Pricing Effectively

This is the written script of Halftime, episode 26 of the Makers of Sport® podcast. Halftime was a short show on the off weeks between interviews where I wrote and read on topics in professionalism, entrepreneurship and business for creatives in sport. The episode aired March 2, 2015; the audio is on SoundCloud and the show notes live at makersofsport.com. The show's opening and closing announcements are trimmed here.

For today's topic, I’m gearing this talk more towards those of you who freelance or want to freelance. We are discussing the the infamous topic of pricing

I’ll preface by saying please don’t expect to come out of this show with a solid figure in your head that tells you what you are supposed to charge. This topic is very tough to put into a box and give a solid answer to. And you will hear many different opinions or see articles making sometimes polarizing arguments saying if you don’t charge in the method of X person, that you are not a professional or you are wrong. I strongly disagree with these mentalities. As I mentioned on my latest episode, the interception show with Joe Bosack, I feel like too many people try to put the creative service industry in a box and I just do not believe this to be valid. What works for you and your clients, may not work for anyone else. That being said, my goal through this podcast and specifically Halftime is to encourage all of us to up our games in the world of professionalism as it regards to the sports business.

Today, I’ll be covering three pricing methods including the infamous hourly rate, which is perhaps the most commonly used method in the creative services business. I’ll also be discussing the coveted retainer based pricing, and fixed fee pricing. Because each topic can get really deep, I’m going to do a birds eye view of each of these methods in order to keep this to our standard 20 minute Halftime talk.

We’ll begin with hourly pricing. You may notice that many clients will ask you for your hourly rate before working on a project? This method of pricing for man years has been the standard of the freelance industry. So what does it mean? It involves billing each of your time for a certain rate. The client comes to you asking for hourly rate. Typically, with the rare exceptions, the client will require some form of estimate from you on how long something will take so they can get an idea of what their end cost is going to be. Most don’t accept a blind or open hourly rate or just bill until you are finished method. The client typically has a budget in mind. and the end cost is really the number clients are concerned with. This is why I’m not a huge fan of the billable hour because clients may see something like $500 per hour and think that is way too much in comparison to someone charging $75 per hour. However, your experience and knowledge may allow you to achieve results quicker than the person charging $75 per hour offsetting some of their cost.

So the client comes to you asking for hourly rate, in some instances they may request your rate card. That means they are expecting different rates for different tasks. Agencies that charge hourly will have different rates for junior designers, senior designers, creative directors or partners. They also may have different rates based on the task. For example, project or meetings may be a less rate than the creative or development type work. In these instances hourly rates are calculated based on the difficulty of the task and the level of experience one has. I do not in any circumstances recommend using this method as a freelancer. It complicates things and makes tracking and accounting very tough. If you are freelancing and going the hourly rate route, my recommendation is to use one hourly rate for everything: phone calls, meetings, project management, design, writing, revisions, etc.

How do you come up with your hourly rate? This is where things get difficult and where it is different for everyone. I don’t believe in a “market rate” in the creative industry. Everyone is different, has different experiences, talents, methods, backgrounds and personalities. Just because freelancer A charges X hourly rate does not mean you can also command that rate. Maybe they have some bigger names on their client roster, or they speak or are well known in a certain niche.

To figure out your hourly rate, you have to first determine your operating cost. This is where you have to add up all of your overhead, what it costs you to survive as a business, or as a person. Typical expenses include utilities, electricity, Internet costs, any monthly software costs such as Adobe Creative Cloud, mortgages if you have a home, office rent if you choose to have an office, retirement, groceries or dining out budgets for the month. If you want to keep your Netflix subscription or get the latest sports package from a television company, you will need to add this in your operating cost. This isn’t a business expense but it is a personal expense that needs to be covered through the work you provide.

Basicaly, this figure equals what it costs you to survive – the very minimum you can make. This is your break even rate, meaning if you charge this and work the U.S. standard 40 hours per week for the year, you will pay for everything you need to survive but will have zero dollars left over. That zero dollars is where you profit lies.

What you will do from here is take that bulk number for the year, for ease of math, let’s say it’s $60,000. Now there are 52 weeks in the year and if you want 2 weeks vacation and holidays, you will subtract those. So let’s say we will take 2 weeks vacation and 10 holidays which equals 4 weeks (I’m counting business days here which is 5 per week). That gives us 48 working weeks in our year. So if we take our $60,000 in operating cost and divide it 48 we get $1,250 per week. We need to make $1,250 per week to survive. Now we need to take into account how many hours want to work.

