If you offer your services as a freelance developer, you have a major say in how you price your project.
But how do you go about charging for a website project?
"Well, I just bill by the hour and send an invoice every week or month."
...I hear you say.
Well, let me tell you that there are far better options out there.
In this article, we're going to do a little analysis of the different pricing options available to you as a developer to see which one would work better for you.
Which pricing strategy to use often boils down to the particular scenario, your time, your client, and your enjoyment, but there are general approaches here.
What I will do is show you a few advantages and disadvantages of hourly vs value-based pricing so that you can make a more informed decision on the pricing strategy you choose.
Hourly-based billing is the most popular and the easiest to understand and start with.
However, I'm not going to share the advantages of billing by the hour because I believe that there is a better way.
I'm going to discuss the disadvantages of using an hourly-based pricing approach before I show what I believe is a better method.
Hourly Billing is Harmful to Your Client Relationship
Billing by the hour can be quite harmful to your working relationship with your client.
How? Well, put simply, the longer a project takes, the better it is for you and the worse it is for your client.
This creates trust fractures that erode the relationship over time if your estimates are not accurate.
This can happen in several ways. But it is often exaggerated by the client not understanding how long it would take to implement a feature which in turn leads to the client thinking you're working slowly on purpose.
Another way this can happen is if the project was not planned exactly as it will pan out, which happens a lot in development.
If the project starts taking longer than initially planned, you will appear to be taking advantage of your client. Your client will start reviewing the timesheets that you sent their way to find discrepancies and there will be an erosion of trust.
In general, you can not truly partner with your clients if you’re billing by the hour, which means that you can’t do your best work. And this means that your clients aren’t getting all the potential you are putting on offer.
Yes, some freelancers do make it work, but that's a small %.
You also need to consider if you're sick – then what? You don't get paid while you're ill for 2 weeks.
Hourly Billing Discourages Efficiency and Innovation
You don't get rewarded for finding time-efficient ways to finish a project. If anything you're getting financially punished.
If you price your projects by the hour, you will, as a more experienced developer, get projects done sooner, meaning you earn less per project.
So you think you make up for this by charging more per hour?
Well, this might only serve to scare your future (or even current) clients off to another developer who charges less per hour.
Hourly Billing Discourages Efficiency
Certain web projects can indeed take a day or so to finish. If you're charging by the hour, what incentive do you have to find a way to complete the project in the shortest amount of time?
If anything, even if you don't do it intentionally, your work rate and efficiency will not be something you're too concerned about optimizing.
Here's an example to illustrate the point:
Imagine you're working on a project that has similarities to a previous project you worked on. You'd like to reuse parts of a component you had built for that previous project but by doing so, you'd cut down the number of hours you'd spend on your current project.
In this way, you've directly lowered your income because of a component that you built in a reusable way.
Or maybe you're using Tailwind UI or WebFlow and you can create a website in 1 hour – should you only charge your hourly fee?
Your Income is Capped
Hourly billing places an artificial limit on your income!
Let me explain.
There are only so many hours you can work in a year.
By providing a price per hour, you're limiting how much you're practically able to earn each year.
If you suddenly decided to increase your hourly rate because you'd like to start earning more, your clients will most likely not understand.
"Why," they ask, "are you suddenly valuing your services so much higher for the same work?"
Even before you explain whatever your reasoning is, you're entering the conversation with them on the back foot – and that's just your current clients.
Potential clients will simply turn away and look for another freelancer who can offer them the same service at a lower hourly rate.
If you think you can just earn more by working more, ask yourself:
Is that sustainable?
If yes, do it.
But know that there will come a point where there are simply not more hours in the day to get more work done.
There is a ceiling to how much you can work and, as a result, how much you can earn. At the end of the day, both you and the client will benefit from not using an hourly-based pricing approach.
Transitioning from hourly billing to value-based pricing is tricky and takes time if you're used to an hourly-based approach.
It requires a change in thinking, but once you realize how ineffective it is to trade your time for money, you will find your profitability increasing by a lot.
