Friday 20, 05.2016

Charging clients: Hourly rate or project based?

As a freelance designer, I’ve often wondered what is the best way to charge your clients. I don’t think there is a right or wrong way, I think that, depending on the context, you can pick whichever option suits you best.

You can work on an hourly rate – and use a tracking tool for your time, which means the client will pay for each mistake they make, as well as for additional revisions they want to make, but which also means they own your time, as long as they pay for it. It’s a two way street.

Or you can work project based, which means you set an overall price on the entire project, charging for the value you deliver to the client, rather than by the hour. It’s a good option, if you’re confident in the value you can provide (and especially if there’s not a very large pool of people who can offer what you have) and it works, as long as you make sure to get all the details of the project beforehand, as clearly and specific as possible. And, of course, if you’re a fast worker, this option is even better for you.

Me, I prefer the project-based approach. I do use an hourly rate estimate when I do the math, just to make sure I check out ok, but I usually offer an overall estimate for the entire project, because I feel that this way, my focus is on doing whatever it takes to achieve good results – even if sometimes this means I will exceed the amount of time I had initially planned (and this is something that I’m ok with and works for me, so I’m not saying that it’s ok to do, in general). For some more info on the subject of value-based pricing, SeanWes has some podcasts that I found interesting (and here are two of them: 1, 2).

I wanted to see what other professionals think of this, so I asked graphic designers Tim Reid and Tom Ralston, founders of creative agency Core, how they charge their clients.

Tim Reid Core AgencyTim Reid – Partner & Creative Director Core Agency

We’re still working this out ourselves, to be honest, and it’ll probably be a lifetime’s endeavour of trying and failing until we land on the most effective way of pricing. Currently, we’re trying to unlearn the inherent habit of the hourly rate and adopt a more project/value-based way of charging, and here’s why…

A few years ago, Tom and myself were lucky enough to be in the audience at this Creative Mornings talk.

To paraphrase Jon Lax’s talk, he describes the history of where the billable hour came from and how it wiggled it’s way into our industry. Moreover, he goes on to mention how he would like to start a revolution against the billable hour and time sheets in general. His reasoning is that the way we work as designers can’t be compared to manufacturing (where the billable hour came from). Designing logo concepts can’t be compared to the industrial fabrication of say, the front panel of a car, and so subsequently this habit of monitoring your time is irrelevant. 

Having spent years struggling to settle on an hourly rate whilst trying to develop better billing systems and analytics for tracking time, my world changed immediately upon hearing this. I had been bashing my head against a wall, trying to make sense of a bunch of arbitrary figures that had no worth behind them. What is an hour? What does one hour’s worth of work look like? I could produce 20 different layout ideas in an hour, whereas someone else might only produce one. But are my ideas any good? Is this other person’s any good, just because more time was spent on that single idea? Who knows?! The time spent on a creative endeavour doesn’t equate to anything, it’s meaningless. The end result is what is required and it’s what the client should be paying for.

In my opinion, hourly work assumes that something taking a longer time is somehow worth more. Sure, I get paid more if I take my time, but does that help me get to the right solution? It seems to promote idleness  a project-based rate promotes results. 

 

Tom Ralston Core AgencyTom Ralston Core AgencyTom Ralston – Parter & Creative Director Core Agency

The Hourly Rate

There is a wonderful simplicity to the hourly rate. If you can predict how long a project will take, and know what your time is worth you can therefore assign a cost to any given project. Isn’t that straight-forward? The (time = value) equation may be convenient and easy to understand, but it doesn’t mean that it is necessarily the best method of billing.

When you are using an hourly rate as the foundation of your pricing you are placing a cap on your value, and therefore also limiting your earning potential. When an employee signs on for a salary paid position, they are agreeing to limit the amount they could potentially earn in a year in exchange for stability, job security and benefits. For the freelancer or self-employed individual, an hourly rate has the same limiting effect. If each hour is valued at the same price you will only gain income for the amount of hours you can squeeze into a week, a month and a year.

The length of time the designer spends on a project does not directly effect the results for the client, and in an ideal world, the designer would spend a very short time on a project for maxim results to the client — but under the hourly rate paradigm, this yields the lowest earning for the designer, with no change in results for the client. Furthermore, when designers price using an hourly rate, they are teaching the client that time is valued above results.

The Project Rate

When using an hourly rate you are also assuming that all services and project deliverables can be valued equally. Not each hour you work will have the same value or outcome for your client, and nor will each project. Some projects are intrinsically more valuable for your clients, and some deliverables more complex in thought and execution. Different types of work can have more lucrative outcomes for your clients, and if you can learn to value the outcomes over the deliverables you can harness more earning power. 

The benefit of a project rate is that depending on the complexity of the ask, the timeline, the value you can offer the client, you can vary the price of the project. But many designers place a fixed price on their services, and a fixed rate on their time. At Core, we utilise a combination of project rates and value based pricing.

