Dear future client,
A lot of freelancers are happy to charge you an hourly rate & bill you based on the amount of time worked.
I’m not one of them.
I firmly believe that if I bill you by the hour, then our project has a much higher chance of failure.
Firstly, it immediately puts our incentives at odds. The way I would make more money is to take more time to get work done. I get rewarded, and you get punished for my inefficient work. You may think ” If you’re a trustworthy developer, you won’t do that.” And you’d be right. However, that means that the right thing and the most profitable thing are different. That’s a fundamentally broken system. I’m in the client services business. I should make the most money when I best serve my clients, not the other way around.
Another way I can provide better service is to spend more energy on solving your business problems instead of dealing with red tape. I don’t want our phone conversations or meetings to have a taxi meter dangling overhead. I don’t want to fret about whether or not sending an emails “counts” as billable time. How about instead, I just do what needs to be done, no matter how long it takes. And as a bonus, you’ll always know the exact amount you are expected to pay. Your accountant will appreciate it.
Lastly, it reduces potential solutions. Let’s say I find an off-the-shelf solution for your problem. I could buy it for $100 or build something similar for $1,000 in billable time. All other factors equal, you’d rather have the cheaper, faster option, wouldn’t you? Good, because I’d like to give it to you. However, billing based on time means I can’t do so without taking money away from myself, my business, and my family.
We’ll agree to prices based on your needs & the value I can provide. In cases where the scope and value are more clearly defined, this can be a payment of one or more fixed fees. For projects that require more exploration, this can be recurring fixed fees on a weekly or monthly basis. This model provides a balance of flexibility for both of us.
Then we can be in alignment: the only thing that will matter about the project is achieving success.
That being said, there are always exceptions to the rule. If you feel there is a strong case for working hourly than I’ll consider it.
However, if you insist on hourly billing because you are focused on effort not results, I’ll be more than happy to refer you to someone more focused on delivering code instead of business results.
Asking “how much will a website cost?” is like asking “how long is a rope?” or “how much is a house?”. But the client might not know that. They’ll want a quote in the first 5 minutes of talking to you.
How do you respond to these requests?
Definitely not with a price. Setting a price before fully understanding the requirements puts you at risk of underbidding, and potentially working a ton of cheap hours.
You can try to ask follow up questions to suss out the client’s budget. But what about when those don’t work? By the end of reading this article, you’ll have a set of tools you can use to move forward from these situations without binding your self to a price or work order that’s worth your time to fulfill.
Why are they pushing for a price at the beginning of the conversation? There are a few different possibilities:
Asking for budget numbers outright can be a turn off for some clients. They are concerned that if they say $10,000, you’ll say “here’s a $9,900” proposal. You’ll have to get there by more indirect means.
You’ll have to use your intuition to judge your potential next client’s situation of awareness. For this reason, I encourage getting the fidelity of communication as high as possible as early as possible. If you’ve only been speaking via email, pick up the phone or get the client on Skype. Meeting in person is preferable when possible. It will help you decide which tactic to use.
Explain that you need to know more before you can fully answer their question. If you use this line, have a next step ready to go. Here are some ideas, in ascending order of difficulty to pull off:
This way, you can try to steer towards a continued conversation. From there, you can learn more about the project and come up with a fair price.
I’m gobsmacked by the number of times I’ve asked the question, and a client blurts out their budget. “We have a budget of $15,000.”
This question can help you filter out clients with unreasonable expectations. You can’t accurately price a project based on a 3-sentence description, but you can at least tell a $500 project from a $50k project.
If your client thinks that a complete eCommerce solution costs the same a nice dinner and a bottle of wine, then you know that you don’t want to work with them, and can go ahead and end the conversation.
You show them a bit of the dark art of how you price your services, and in exchange, you have both educated them about market rates and give them perspective on where they may fall. Like the previous question, you have a similar effect of pushing for alignment: If what you offer at a particular price is wildly different than what the client expects, you can end the call.
The worst thing you can do is blurt out a way-too-low price because you didn’t understand the scope of what is being asked of you. Try the techniques above, and learn more about the project and the client before you make any commitments. And if you want to improve dramatically at the art and science of pitching & pricing software projects, I’d recommend Dependable.
Maybe it’s because they didn’t have experience. Maybe it’s because they thought the formula was rate = salary rate / 2000. They didn’t consider all the overhead and liability of being an independent business owner.
