Increasing freelance profits with “Value Based Pricing”

Many freelancers work on a per hour or per day cost. This article discusses why this can be a bad idea, introducing the idea of Value Based Pricing as an alternative

Many freelancers work on a per hour or per day cost. This article discusses why this can be a bad idea, introducing the idea of Value Based Pricing as an alternative.

Selling Time By The Hour

The default freelance position seems to be selling our time by the hour. That website will take ten hours, at £x per hour for a total of £x. There are a few problems with this, including:

Comparing the wrong thing

Freelance marketplaces quote hourly rates for workers, and it’s easy to judge people by their hourly rate. Cheapest might seem good, and comparing people can be difficult especially if freelancers are in different countries. This misses the point though – which is how well can they execute your project?

Efficiency reduces profit

Something that has become apparent to me as I’ve got more efficient over the years is that clients now get better value from my hourly rate as I’m faster. This obviously benefits them but actually works against my best interest. The only way to combat that would be to say it took longer than it did, which doesn’t sit well with me.

An Alternative: Value Based Pricing

Rather than selling hours, some people recommend something called value based pricing. This is where the cost of the service is related to how much the client will make from it. If the website will make them £100k in the first year, the idea is that charging them £10k is a good business decision for a freelancer. You make more than an hourly rate, probably get treated better and the client is still making plenty of money.

This sounds great but used to bother me for a variety of reasons, including:

There’s often a cheaper option

I’ll talk about websites as that’s what I know. It’s hard to see how a custom designed and built site is going to be better for the client that a DIY website builder. There are so many factors here that it felt hard to justify the extra cost to a client. At the end of the day I don’t want to work with clients who have small budgets or don’t understand the value of good work. Setting a higher price filters problem clients out and creates confidence in the services offered, as well as positioning me as a consultant/partner rather than hired minion to ‘push pixels’.

Scope Creep

While it’s easy to say ‘yes mate, a website is £10k’ there are wildly different expectations of what a website includes.  A good contract will (hopefully) sort most of that out, but there is still chance of misunderstandings. Will that include copywriting, images, “SEO”, ongoing maintenance? What if they don’t like the first design, does it include a second pass of the design phase? This could end up with me working more hours than the value based price I asked for. Tricky.

Breaking The Time Barrier

Freshbooks offer a free PDF called Breaking The Time Barrier which goes into more detail about value based pricing. It’s a short book framed as a conversation between two people and well worth the time investment.

How Do You Charge?

I’m trying out Value Based Pricing with some new clients to see how it can work for me.

Do you charge by the hour, by the project or based on value? How has that worked (or not) for you? Tweet me!