Friday 20, 05.2016

Charging clients: Hourly rate or project based?

As a freelance designer, I’ve often wondered what is the best way to charge your clients. I don’t think there is a right or wrong way, I think that, depending on the context, you can pick whichever option suits you best.

You can work on an hourly rate – and use a tracking tool for your time, which means the client will pay for each mistake they make, as well as for additional revisions they want to make, but which also means they own your time, as long as they pay for it. It’s a two way street.

Or you can work project based, which means you set an overall price on the entire project, charging for the value you deliver to the client, rather than by the hour. It’s a good option, if you’re confident in the value you can provide (and especially if there’s not a very large pool of people who can offer what you have) and it works, as long as you make sure to get all the details of the project beforehand, as clearly and specific as possible. And, of course, if you’re a fast worker, this option is even better for you.

Me, I prefer the project-based approach. I do use an hourly rate estimate when I do the math, just to make sure I check out ok, but I usually offer an overall estimate for the entire project, because I feel that this way, my focus is on doing whatever it takes to achieve good results – even if sometimes this means I will exceed the amount of time I had initially planned (and this is something that I’m ok with and works for me, so I’m not saying that it’s ok to do, in general). For some more info on the subject of value-based pricing, SeanWes has some podcasts that I found interesting (and here are two of them: 1, 2).

I wanted to see what other professionals think of this, so I asked graphic designers Tim Reid and Tom Ralston, founders of creative agency Core, how they charge their clients.

Tim Reid Core AgencyTim Reid – Partner & Creative Director Core Agency

We’re still working this out ourselves, to be honest, and it’ll probably be a lifetime’s endeavour of trying and failing until we land on the most effective way of pricing. Currently, we’re trying to unlearn the inherent habit of the hourly rate and adopt a more project/value-based way of charging, and here’s why…

A few years ago, Tom and myself were lucky enough to be in the audience at this Creative Mornings talk.

To paraphrase Jon Lax’s talk, he describes the history of where the billable hour came from and how it wiggled it’s way into our industry. Moreover, he goes on to mention how he would like to start a revolution against the billable hour and time sheets in general. His reasoning is that the way we work as designers can’t be compared to manufacturing (where the billable hour came from). Designing logo concepts can’t be compared to the industrial fabrication of say, the front panel of a car, and so subsequently this habit of monitoring your time is irrelevant. 

Having spent years struggling to settle on an hourly rate whilst trying to develop better billing systems and analytics for tracking time, my world changed immediately upon hearing this. I had been bashing my head against a wall, trying to make sense of a bunch of arbitrary figures that had no worth behind them. What is an hour? What does one hour’s worth of work look like? I could produce 20 different layout ideas in an hour, whereas someone else might only produce one. But are my ideas any good? Is this other person’s any good, just because more time was spent on that single idea? Who knows?! The time spent on a creative endeavour doesn’t equate to anything, it’s meaningless. The end result is what is required and it’s what the client should be paying for.

In my opinion, hourly work assumes that something taking a longer time is somehow worth more. Sure, I get paid more if I take my time, but does that help me get to the right solution? It seems to promote idleness  a project-based rate promotes results. 

 

Tom Ralston Core AgencyTom Ralston Core AgencyTom Ralston – Parter & Creative Director Core Agency

The Hourly Rate

There is a wonderful simplicity to the hourly rate. If you can predict how long a project will take, and know what your time is worth you can therefore assign a cost to any given project. Isn’t that straight-forward? The (time = value) equation may be convenient and easy to understand, but it doesn’t mean that it is necessarily the best method of billing.

When you are using an hourly rate as the foundation of your pricing you are placing a cap on your value, and therefore also limiting your earning potential. When an employee signs on for a salary paid position, they are agreeing to limit the amount they could potentially earn in a year in exchange for stability, job security and benefits. For the freelancer or self-employed individual, an hourly rate has the same limiting effect. If each hour is valued at the same price you will only gain income for the amount of hours you can squeeze into a week, a month and a year.

The length of time the designer spends on a project does not directly effect the results for the client, and in an ideal world, the designer would spend a very short time on a project for maxim results to the client — but under the hourly rate paradigm, this yields the lowest earning for the designer, with no change in results for the client. Furthermore, when designers price using an hourly rate, they are teaching the client that time is valued above results.

The Project Rate

When using an hourly rate you are also assuming that all services and project deliverables can be valued equally. Not each hour you work will have the same value or outcome for your client, and nor will each project. Some projects are intrinsically more valuable for your clients, and some deliverables more complex in thought and execution. Different types of work can have more lucrative outcomes for your clients, and if you can learn to value the outcomes over the deliverables you can harness more earning power. 

The benefit of a project rate is that depending on the complexity of the ask, the timeline, the value you can offer the client, you can vary the price of the project. But many designers place a fixed price on their services, and a fixed rate on their time. At Core, we utilise a combination of project rates and value based pricing.

Value based Pricing

Value based pricing works from the principle that your client is paying for results and outcomes. In practicality this means honing in on the problems your client is facing, strategising potential solutions and projecting the results of the work you create, and how they will benefit the client and their consumers. By assessing the impact you can have, you can then assign a monetary value to your strategy. The beauty of this billing system is it aligns your strategy with the client’s goals. If you can get to the root of the client’s requirements and understand how you can bring value and results, then what you are offering them is an investment, not an expense. By utilising this method, you are placing the price on expected value and results, as opposed to how long the project will take, and there is far more incentive for the client to invest in you.

How to start out?

As I mentioned, the Time = Value equation is easy to understand and put into practice. The truth is that Value based pricing and Project rates are not easy to master, and these pricing methods only come with experience. Hourly rates can have a useful place in the design process, particularly when it comes to starting out in the industry and ascertaining your value as a designer. As hourly billing is the most common method, you can get a feel for the industry standard and estimate your worth by experience. You can then increase your rate as you develop in experience, confidence and expertise. The problem arises when you outgrow the hourly rate you have placed upon yourself, and when you fail to realise that you are offering more value to your clients than you are charging. Once you start to get a feel for your worth, you should start charging by either project, or by value-based-pricing.

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About Miruna

Hi, my name is Miruna Sfia. I'm 28 and I'm a self-employed graphic designer and illustrator living in Bucharest, Romania. I created Talk Illustration because I wanted to be able to learn from some of the best people in my industry.

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