Pricing for Profit: Why Hourly Rates Don’t Bring Profits
Over the past twenty years I’ve made an incredible number of mistakes when it comes to business, especially as it relates to freelancing.
When I first started my journey back in 1988, there weren’t awesome resources such as Google, uGurus, or Smashing Magazine to help me out. Everything that I learned was completely by trial and error — mostly errors! Yet, even with the amazing resources we have available today, there are still way too many freelancers struggling with the same problems I originally encountered in my early days, particularly when it comes to pricing for profit.
Pricing for Profit is the Greatest Challenge
Our current generation has some of the most talented freelancers I’ve ever seen, yet so many of these prodigies are broke or struggling to survive. They have amazing skills and client opportunities, but they lack the experience to price their projects in a way that will provide them a living, or they fail to consider the need to actually make a profit for their services. If you ever want to succeed as a professional freelancer, you will need to have the proper understanding about making money.
You have to make money to be in business. Period!
Before I share with you how you should price and sell your services as a freelancer, there is one big rule that you need to know first. You are in business to make money.
Read that again: You are in business to make money.
It’s weird, but so many talented individuals almost feel ashamed asking for money for the services they offer, usually because they don’t feel they are good enough. Working for free or cheap isn’t a viable option, and it’s no badge of honor. You have to come to the point where you believe you are worth it and that you must get paid what you are worth. If you don’t embrace this one truth, you will never thrive in freelancing.
Why Hourly Rates Don’t Bring Profits
When I started my first design business, the minimum wage in the U.S. was $3.35 per hour. It was natural for me to think that anything above that would be a win. Knowing that I had some skills that people wanted, I just pulled a figure out of my hat and set my rates at $10 per hour. Back then, that sounded like a lot, but what I didn’t realize was that I would have to pay expenses and taxes. I actually made less money freelancing than I would have made working for $3.35 per hour!
Most of the time, freelancers just pull some random figure out of the air and make that their hourly fee. It simply doesn’t work!
Hourly Rates Will Suck the Life and the Profits from Your Business
I don’t want to dive into the methodologies of how you need to come up with an hourly rate for your work. There are enough resources to help you do that. While it’s beneficial to know what you should be making as an hourly rate, you need to change your mindset if you want to make great money.
Hourly fees are great if you want to get paid for consulting or providing feedback on solutions. Hourly works well if you are trying to avoid project scope creep or have some unknowns in the project. But if you are basing your project on the hours you will invest in it compared to the value you are delivering to the client, you are likely leaving a LOT of money on the table. Let me give you a brief example.
Hourly rates leave thousands of dollars on the table.
Typically a freelancer sells the client on time and trades time for money. Say you have a potential logo design project for a client, and you figure your hourly rate needs to be $75 per hour. You estimate it will take you 20 hours to complete the project (including proposal, invoicing, and client communication), which is a nice $1,500. Definitely not a bad payday by any means, but let me ask you some questions.
- Did you include a profit in that hourly fee? Most people do not and only cover their overhead.
- What happens if you go over your allocated time? Will you bill the client, and will the client pay for the overages?
- What if it only takes you 15 hours instead of the 20 you quoted? Will you pad your time or be honest and not charge for the unused hours?
Hourly fees trap you into the mindset that you should charge for time instead of charging for value. Plus, most freelancers don’t even figure their hourly rate effectively, so they are losing money right from the beginning. Unfortunately, you will lose hundreds or thousands of dollars by taking the hourly route.
Pricing for Profit Begins with Pricing for Projects
Now let’s look at pricing from a different perspective — selling by the value you deliver and pricing for that.
As a freelancer, your purpose is to provide valuable solutions to your clients. They are hiring you to achieve an objective, whatever that might be. Your focus should deliver output based on their needs, but you should also strive to deliver on their wants.
Clients who truly value the services you offer aren’t as concerned about the fees or your hours as much as they are concerned about their wants. The client may need a professional logo that works for all forms of media, but what they may want is to be memorable and have a sexy identity.
Do you see the difference?
If you are a great listener, and you do your homework, you will be able to identify and separate needs from wants. Your job is to meet their needs, but to sell on their wants. The wants is where the true value is.
Now let’s make some REAL money!
Take the same logo design project above and instead of selling time ($75 per hour) for output, you sell this project on value. You tell the client you will deliver a logo that is professional and that works for all forms or media (needs), but that you’ll also make sure they will stand out in the crowd and have a sexy identity that people will remember (wants). You have just offered a valuable solution, and now it’s time to price the project.
You tell the client that the project will be a $3,000 investment for the value you will deliver to them. And they sign up right there! You have just made an additional $1,500 for the SAME EXACT project.
You might need that full twenty hours to complete the project or maybe not, but, regardless, you get paid the three thousand dollars. Even if you blow your time estimate, and it takes 25 hours, you’re still making a better hourly rate for the added time.
Here’s one more thing to keep in mind — the more efficient you become in your process, the more money you will make. As you develop your process and skills, you will get faster. You don’t have to adjust your rates for this efficiency. If you are able to design a logo in 10 hours at $3,000 per project, that’s $300 per hour — and you can jump for joy!
How This Took Me to Another Level
I want to wrap up by sharing a personal story with you to show you just how changing your mindset can dramatically impact your life and your business.
In my first ten years of freelancing, I struggled to provide for my family. There were weeks when all I could feed my family was Ramen Noodles or military M.R.E.’s. Every day was a battle to pay the next cut-off notice. And then a miracle happened.
My best friend’s grandfather taught me the principles of selling on value and by the project … the same principles I am sharing with you today. I won’t go into the story but the gist of it is this: clients don’t care about the hours it takes you to do a project or your expenses, they care about what it will take to achieve their objectives, so always price on that.
By using those principles and changing my mindset from selling hourly to selling value, I was able to triple my income in a short time and become a true provider for my family. These principles have allowed me to make six figures in business and to work way less hours than most of my freelancing colleagues. I am happier and more profitable than I’ve even been.
And the reality is that if I can do it, so can you!