If you’re a freelancer or a business owner, there are quite a few challenges laid ahead of you. One of those challenges is how to set your pricing. You probably have a good idea about how much you need to charge – after doing your own research. However, do you know how to price a service?
Even when you have a value in mind, you can choose several ways to charge for your services. Today, we’ll show you a few ways that you can price a service and ask for money for the services that you provide.
There are five basic ways to price a service:
– By the hour or the day
– A fixed cost and a markup
– A retainer package
– By commission
– By value
Bear in mind that some industries have a common way of charging money for services. For example, videographers commonly charge by the day. However, that doesn’t mean that you should follow these rules too.
So, let’s get started.
This is a very common way of pricing a service. However, it is also one of the worst ones for everyone involved.
Simply put, if a client is paying you by the hour or day, there is no incentive for you to finish your work earlier. After all, if you can do a job in 2 hours and you tell the client that it’s going to take 8, you are definitely going to take your time and use up the entire 8 hours that you are paid for. The client ends up paying more and you end up spending more time on a simple project that could have taken just 2 hours. Nobody wins.
Some business owners have this excuse – sure, the freelancer is being paid by the hour or day, but I put a limit on how many hours/days they can work. That’s even worse. That way, the client puts a cap on your earnings. If you finish earlier, they win! That makes no sense from the perspective of someone who does the job.
If you charge for your time, you will be stuck in a loop of bad clients, working long hours and scraping the bottom of the pricing pool. Sure, it’s the common way to price a service in some industries, but if you have a choice – skip it.
One situation when hourly pricing is a good idea is when the project deliverables are unclear. For example, a client that wants some design work done for their website. In the middle of the project, they change their mind and now they want landing pages, social media graphics and something else that wasn’t mentioned in the project proposal. If you’re locked up in a contract, all of a sudden you’re doing more work for the same price. If you’re doing hourly pricing – just add up more hours.
In some industries and for some businesses, this makes sense. If you sell services, it isn’t the ideal way to charge for your work. Let’s see an example.
You run a roofing company and you need $2,000 of hard costs, as well as $500 for labor which you need for a project. So, you end up charging $5,000 so that you have enough room to make money every time, and you’re safe – there’s a clear $2,500 profit for you.
This pricing method does not work in the services industry because in most situations, you are selling your own time and a result you will be delivering, rather than a physical product. In short, this is not a good way to price a service.
If a client wants you to work with them every month but doesn’t want to bring you on as a salaried employee, they will ask for a retainer contract. This essentially means working the same number of hours every month for a fixed price. This is similar to hourly pricing but it extends on a monthly level.
There are two types of retainer pricing methods: rolling retainers and use-it-or-lose-it retainers. In rolling retainers, every hour that you don’t work in a month rolls over to the next month. That way, the client gets the best bang for their buck and you get paid for how much you work. This is not ideal because you may end up setting aside 40 hours per month for a client and they end up using only 10. That way, you have dead space that could be filled up with another client AND you get less money that month. Double loss.
On the other hand, use-it-or-lose-it retainers mean that you get the same amount of money every month, no matter how much work the client throws your way. This is the better arrangement of the two retainer packages, but you are still trading your time for money. Sometimes, it will happen that you get fewer hours to work for the same pay, but don’t count on it.
While retainers are a good idea in theory, in practice they are just another way to get paid by the hour. In other words, skip if you can.
This is close to the ideal way of setting a price for a service, but once again, it works for some businesses – but not for all. In the real estate business, this is how to price a service. For example, someone selling a house for $500k gets a 2% commission if they sell the house within 2 months, and after that, their commission decreases to 1%.
When charging by commission, everyone wins. You have the incentive to do a great job and do it quickly. Something similar is used in the online advertising industry, where agencies charge clients based on the size of the account that you’re managing.
The biggest mistake you can make with charging by commission is when you charge based on someone else’s results, especially if you can’t control them. For example, doing SEO work for a client and getting paid based on the search engine rankings that the website can get. Any SEO expert who knows their stuff will NEVER guarantee you that a website can rank #1 for a keyword because they cannot guarantee it. They don’t have control over all of the factors and it’s not going to happen. In short, never accept commission-based pricing if you can’t control all of the factors in your job.
When it comes to pricing a service, the best way to do it is based on the value you provide. You don’t charge by the day or the hour, you are charging based on the value that they get once you do your service successfully. For some industries, this doesn’t make much sense. However, if you sell services, this is the best way to do the best work you can and charge as much as you possibly can. You don’t have to lock yourself up in lengthy, complicated contracts and the client doesn’t have to suffer if you do a poor job and you need more time to finish something.
At this point, you’re probably interested but you’re wondering how to implement this pricing model. To get it right, you need to find out exactly what kind of value you provide to the client. And for that, you need to have a great discovery session and talk to the client. You need to research what they’re doing right now and how you can help them become more successful.
For example, you’re a copywriter and you’ve found out through your discovery sessions that you can increase your client’s revenue by $20,000 every month. If you charge them $1,000 to write new copy for their website, you’re seriously undercutting yourself and selling your services for cheap.
To find out the value that you bring, you need to ask the right questions:
– Their current traffic
– Current conversion rate to a sale or lead
– Conversion rate from a lead to a sale
– The average value of a transaction
– The average profit per sale
– Where the client thinks they lose the most profit
You can (and should) ask more questions, but just the answers to these questions will help you find out how much the client is making per month. Moreover, you will immediately know how much of a difference you can make on their revenue.
When you have all of this data, you can confidently state that your work can bring in an extra $10,000 every month. You can and should ask the client at least $3,000 for your copywriting work because they will get that value within their first month after your work is done.
This is by far the best way to price a service. However, it requires several things.
– You need to really know how to do your job well.
– You need to have experience with similar projects in the past.
– You need to guarantee at least some part of the results that you can achieve.
– You need to “feel the pulse” of the client to see what price you can aim for.
Over time, you’ll get a feel for how you can charge based on value. This way, you can get the most amount of money for the work that you do and you will be paid based on the impact of your work, not the number of hours you spend working on a task.
The worst way to price a service is to trade your time for money. The best way to price a service is to charge based on value. Whether you’re a freelancer or a company that sells services, try to sell value to your clients, without locking yourself up in contracts that take too much of your time and give too little in return. If you’re looking for a tool to help you get more sales and win more clients, make sure to give our proposal software a try!