In the U.S., we typically work 40 hours per week, but, keep in mind these are your billable hours. For every billable hour, there are non-billable hours such as business development, initial meetings, learning or education, networking lunches, accounting or bookkeeping and updating your social media for business purposes. So let’s say we want to bill 30 hours per week, while working 40. In this case we will take our $1250 and divide it by 30 hours and we have $41.66. So let’s round that up to $42. We need to make $42 dollars per hour after taking in account our vacations, holidays and operating expenses. This our break even rate.

After you come up with this figure, you can add to it in order to realize some profit off the work you provide. This is where things can get tricky. Everyone’s expenses are obviously different, but here is where we start to figure out some value. For example, how long have you been working? How fast are you? How in demand are you? Have you done big brand work? Are you performing a task that is very hard to replicate, such as iOS programming, video work or a particular illustration style. To start as a beginner, we can take a percentage of our operating cost. Let’s say we want to realize 20% profit on our business. 20% of $60,000 is $12,000. So adding that to our operating expenses, we are shooting for $72,000 a year as a salary. We’ll take that figure and repeat the same math we just did in order to come up with a rate of $50 per hour. So we need to charge $50 per hour at least 30 hours per week for 48 weeks of the year to meet our target salary.

There are plenty of hourly rate calculators online to help you determine hourly rates since we are creative people and hate math. I’ll post a few in the show notes.

The downfall of the hourly rate is it punishes efficiency. The more you do something, the better you get at and the quicker you become at it. So the only want to make money is to continue raising your hourly rate. This can get tricky when you have multiple clients and when new ones come in you experiment with a new rate which can cause confusion on your end when it comes to invoicing and time tracking if you are not careful about how you approach that. I use an online time tracking system called harvest for both invoices and time tracking.

The next pricing method I’ll discuss is the retainer. This is the coveted method for most creative businesses because it means steady and predictable revenue. From experience, this method in my opinion provides the best relationship between you, the creative, and the client. Basically what is happening here is the client is renting you for a certain amount of time. The hourly rate from earlier still applies, however in this case, you will specify in your contracts, and I know as a professional, you approach every job with a contract so I’m going to even visit that topic, anyhow you will specify that the client will pay you either on the first of every month or the last day of every month for the amount of hours the two of you have agreed up on for that following month. 100% of the money comes up front in this case. Also, you are getting steady work so in exchange, you will typically reward the client with some type of percentage discount on your hourly rate. So for ease of math, I may have an hourly rate of a $100 per hour, the client agrees to a retainer with me because they have a ton of work they need to send my way and paying via the retainer is going to save them 10%. This part of the sell of the retainer. They pay you up from every month and you drop everything and give them priority when they send work.

So let’s the say the client has a ton of work for me and i agree to give the a 10% discount on my rates if they pay me via retainer. We agree to a time frame of the contract and amount of hours per month. So we may agree to 20 hours per month at $90 an hour for a year. Once a year is up, things may have changed for me. I may have had a kid, bought a house or gotten so busy I need to hire someone so I need to bump my hourly rate up which means my retainer contact would need to be revisited. In our fake scenario, we would be paid $1,800 on the first day of the month (or last day of the previous month) for that month’s hours. I will track my time against those hours and let the client when we are approaching 20. Some people may specify in their contracts that once you reach 20 hours, we begin billing again at the full rate of $100 per hour. This is because we have set aside 20 hours for that client and when they reach that maximum, we are dipping into our other time with our clients where we bill the full $100 per hour. If a client consistently goes over, you may encourage them to up the retainer hours.

If your retainer under utilizes the hours you have reserved for them, you can choose to let them roll over the next month. Personally, i don’t advocate for this method. I abide be a use them or lose them mentality. I’m setting aside 20 hours for you and turning down work in order to reserve those hours, if you don’t use them, I believe that to be your fault, not mine. As a freelancer, you just an afford to roll that over to the next month because you now dedicated more than the allotted 20 hours which dips into other client work.

So what happens when you end up getting 4 retainers and reserving more than the 30 billable hours per week overall we discussed earlier. This is when you start hiring people or outsourcing some of your work. That means you business is scaling and you can no longer perform the work alone because there isn’t enough time in the day. That is a topic outside the scope of this discussion so I may touch on that in another Halftime episode.