What is Value-Based Pricing?
The key takeaway about the difference between value-based and hourly-based pricing is this:
- In hourly-based pricing, you sell your time.
- In value-based pricing, you sell results.
- In hourly-based pricing, you ask what they want to be built.
- In value-based pricing, you ask why they want something built.
This makes all the difference and can be a real game-changer if you're switching from hourly-based pricing.
With the focus on results, there are suddenly a lot more advantages for you and the client.
When you and your client understand the "why" (the value gained), a higher, value-based price will make perfect sense.
Before we get into that, let's look at how to apply value-based pricing.
- Find the potential value of a project to a client over a year.
- Base your price off of those (potential) income returns.
The main thing you need to do is to figure out how much the site is worth to the business.
Here's an example:
A business sells 3D Printers and they want a website.
This is the system I follow:
- Find out if the business has an existing website
- Find out what their competitors are doing that they aren't doing
- See if the business has active AdWords campaigns
- See how the business ranks on Google (SEO)
- See if the business has social media profiles
- Find out how much the average 3D printer costs
- Find out how many printers the business sells every month
With this information, I'd be able to figure out if I can really make an improvement in the sales of this business and I'd know exactly how much to charge for the project.
So if the business sells an average of ten 3D printers at an average of $2,000 each per month ($20k sales per month) and after calculating that I could potentially increase sales by 30% month after month, it then equals an extra three sales per month (or $6,000).
I then mention this to the prospective client and say even if we work on just 2 extra sales per month, it adds up to an extra $48,000 per year just by the changes and improvements I will be doing.
Therefore, spending $8,000 once-off for the website to potentially increase sales by almost $50,000 in one year is a no-brainer…
Now let's look into the advantages of value-based pricing.
Advantages of Value-based Pricing
Freedom to Make Great Products
You can focus on creating something great without worrying about going over the client's budget or counting every hour. This gives you work freedom and means that how you go about the process is up to you.
Not only does this approach encourage you to find the most optimal solution, but it also incentivizes you to stay up to date with the latest technologies and tools that make your workflow easier and more productive.
No Hidden Costs for the Client
Due to the price being agreed upfront, you take on all the risk. This means the client will have no financial surprises down the line which helps facilitate trust. In other words, the client experiences less risk.
More Clients That You Enjoy
The nature of value-based pricing means that you will likely be earning significantly more. You can now start working with fewer clients and provide much better service to each while earning the same or more than you did while using hourly-based pricing.
Scope Creep Insurance
Once a project has been defined in terms of the business outcomes (for example, increased traffic, more sales) instead of deliverables (like change the font size of the navigation bar items, the password reset form needs ReCAPTCHA) it’s fairly easy to control scope. This is because business needs don’t change that often, and random requests from the client can be judged against the desired outcome.
The crucial factor with value-based pricing is this:
It is up to you to make the business see your services as a necessary investment and not a cost.
You need to explain how you are the right person by explaining how both of you benefit from the pricing approach you're taking.
Bring their focus to the importance of results and what value the project will bring them.
Ultimately, this approach takes a lot of trial and error, but trust the process and your future self will be thanking you.
Base your value-based quote on the client’s perceived value of the project outcome instead of your estimated labor. This allows you to set your fees significantly higher, deliver more effective results, increase client satisfaction, and more.
You want to charge for your head, not your hands. Smarts, not labor. Results, not deliverables. Outcomes, not activities.
So Which Pricing Method Should You Use?
To me, it's clear that value-based pricing is the best way to price your projects.
Of course, the method you choose is up to you and, for many people, hourly-based pricing works perfectly fine.
There are other pricing methods like Fixed Pricing, where you calculate you assumed costs, add a profit to it and provide the client with that pricing, but I generally prefer Value-Based Pricing over this method.
If you do choose to switch to a value-based approach, remember that this new approach will take some getting used to but it will certainly be worth it in the long-run.
I have a helpful eBook talking about pricing and freelancing a lot more if you're interested.
Hope you found this article helpful :)
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