How to price design work — stop charging for time and focus on value
How hourly pricing works against you and the benefits of using a value-based pricing model.
Pricing creative work is a new concept for most freelancers who are starting their business. We are used to being paid for our time, either by an hourly wage or an annual salary. It makes it simple to quantify how much value we think we are putting into a job. The more hours we work, the more we get paid. But there are a few flaws in the hourly pricing model that will limit the amount you can earn as a freelancer.
Trading time for money
Suppose a client is looking to hire one of two freelancers. The project is estimated to take around 20 hours and their budget is $2000.
- Freelancer A is a recent design grad student that charges $50/hour.
- Freelancer B is an experienced professional that charges $100/hour.
Scenario A — The client hires Freelancer A
The client compares the hourly rates and goes with the cheaper one. Freelancer A works for 20 hours, but the designs don’t meet the client’s expectations. Since they are charging half the rate, the client has the budget to keep working with them, although it will now take more time. They finish the project after 40 hours of work and the final work is fantastic. Freelancer A gets paid $2000.
Scenario B — The client hires Freelancer B
Although Freelancer B charges a higher hourly rate, the client believes that a professional designer will create quality work. Since they have years of experience, Freelancer B is able to finish the project in 15 hours. The final work is fantastic, but they only get paid $1500.
Let’s break it down
Freelancer A took longer to finish the project as their quality of work did not meet the client’s expectations at the 20-hour mark. Freelancer B was able to finish the project and meet the client’s expectations in only 15 hours. Thus, time is not an indicator of work quality.
As a business person, the client most likely values their time, so it would make sense to hire Freelancer B. They only spent 15 hours working on the project, which allowed the client to focus the rest of their time on running their business. However, instead of being rewarded for their expertise, Freelancer B is punished for being efficient, since the quicker they finish, the less they earn.
That is the problem with the hourly pricing model. Freelancers can gain from working more hours, but most clients are interested in spending less time on a project, not more of it.
Trading value for money
Hourly rate pricing also limits your potential client base. When clients hear your hourly rate, they will assume things such as your experience level and quality of your work.
By following a value-based pricing model, you are pricing the client, not the job. Clients want to feel that they are receiving a fair value for what they pay. A few factors can influence the value of the work to the client.
Risk exposure
If the Mom-and-Pop shop implements a new logo, they probably have to update their business cards, storefront and perhaps a few other marketing materials. The large business would have many more touchpoints, such as numerous storefronts, merchandise, a website, a mobile app, etc.
Updating all of these touchpoints will cost much more than the design work, so the client will want the designs to be right the first time. The risk of getting the logo wrong is higher for the large business, as they have a higher cost of implementation.
Thus, the large business would ideally want to hire someone with a track record of successful projects and a certain level of confidence in their craft, unlike what Uber’s CEO did. Hiring a professional freelancer or agency will come at a much higher price than working with someone less experienced.
Budget
The client’s budget comes from a percentage of their gross revenue for the year. Since clients come in all sizes, their budgets will range. A business that earns more revenue will have a larger budget to spend on services like design.
If I sell the exact same logo to a Mom-and-Pop shop and a large established business, the Mom-and-Pop shop will have a much smaller budget to work with, so I would charge them less than a large business.
But how do you figure out exactly what to charge the client?
Determining the value to the client
Many freelancers approach a client by first discussing the scope of the project, followed by price and value. This method keeps the focus of the value on the work itself. By providing a breakdown of your services, presumably with the timeline and rate included, the client has the power to negotiate down.
Setting context
By adopting a strategic approach, focus the conversation around the business. Dig deep into their goals and KPIs for the project. By understanding what areas need improvement and what their desired future state looks like, now you can tie your proposal directly to those metrics.
Desired Future State → Success Metrics → Value → Price
For example, you determine that the client wants to increase their ecommerce sales by $100,000. If you convince them that you can build an optimized website that could result in an extra $100,000 in revenue, ask how much it would be worth for them to pay. This will get them thinking about how much they really value the work.
Pricing business value
Suggest pricing the work at a percentage of the expected additional revenue. By then setting a price of 20% of the expected revenue, you would be able to charge $20,000 for the website.
If you hadn’t set the context in terms of business value, then bidding $20,000 on the project probably wouldn’t have gotten you the client. By following the value-based pricing model, the client decides how much they value the work in relation to their business without factoring in the time or effort it would take you to complete it.
Handling skeptical clients
If the client is risk-averse or still skeptical about the business impact that your work will create, then you need to steer the conversation in a way that will make them buy into the value-based approach.
Ask the client if they are willing to invest $20,000 into their business to potentially gain $100,000 in revenue. To most businesses, the potential to 5X their money on an investment with little downside should be a no-brainer.
However, if the client isn’t willing to offer enough to meet your minimum level of engagement, then you have to decide when to move on. Never feel pressured to take a lower price because you feel like you have to. You could possibly adjust your deliverables to be able to meet the client at their price point. But as long as you have sufficient runway saved up, then you should be able to say “No” to clients that can’t pay you for what you are valued.
As a designer, it’s important to think like a business person if you are going to run a successful freelance practice. The art of negotiating is tricky to master and takes years of practice to be able to perfect.
It won’t be easy at first to implement a value-based pricing model with your freelance business. But once you open your mind to charging based on value instead of your time, you will remove the limits to how much you can make.
Thanks for reading!
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