Value based Pricing

Value based pricing works from the principle that your client is paying for results and outcomes. In practicality this means honing in on the problems your client is facing, strategising potential solutions and projecting the results of the work you create, and how they will benefit the client and their consumers. By assessing the impact you can have, you can then assign a monetary value to your strategy. The beauty of this billing system is it aligns your strategy with the client’s goals. If you can get to the root of the client’s requirements and understand how you can bring value and results, then what you are offering them is an investment, not an expense. By utilising this method, you are placing the price on expected value and results, as opposed to how long the project will take, and there is far more incentive for the client to invest in you.

How to start out?

As I mentioned, the Time = Value equation is easy to understand and put into practice. The truth is that Value based pricing and Project rates are not easy to master, and these pricing methods only come with experience. Hourly rates can have a useful place in the design process, particularly when it comes to starting out in the industry and ascertaining your value as a designer. As hourly billing is the most common method, you can get a feel for the industry standard and estimate your worth by experience. You can then increase your rate as you develop in experience, confidence and expertise. The problem arises when you outgrow the hourly rate you have placed upon yourself, and when you fail to realise that you are offering more value to your clients than you are charging. Once you start to get a feel for your worth, you should start charging by either project, or by value-based-pricing.

Get in touch with Core Agency on their: website | facebook | twitter

About Miruna

Hi, my name is Miruna Sfia. I'm 28 and I'm a self-employed graphic designer and illustrator living in Bucharest, Romania. I created Friday Illustrated because I wanted to be able to learn from some of the best people in my industry.

If you want to know more about the things I work on, feel free to follow me via Facebook, Twitter or Google+

2 Comments

  1. Madalin

    May 22, 2016 at 5:56 am

    I remember reading an article some time ago that put forward the issue of pricing for illustration work (I can’t remember what it was called or who wrote it for the life of me).

    There were 2 issues, the first one being if you hire 2 designers to create 1 poster each for a concert and both posters turn out of equal quality. You pay them hourly but one tells you that she worked on it for 8 hours so she gets $800 and the other worked on it for 12 hours so he gets $1200. Does that seem right?

    The 2nd issue was the right to use the work. Would you charge the same for an illustration that is presented in a concept meeting as one that is printed in a magazine? What about one that can be used online once… or twice… or in perpetuity? What if the client wants to add your work to their portfolio? What if the client want to say that it’s their company’s work (or part of their company’s work)?

    I believe hourly rates work because they’re easy to understand and easy to sell. But how do you explain the value of… value?

    I believe we should look into how marketing budgets are set… how much is the awareness of a user worth to you? $1? How much is a lead worth to you? $25? How about a trial member paying for a minimal service? $50? How about someone actually buying your premium service? $150? So how many people do you want at each level, how big is your total marketing budget and how much of that budget is the design service worth?

    I like this subject and I’m still fiddling with it 🙂

    Reply

  2. Tom Ralston

    May 23, 2016 at 10:24 pm

    Hey Madalin,

    Thanks for the feedback and expanding upon the conversation! You raise some really interesting points.

    Firstly, I agree that you should factor in the rights to use the work in your costs, and you should be clear about ownership and rights of the work you create. If you are transferring the rights to client, or offering up the work in perpetuity, you are offering additional value to the client and therefore this should be reflected in the quote.

    Your example of the two poster makers working for two different prices (based on time taken) only works under the age-old hourly rate paradigm. What if we think about this in terms of value based pricing?

    Value based pricing posits that costs are based on results – not tasks or deliverables. If you successfully meet the deadline and solve the client’s problem, does it matter how long the task took? It could take one poster maker less than an hour, but if they have a really good understanding of the project request they could bring about a greater return on investment for the client. Perhaps this could result in increased poster sales, or more ticket purchases for the concert. If you really have a good understanding of what the project entails, you can offer up a solution that goes beyond the ‘time-to-make’ cost. What if they design a poster that can be adapted or reused for future concerts? Moreover, if a venue or band sells 30 seats vs 30,000 seats surely that would affect the scope of sales? What if the poster maker has a history of creating return on investment for clients? The key is to ask the right questions. You should be a consultant to your client, rather than a commodity. Value based pricing is an exercise in exploration and problem solving which is very similar to the design process. If you ask your clients the right questions, they will direct you to the inherent value of the project.

    In regards to marketing budgets, it is my experience that most clients don’t have budgets at the ready, and when you ask them to offer up a budget they often give an arbitrary figure because… guess what? If you don’t know how much your work should cost, they won’t either! This is particularly true for clients who may have never used a designer before. How on earth would they know how much your work costs? The designers job is to educate on price, and every project is different and requires different results. If you can show that you understand what a client wants, and better still direct them to what they need, you are offering tremendous value to them, and better solutions to their problems. As you mention, exploring the value of their users (leads, trial members, premium users for example) is precisely the kind of thinking that should be adopted for value based pricing. If you can suggest a way of bringing your client more premium users, that means your price has just gone up! Not only only does your price go up, your client is happy to pay more because they are reaping the rewards of increased premium users.

    Just like you I am continually experimenting with rates and pricing, and I am by no means on expert on this subject. I would highly recommend reading Alan Weiss’ ‘Value-based Fees’. It’s a great book, as enlightening as it is accessible and considering the complexity of the subject matter, it is exceptionally easy to understand. It has definitely had a profound impact on the way I think about my own pricing strategies.

    Reply

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