They start to charge their new clients more. $50/hour becomes $60 becomes $75, maybe even $100. But then, you have a conundrum. You still have old clients. Loyal, long-term ones that pay your old rates. These old dogs are paying $50/hour while the shiny new ones are paying $100 for the same work.
On the one hand, the long-term clients have changed from stable income to liability. You could replace them with someone that pays double. Keeping them around is bad business.
On the other hand, they bet on you when few would. They hung around through some tough times while you were learning the ropes. Raising prices on them or worse, kicking them to curb feels unfair. Not keeping them around is bad business.
You should raise your rates, but do it the right way. There’s a way to respect both your relationship with the client and your own business. Here’s how to approach it:
I always did my rate increases on January 1st. The benefit was two-fold. First, clients are more likely to make buying decisions for the next year at the end of the previous one; it lets them get a big tax write-off at years end and pursue new initiatives in the coming year. It also made it clear that this was a planned business move, nothing personal. Lots of companies make changes in the new year. Your clients, as business people, should understand, and respect that.
If you can’t wait until then, the starts of fiscal quarters work well: April, July, or October 1st. Any date so long as it doesn’t look arbitrary.
Don’t spring a rate increase on your clients.Your invoice should never surprise. Give them 30 days notice minimum. 60 is better.
Rate increases are more likely to be accepted if they sound reasonable. If you try to jump from $20/hour to $10,000/week, you are going to raise a few eyebrows and get more than one boot on your ass. Don’t raise your rates more than 50%. Even if you are charging the old client $50/hour and charging new clients $100, consider increasing their rate to $75. You could tell them you charge others $100, but since they have been a long-time customer, you are cutting them a break.
Tell them that the deadline is the deadline for new work booked, and does not affect the rate of previous agreements. If you agreed to a 50-hour project at your lower rate, you need to do that work at your lower rate, no matter what. Letting people know that there is a rate increase coming gives you a sense of urgency. Use it.
Don’t call this a rate increase; it’s just a price change. Be direct and professional. Don’t apologize and don’t sugar coat. You are a business person making a business decision and communicating that decision in a professional manner. Act like it. Own it.
Higher prices typically mean a higher quality of service. In what ways has the value of your service increased, or will increase, for your clients moving forward? Here are some examples:
● You’ve become better and faster at what you do. Your work is worth more now than when you started.
● Raising your rates means that you have to take on fewer clients so that each client will get more of your focus and attention.
● You’ve added or will add new parts to your service, increasing the value.
Bring these to your client’s attention when you bring up the rate increase. Don’t assume the justification is obvious, politely bring it to their attention.
Hi Client, I want to let you know I am changing my billing for the for next year. I'm changing my business, so I can take on fewer clients, and give more specialized attention to clients like you. All work booked after January 1st will be billed at the rate of $100/hour. All worked booked before then will remain at the old price. Please let me know if you have any questions or concerns. Regards, Glenn
Your clients won’t always greet your rate increases with welcoming arms and open checkbooks. Here are some common objections, and how to respond to them.
“I should get to keep my old rate.”
reiterate your earlier message: They can keep the old rate for work they book now, but new work will have to be at the new rate.
“Why Should I pay more for the same service?”
Point out your value add from before, and also that you know their business more intimately than literally anyone else on the market. Your client knows you, and you know them better than anyone. That makes you worth more. You have the ultimate unique selling proposition. Now is the time to use it.
“ The new price puts you out of my budget.”
Then tell them you are sorry your services are no longer a good fit, and if you can, point them in the direction of someone who can help them.
Do you have some older clients paying less than your new ones? Time to fix that. Choose a date, and put your plan in motion. Draft the email you are going to send.
Are all of your clients paying you the same, i.e. your top rate? Capital! Think about whether it’s time to put a rate raise on the schedule.
Either you outgrow your clients, or they outgrow you. Or one of you gets pissed and fires the other. Not every client relationship will survive this process, and that’s perfectly ok. You gave people every opportunity and reason in the world:
● You gave them notice of the increase.
● You gave them one last chance to get work at the old price.
● You gave them reasons justifying the rate jump.
● You gave them options if it didn’t work out.
If you follow the steps above, no reason for hard feelings on either side. And once you’re done, consider the outcomes:
● Your old clients are paying your new (or close to your new) rate. You are making more money for the same amount of work.
● Your old clients leave, and you replace them. You are now making more money for the same amount of work.
● Your old clients leave, and you don’t replace them. You are now making the same amount of money for less work.
There is no bad outcome here. So what’s stopping you? Time to fix this inefficiency in your service business.
