Hourly rate? Not here… How about value or per project pricing?
Posted in Business, on April 22nd, 2010 by Carlos.
As I’ve been monitoring the Tweet-o-sphere the past couple of days, I’ve noticed the topic about designers charging by the hour or using value or per project pricing coming up several times. I also had a conversation about it with a friend the other day as he had just recently took his own business full-time so I figured it would be useful to write something about it.
From my days of working in the Corporate Communications department of my previous employer, I worked with a lot of small design firms and freelance designers. They didn’t, from what I could tell at least, charge by the hour. I never thought much of it to be honest. We were getting great quality work done for a fair price. I never bothered to care if it took them 5 hours or 5 days. Well actually, I did. I wanted it done in less time because it meant we got our projects delivered faster. Our team was constantly under the gun to deliver faster than humanly possible, and having designers we could turn to so we can make that happen was priceless. There’s no doubt, they knew that, and priced accordingly. In turn I knew I was getting quality work done, and turned around quickly. It was win/win.
When I started up my own business, I really felt that an hourly rate could do an injustice to the skills and efficiencies I had developed as a designer. The main question sticking out in my mind was “Why should I be compensated less for being more efficient than the next guy?” Seriously. Especially when your efficiency is a result of having a better understanding of the client, their requirements, the tools you use to complete the job, etc. What’s the incentive to work faster when you get paid more for the longer you take? The argument can be made that with hourly pricing you are aiming for quantity. So if it does take you only 6 hours to finish a job, you have more hours left over to take on more work. But the exact same logic can be applied to value pricing, you just wind up getting compensated for more than just the time you put in. I’m convinced that when you charge by the hour, it’s part how much time you actually put into a project, part how much time you think should go into a project and part how much time a client thinks should go into a project. So really, maybe an hourly rate is not a truly accurate measure anyways.
In practice, setting a per project price or a price based on value can seem daunting, especially if you are use to charging hourly. How much IS a project really worth? I can’t provide any magical formula to figure it out, it’s just something you get better at as time goes on. Talk to other designers to see what they charge. Talk to people in similar positions as your clients to see what they would expect to pay. Talk to your clients to see what they think (admittedly, not many will open up too much about it). To be completely honest, I still use time as one of the factors that help me calculate my estimates, but it’s not the only factor. Others can be: what the project is worth to you, what the project is worth to the client (that’s a hard one to figure out), the unique value proposition that you bring to the project (e.g. are you an expert in packaging design, are you an expert in 3D renderings, etc.) and the turn-around expected, to name a few. Practice makes near-perfect in this sense. Sometimes you will lose your shirt because something you quoted actually wound up taking much longer than you had anticipated, making your effective hourly rate peanuts. It’s bound to happen, but it can also work the other way, where you fire off a project in a good amount of time and you are compensated well for it. I’m convinced it really just balances itself out in the end, so it’s not always worth sweating the details.
There will still be plenty of potential clients expecting hourly rates. I’ve lost a handful of opportunities because I didn’t have an hourly rate, and wouldn’t divulge one. It’s just not the type of compensation model I feel comfortable with. But if you’re not comfortable with something, why do it? Value or per project pricing isn’t perfect, but I think it helps to minimize the commoditization of design work. In a world where everyone considers themselves to be a web designer or Photoshop expert just because they swiped a copy of Adobe Creative Suite from a bit torrent site, there is a need to set the truly talented folks apart. I think pricing projects differently is one of the first steps in making that happen. It acknowledges your expertise, and the true value of the work you are doing.
This is a good thing for both new and old designers to think about. A formula I’ve tried recently is:
(estimated project time) x (hourly rate) ± (client specific needs)
So far, it’s allowed me to come up with faster quotes and be more confident with the client about where my costs are coming from.