Many client service businesses in the tech startup world prefer the retainer method. This means your revenue is predicable, recurring and you can better plan for the year as it regards to hiring, bringing on new work or doing things like renting an office. Some companies even break it down into a weekly rate. They will often have multiple retainer contracts and will dedicate specific teams to each client. With the technology world moving into agile practices and constantly changing and iterating on their products (think Facebook and their constant interface changes), they may prefer retaining companies or talent on a weekly rate. Just be sure to reserve that time in advance so you can plan for other work you have at the moment. And especially when that time ends, be sure to have something else in place.

The bottom line on retainers is that it provides the client more access to you and you become a partner with them becoming much more deeply ingrained in to their business and processes. In my experience, these are the best business relationships if you are providing a service.

The last pricing strategy we are going to touch on is the fixed fee. This is where you have a set price for your services and your client knows exactly what they are going to pay. This can sort of be coupled with hourly billing in that you can come up with a price based on an undisclosed hourly rate and give that price to client. They pay whatever that estimate is. Nothing more, nothing less. In this scenario, you have to pay attention to scope and clearly define all deliverables in your contract. Otherwise, this type of pricing method can lead to scope creep, where the client tends to nickel and dime the project constantly making revisions or requests that weren’t necessarily agreed to when you originally came up with the price. Sometimes, you’ll see lower end creative businesses packaging things up as fixed price. For example, you may go to a shop and they will provide an identity package for $3000. In that you get a logo, business card, envelope and letterhead and maybe one round of revisions on each. This means that every single client that comes to you gets the same price. Big or small. Large budget or tiny budget. Your price never changes in that instance.

In some cases you may hear the term value-based pricing which is another way to do fixed fee pricing. That is where mixture of things come into play. One is your time. How much is it worth, what we discussed earlier. Next is realizing the value to the client. This is where you will need to ask the client questions to determine how much something is worth to them. In all of these pricing instances, you have to look at the risk involved on your end. For example, there is much more risk involved when doing a rebrand for Pepsi rather than the mom and pop chicken joint in your locale. This is where we see articles comparing logo designs to maybe something like “pepsi's logo” in which case it drives me nuts. It’s not an apples to apples comparison. In Pepsi’s instance strategy and full branding campaign was involved rather than a logo. Also, Pepsi being the consumer brand it is needs remain recognizable on the shelf. In the instance isn’t, Pepsi being a global brand, there is much more risk on your end involved.

So how do you determine the value to the client? One example, which was written recently about by Fast Company is do a value mirror. In their example they use a law firm that has 500 partners billing at an average of $1000 per hour. So they determined their design budget to be $500,000 which is one of our work from each of the 500 partners. You have some internal math is done to cover your time worth cost but the client doesn’t need to know that. That’s an internal business cost, it doesn’t have to be anyone else’s business but your’s if you choose it not to be. That time cost is your expense.

A different example not related to the fast company one, may be you are working on a website for a college. You ask the client how many student leads are hoping to realize per month from this new project you are providing. They tell you 10 leads. Next question is you ask how much a lead is worth to the school. They, having already determined this number say $5000. You then ask how many leads they hope to close on out of those 10 leads per month, they tell you 40 percent or 4. So now we have a website worth $20,000 to the client per month. After determining the typical timeframe for a website to be in existence before a large redesign and the constant change of technology, let’s estimate the site to be untouched structurally for 2 years. So we now have determined that the value of this project to the client is worth $480,000. If you come in on your bid at $150,000 for the site, you have just proved that the value your site is going to bring to them is $480,000 if they can close on 40% of their leads.

A lot of this stuff is about reframing the problem. Going to a client and telling them a site is going to cost $70,000 as a freelancer, they may you’re crazy. But you show them through those value based questions about their business what the real worth of the project is to them. It puts it in perspective that they are realizing much more value than what they are paying you.

To wrap up, everything here eventually revolves around estimates and determining your own value. At the end of the day, you need to be confident and charge what you are worth. Try to be objective about this. Are you landing local work or national work? Do you provide one service or multiple services? The key to pricing is to be confident. Approach these conversations about money firmly. The minute you begin to second guess, sharks can immediately smell blood in the water. Not only does that make a potential client question your worth in regards to money, but it also makes them question whether you are even capable of doing a good job.

I’ll end this pricing discussion with a brilliant and inspirational quote from one of Pentagram’s partners Paula Scher. She once drew a logo for multi-million dollar client on a napkin in the meeting with the client. When being told that it only took her a few seconds to draw it, she mentioned it actually took her 34 years. 34 years to grow her skills, knowledge and abilities to draw a competent logo in a few seconds.

Never undermine your worth in this industry.