get paid less.
- The longer the project is, the better it is for you (more income) and the worse it is for the client (more expense).
Billing Hourly is Harmful for Your Working Relationship with the Client
To illustrate this point, let’s say you wanted to build an additional room on to your house.
The builder tells you it will cost $75k based on his best estimates and you go ahead with the agreement.
The builder completes 80% of the project and then says it’s going to cost another $15k to finish the remainder.
How would you feel? Would you work with them again? Would you refer them to friends?
Probably not. And it’s the same thing with web design/development projects.
If the project is not planned correctly, things can really turn bad if you now realize you are losing money and then tell the client it’s going to cost 30% more because of “xyz”.
Hourly Billing Discourages Efficiency and Innovation
Let’s say that the same web design project comes to you and 9 other web designers. You each have different hourly rates that you decided would be fair for your expertise.
“John” charges $45 per hour and others charge $75 per hour and then there’s this one guy (who I’ll name Bob) who charges $150 per hour.
Bob, with his experience in finding better ways to complete projects, codes the website in 3 hours = total fee of $450.
John, with his lack of experience, knowledge and efficiency, codes the website in 16 hours = total fee of $720.
Hourly billing encourages you to not work smart and to drag the hours so you get paid more.
Look, some websites can be done in less than a day – even a few hours if you have all the info ready and you know exactly what needs to be done.
If you are charging by the hour, why would you rush to get this website done as soon as possible when you could delay it by a few days and get paid more for it?
Maybe there’s a snippet of code you can buy for $100 that can save you 3 days of coding time, but you are hesitant to do this because that means you lose out on getting paid more and you have bills to pay.
In other words, the client is paying you for 3 days extra (which would be more than $1,000) because you don't want to use a $100 code snippet as this means you lose out on $1,000.
Can you see why this is harmful to you and your client?
Here’s another practical example:
If you are working on 3 client projects (retainer or once-off) at the same time and it takes you up to 2 hours per week to track your hours, prepare invoices, process payments, organise the accounting/tax side, etc. that can take almost a full working day each week just to handle this boring administrative task.
This is beyond crazy. You are not hired as an administrator or debtors clerk or whatever else – don’t fall into this pit.
On top of that, you’ll deal with one or two clients who always question everything and this takes even more of your time. This leads to a lack of trust down the line and nobody wants to work like that.
I know these are very simple examples, but it still holds true in more complex projects as well.
Your clients need to know this. Use the same analogy above or something that makes sense to you, but this is very important in moving forward.
Your Income is Capped
There are only so many hours you can work in a year. Let’s say you are earning $60k per year.
If we work on roughly 250 working days, this is $240 per day and $30 per hour (8 working hours each day).
Firstly, not many web developers/designers are booked every hour for the whole year, but let’s say this is the case. What if you wanted to earn $100k next year?
That would mean you need to increase your hourly billing to $50.
Although it’s only $20 extra per hour, that’s $160 extra per day, $800 per week and over $3k per month extra for a client to consider. It can often be a deal breaker in keeping retainer clients or signing up new clients for weekly/monthly projects.
Unless your existing clients really value your services, they will not understand why you now all of a sudden value your services at almost twice the price for the same amount of work.
It’s very likely that they will start looking for other freelancers with a lower hourly rate.
New clients or prospective clients may not sign up with your premium service as you are almost double the “going rate” for other freelancers with similar expertise.
Bottom line: increasing your income is not easy. Although you want a higher income, the clients you work with really don’t care about your income desires and they don’t want a higher expense.
Bottom line of the bottom line: Guess who really makes the final decision at the end? (it’s not you)
The solution is not some fancy tool or time-tracking software.
Yes, these can help, but this is more like a temporary fix and it doesn’t deal with the main issues mentioned above.
Remember: It’s in the client’s best interests that you don’t bill by the hour. You just need to educate them on this.
Value Based Pricing
To avoid any misconceptions about this pricing method, it’s not a fixed amount that is calculated by your cost + your desired profit.
Here are some common truths about value based pricing:
- You don’t sell hours (like everyone else does) – you sell results (or the potential results).
- There’s an incentive to stay up to date with the latest technologies, software or tools to make your job easier and to become more efficient.
- It allows you to really create something amazing and not to worry about going over the client’s desired budget.
- There are no hidden financial surprises to clients. You take all the risk in delivering the project within the total cost you’ve informed the client about.
- You can work with less clients and provide a better service because you are often earning significantly more.
You are essentially providing a fixed amount based on the projected return or outcome of the project.
You must probably be thinking that this sounds all fancy, but how can it be applied?
Here’s a short summary:
Find out the potential value of the project to the client over a year. In other words, find out the potential increase in sales that the business could be making after you create the website.
Then base your price off of this potential return.
Example #1 – The Existing Business Website:
A business sells agricultural drones via their website. They ask you to create a website focused around getting more sales.
After you ask the basic questions (refer to the Prospective Clients Checklist), your 2 main questions should be:
- 1. How many sales do you currently get each month?
- 2. What is the average sales value of a drone?
They answer with:
- 10 sales per month
- $8,500 each
You then do simple math to figure out how much they make each month ($8,500 x 10 = $85,000).
You look at their current site and see where they are losing sales and you work on a low estimate of what you expect sales could increase by after you make a conversion-centred website.
In this scenario, let’s say you are confident it would at least be 2 sales extra per month.
This would mean the business would make an additional $16,000 per month and almost $200,000 after one year.
After informing the client of this in the proposal and why you feel this is a low and realistic estimate, you then give your website cost based on the potential annual return.
For this example, your price could be $10,000 - $15,000.
Would you, ‘as the business owner’ be willing to pay around 5% of what you could potentially make after one year?
Example #2 – The New Business Website:
A business sells agricultural drones and they want a new website.
They ask you to create a website focused around getting sales.
After you ask the basics questions (refer to the Prospective Clients Checklist), your main question should be:
- What is the average sales value of a drone?
They answer with:
- $8,500 each
After doing further research about the market and their marketing plan, you are confident that you can create a conversion-centred website that can convert into at least 4 sales each month (or one sale per week).
This equals $34,000 per month and over $400,000 in a year.
Your price could easily be $10,000 - $15,000 and it would make sense to the prospective client after you have explained the value of the potential return.
Remember: your responsibility is to make the business see this as a necessary investment and not a cost. You need to explain why you are the right person for the project.
By breaking it down like this and being practical about it, you instantly stand out from the crowd of other freelancers who say things like, “I estimate that this project will take about 120 hours X my hourly rate of $45 = $5.4k”.
The bottom line is that it's a win for you and a win for the client.
By thinking about OUTCOMES, it shows you understand the project as the business does. You are not thinking about HOURS like everyone else does.
Now of course this is a very simplified summary. You would have to deal with the objections clients or potential clients may have like:
- 100% payment upfront
- Questions about pricing
- Doubts of the client
As far as I know, this method works in any product or service industry – even lawyers and accountants. The issue is not whether it works, but rather who is actually doing it effectively.
The truth is that this model is simple in theory, but in practice you might stuff up in a few areas.
That’s OK… don’t have a narrow mindset. You are running a marathon and not a sprint.
It takes a lot of trial and error and ultimately you will learn by experience about what, how and when to say the right things that will get you higher paying clients.
Learn from your mistakes, see where you can improve and each year you will become better in how you handle objections, how you communicate and more.
I hope this has helped you to rethink this topic.
If you’d like to learn more and improve your skillset and become a happier freelancer that earns more, make sure to check out my course.
Until next time,