This week I’d like to have a quick chat about the three different ways to price design projects. It has come to my attention that lots of people would like to know the difference between an hourly rate, project pricing and value based pricing and why designers prefer one over the others! Here goes...
Hourly rate is the most common way that a business will request in a quote. Makes sense, how long will this job take you and what is your hourly rate.
Project pricing is having a set price for different types of work. In my case tasks can be split up into branding, website design, graphic design etc. These usually have a few different levels of pricing within each category, so a one page website is going to be less expensive than a full blown ecommerce website for example.
Value based pricing is when you price the client and not the work.
For example if a company asked me to design a logo and branding guidelines for a new product that they expected to generate $100K in its first year then it's reasonable for me to price that job at 10% of that amount. So $10K investment for a logo and branding guidelines.
If a small entrepreneur wants me to build them an ecommerce website that they predict will increase sales by $60K then it's reasonable for me to suggest a $6k investment.
Best case scenario is a company wants me to design a logo and brand guidelines for a service or product that’s expected to make $500K in its first year, so $50K investment for the engagement is reasonable.
Each of these methods has its pros and cons but ultimately you want to be using value based pricing because, as the name suggests, it values your expertise and contribution the most.
Hourly rate is the most frustrating because it is most common. I appreciate that standardising the measurement of hours x hourly rate, is a super easy way for companies to compare quotes from different designers/firms.
What it doesn’t do is value the designers expertise and experience. If a designer can whip you up an amazing brochure in a few hours then they are going to get paid less than a designer that takes days to do the same job.
The better I get at my job, the quicker I get the work done and the less I get paid! No good at all!
Project pricing is slightly better because it treats the designer more as an expert rather than a robot. If a company is willing to pay a set price for a job and not be worried about the hours spent on the project then it shows they trust the designer and appreciates their ability to get the job done.
Unfortunately project based pricing doesn’t scale particular well and also doesn’t leave a lot of room for ‘mishaps’. The designer is taking most of the risk, some clients will be a dream to work with and that set price will be more than adequate for the job. If you have a nightmare client that had 100 rounds of revisions then that set price starts to stretch pretty thin.
Value based pricing is the most respectful of the designers expertise and experience. While there are obviously schedules and outcomes for the project the company trusts that the designers know what they are doing and is happy to accept an agreed price without getting bogged down in the details.
The best invoice I can send has one line item.
The point is that if you're an expert then you shouldn’t have to explain how you spend every hour of your time on a clients project. This information is obviously collected in some form or another for internal use but it isn’t something that the client needs to see. How that time is spent could be easily misunderstood. An hour at my computer using InDesign might look good to the client but it might have been the hour I spent walking around that lake at lunch time thinking about the project that inspired the eureka moment!
What the client expects is that you meet deadlines and produce quality work on time. Your value is that they trust you can do it with as little intervention as possible - that is why they hired an expert. Sure, experts are more expensive but you pay for what you get.
Few things to note is that switching from hourly rates to value based pricing is best done with new clients rather than existing ones. Believe me, when you tell a client that you’ve been drastically undercharging them for years and you’re going to have to double their invoice because you now value yourself as an expert; they don’t normally feel as great about it as you do! From their perspective you just double the bill but the output hasn’t changed.
Best to start using value based pricing on new clients. The other tip is about getting clients to actually talk about the financial goals of the given project. Their “Future State”. Where would they like to be in a year/2 years time? Most companies have a ballpark for what they want to achieve otherwise why bother engaging with a designer at all.
It's about really listening and being able to diagnose the situation early on in the engagement. Sometimes people think they know what they need but they actually need something they hadn’t even thought of yet! That's why they are talking to you. The expert!
I’ll finish with this great anecdote that sums up expertise well...
One day Pablo Picasso was sketching on a park bench. A woman recognized him as the famous artist, and asked him for a portrait sketch. Picasso flipped to a blank page, looked at the woman for a moment, and with a few strokes of the pencil drew her abstract portrait.
The woman looks at the drawing and is ecstatic. As she reaches for it, she asks how much it will cost her. "Five thousand," he says. "Five thousand?! But that drawing took you less than a minute!" Picasso replies, "No, madame, it took a lifetime."