Why charging by the hour may be wrong

Sean Johnson explores the idea of charging for your value, rather than your time.

For the most part, I imagine we're fairly comfortable with pricing up projects. It's something we have to do each and every time we take work on. We might sometimes ask ourselves if we're charging too much or too little, but how often do we question what we are actually worth?

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When pricing a project, I'm guessing you find out the features the client wants, estimate how many days it will take and multiply that by your day rate.

The shrewd amongst us probably add a little extra for contingency, right? The problem is, when we price projects based on how long they take, we're essentially selling our time. We're not selling our skills, our expertise or our ability to do the job.

Naming your price

When we price projects based on time, we're already putting a limit on what we earn – there are only so many hours in a day. What if we miss a few days, a week or even a month?

Work might dry up for a bit, we might be ill or maybe we offered a fixed cost for a project, we've run over and we're now working for free. We can't get that time back.

The latest issue of net magazine discusses pay rates and working practices across the web industry.

I guess if we want to earn more we can always put our rate up, but how far can you go with that? Who's going to pay you £300 per hour when you're being compared to others charging £50? And what if I'm more efficient with my time? Let's say I can do something in half the time as someone less experienced. The quality of the end product may be the same, but I'm able to work faster. Why should I get paid less?

Value-based pricing

Now, what if we were to price up a job based on the value that project would bring? We've all had a client who wants a redesign because they feel their current site is outdated, right?

Don't take their request for a redesign at face value, delve deeper and find the reason why they need to ‘freshen up' their website: maybe sales have dropped, they're not getting enough leads or their customer service calls have gone up. There is always a problem that drives a client to spend money.

When we talk about investment, we think about risk

Instead of asking ‘what' the client wants something, we should ask ‘why' they want it. Keep asking until you fully understand their problem and how much pain that problem causes. You can then uncover what value they put on solving that problem and easing that pain. When we focus on their business problems, we can focus the client on making an investment to solve those problems.

When we talk about investment, we think about risk. I'm sure we all agree that if we invest £1 we're more likely to see a return of £2 than £10,000.

Likewise, if we quantify the value of a project to the client at £100,000 per year, a realistic investment should be around £50,000. Whereas if we base our fee on how long the project takes – say 15 days at our day rate of £500 – we might only be charging around £7,500.

OK, this may sound like a great idea, but how do you quantify the value? How do you put a monetary value on the client's problem? Let's say the goal for the site is to generate more leads. If the client's typical customer spends £1,000 and they convert, on average, 25 per cent of their leads into customers, the value of each generated lead is £250.

If the website can provide 200 leads per year, that's around £50,000 of value. Also, if we focus on building a better user experience we might even be able to improve that conversion rate and push the value up higher.

Practice makes perfect

It can be tricky though. As designers and developers, these conversations are hard. We're not business development managers or growth consultants, but with a little practice we can become more comfortable with these discussions.

We need to think beyond just covering our bases. Yes, we still need to know how long a project will take, so we can cover our costs and schedule in our next project, but if we begin to focus a little more on the value that project will provide the client, we can start to realise what we are really worth.

Words: Sean Johnson

Sean Johnson is a freelance web designer working with small to medium sized businesses around the UK. He also hosts the popular Freelance Web podcast. This article was first published in issue 261 of net magazine.

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