Sometimes when a client reaches out to me, they open with a question like this:
“My real estate company needs a website. We need show our real estate listings. How much will that cost, and how long will it take?”
There are two modes of billing you have probably used or considered using as a freelancer: Billing by the hour, or billing with flat project rates. There are other options, such as billing by the day, the week, or setting up recurring monthly retainer arrangements.
It’s my opinion that you should most definitely not be billing for your time, and instead, focus on outcomes, not inputs. Here’s why:
When you set up a relationship based on hourly billing, you set up conflicting financial incentives between you and the client. The way to maximize your revenue is to work as many hours as possible. The way for the client to reduce their costs is for you to work as few hours as possible. Every step in planning out work for the project is going to be combative.
I was asked to speak on a panel to aspiring freelancers at the University of Georgia’s School of Journalism. With me on the panel was a young writer who had recently graduated was asked what her unique competitive advantage was. She said that in addition to having a great skill at simplifying complex topics, she was able to deliver her work quickly. By doing so, she was able to do work at a higher quality and a lower price, which clients loved.
At first blush, this might not seem like a problem. Clients love her, and she can get plenty of work. So what’s the problem?
This business model is fundamentally flawed and unsustainable; that’s what.
Of course, clients like higher quality at a lower price. A client’s ideal would be to get the best quality in the world for free. However, when you provide more value, you should be getting paid more, not less. All things being equal, which is more valuable: A piece of software delivered two weeks from the day, or a piece of software delivered tomorrow?
To be successful, you need to put yourself in a position where you and the client can find win-win situations. Hourly billing takes away your ability to do so.
I’m going to borrow a story from my friend Jonathan Stark, a mobile strategy consultant:
Hourly billing discourages you from becoming more efficient. On one of my first value based projects, I found myself shopping around for plug-ins that might help me complete the project faster. I found one that did just what I needed. It was $700 – which was more than I had even spent on a piece of software – but it saved weeks of development time which directly benefited both my client and me. Had I been billing by the hour, it wouldn’t have even occurred to me to look for a plug-in solution.
When you charge by the hour, you have zero incentive to look for more efficient solutions. In fact, it could even harm your bottom line. Let’s say in this example the alternative was to bill $5,000 worth of time instead of buying the $700 plugin. Let’s examine your options:
Every single one of these options is harmful to your business, harmful to your client’s business, or both.
In addition to this, hourly billing will lead you to default to a “yes man” attitude when it comes to the client. If a client requests a feature or a set of revisions, it means more work for you, which means more revenue. You are inclined to take on the work even if it is not going to be helpful to the project. There is plenty of additions to software that only add bloat and complexity, with zero value. Writing more code could end up being a case where you provide negative value to the client.
If you are in a situation where you cost the client twice, both in the outcome and your bill, then the client would be smart to fire you, regardless of the quality of your work or customer service. You’ve created a lose-lose situation.
Here’s a short example of how removing time from the equation allowed me to increase revenue. When I was still billing hourly.
At the time, I was charging clients $100/hour for work. I had purchased an annual license from WooThemes, which gave me a set of WordPress themes I could use on unlimited sites for the year, so I came up with a service offering to put this work:
I offered to set up a web host, install the domain, and import any content they had into a fresh WordPress install. The fee was $799, and I would knock the site out in 1 business day. Additional packages included SSL + Stripe integration for $199.
I sold a few of these offerings and realized that once I had a process in place, I could knock out a site in an average of 4 hours. My effective hourly rate was around $200 – $250 / hour.
Do you think “basic WordPress setup services: $200/hour” would sell?
Ultimately, billing by the hour limits the amount of revenue you can generate. It reduces the number of higher margin opportunities you can take on, as there are only so many hours in the day.
By fixing the price, you are taking on an additional risk; by reading this book, you are significantly reducing that risk. You’re the technician, and probably should be taking on the risk.
At it’s worst, hourly billing gives you a financial incentive to take your time, and even sandbag on your work. Maybe something could get done in 2 hours, but you end up taking 3 or 4.
Of course, you wouldn’t do that, or any of the other bad behavior mentioned above, would you? If you sandbag on clients, build useless features, and choose inefficient, ineffective solutions, why would people continue to work with you? It would be career suicide. You are a professional, and you’ll always act in good faith with your clients, right?
That may be true, but as a freelancer, you are building your own business. Why would you build a business that makes you choose between doing the right thing and making money? Why build a business that fundamentally encourages bad behavior, contentious relationships, and lower quality products?