I know there are a million articles on the conceptual niceties of value based services. What I haven't read as much about is why hourly rates are bad. I'd like to focus on that in the hopes of better understanding why value- and project-based pricing make more sense than hourly rates for design.
Here's what I'm covering — from the lens of a designer.
- Hourly rates are the worst. Here's why.
- Sometimes hourly rates can be helpful.
- How can you effectively charge people?
- What you should charge and how you should do it.
- Practical realities of pricing.
1. Hourly rates are the worst. Here's why.
They just are. Who likes being commoditized? I sure don't!
How many times has a client come to you, asked your rate, and then complained about the rate? Every time? Nearly every time? Your cost somehow becomes a problem, no matter what it is. It's the worst.
“Well my executive assistant’s son is in high school studying graphic design, and he said he'd do it for free, and it'd look great in his portfolio,” says the client.
What you really want to reply with is, “Well, he sounds like he stinks and has no bills to pay. Sounds like you'll get some great work from that person. Hire them. Fuck. Why are we talking?”
Instead, what ends up happening in these scenarios is we spend ten hours wasting time by emailing back and forth with you asking me to lower my rate and me explaining why I charge what I do.
If you don't like what I charge, do one of the following:
- Go find someone else who costs less. That's your problem, not mine.
- Increase your budget.
- Lower your expectations of what you can get for your budget.
- Raise your expectations about what I can deliver for you.
- Be fair and realistic about engaging a professional for a project.
Freelancers don't go around asking what your profit margins are, what your salary is, and the gap between what you and your average employee earns. I'd be willing to bet the annual difference is higher than the cost of the work being discussed.
Clients like you are paying designers like me to do something that makes you look better. The problem is, we have opposite interests when negotiating hourly rates.
Take, for example, efficiency. Clients usually want work done fast, cheap, and well. They can only pick two out of three.
Hourly rates create a de-incentivized workflow for the client-contractor relationship for two reasons. One, contractors are encouraged to lock in a cost on an hourly basis, which means time is the value that is being determined. Two, the client typically wants things done in a short amount of time. So time is automatically reduced to a low-value object.
If I have a lot of experience, I should value my time more because I can (theoretically) do more or add more value in less time. But, for whatever reason, many clients tend to have some theoretical hourly rate cap, which is less important than a hard project budget. A project budget helps set expectations better for value-based pricing, and for everyone generally.
If I told a client I could design their logo in five minutes, and they wanted to pay me for only five minutes, I’d never do that job, because they don’t value the work that’s being done. They value the time it’s being done in — which does not affect the value of the work.
They should be excited for both of us to save time, and pay a reasonable price for getting what they asked for — regardless of how little time it may take.
2. Sometimes hourly rates can be helpful. Here's how.
“Wait, but you just…” — You, probably.
I know what I said. They're still the worst. But, they can be helpful from an expectation setting standpoint.
Providing a ballpark hourly rate can help the client understand the general price of a project.
The reality is, for many potential clients, it may be their first time contracting someone to do the thing they’re asking you to deliver. They don't know the rates. They don't have expectations of cost. And if they do, it's probably a hopeful idea on the lower end of what they have heard.
In the same way I know a Ferrari is expensive (but I don't necessarily know how expensive) if I had to get one, I’d hope it's on the lower end of whatever cost I think it is.
For the client, they also very likely do not know or understand the cost-to-value relationship of the work they're asking you to do. They view it as a cost, not an investment in themself or their business.
The way they see it is that they’re paying you to do something for them. It's viewed as an exchange. In the most basic terms, it is.
But in reality if I'm paying someone to make a brand for me, I'm asking them to do something hard, to make me look credible — so other people think their business is a legit thing, a big deal, and they have their shit together.
A logo. A menu. An app. They all do something when it comes to setting and delivering upon consumer expectations. And that value is hard to quantify, which is precisely why hourly rates are the worst.
But, they are helpful in setting budget expectations (and realities) that both you and your client can agree upon.
Me: “My rate is $375/hr."
Client: “Oh, that's way too high.”
Me: “Well, I work fast. I have plenty of experience. I'll be clear about the process.”
Client: “Well my budget is $125/hr.”
Well... now what?
3. How can you effectively charge people?
The client is giving me new information: they have a budget.
They probably said they didn't have one, but now that you're sharing your rate with them, suddenly they have one and it's firm.
They told me that they can afford $125/hr. How long can they afford that for? A day? A week? A month? A year? What’s the timeline?
I can work three hours at $125/hr and make the same as I would in one at $375. So that feels like a real loss for me. But let's do some quick math.
If they can afford $125/hr for up to 48 hours ($6,000), then I actually know their total budget and time expectations. We can work with that.
Can I reasonably produce the same type and quality of work they're expecting within 1/3 of that time? Do I really work faster, or do I just want to be making more per hour? Both "yes" and "no" are fine answers here.
But my point is, just by talking about the hourly rate, we can set expectations. That’s the point of hourly rates in the first place.
At some point it's up to both parties to decide if it's worth it to them. Is it worth my time to work on this project at all, or do I just need to pay rent? Am I willing to reduce my rate to work with this person? Should I charge a higher rate to work with this person? How painful or joyful will it be? How will I feel doing it?
The client is thinking the same thing.
How much should this cost? How badly do I want this person to work on my project? How valuable do I find this type of work, anyway? And one of the final questions might be, "Should we do this in-house, or hire for this role instead?"
There's an inflection point where contracting just doesn't make financial sense for the client anymore. Maybe that's not true from a value-based pricing standpoint, as designers aren't interchangeable. But from a numbers perspective, it tracks.
For example, your client could be paying a contractor $300,000 to work for six months on something you'd hire a designer for at an annual salary of $140,000 per year. You’d likely get wildly different results.
So what the hell should you do?
The tl;dr is annoyingly common: It depends.
4. What you should charge and how you should do it.
As the client, I'd think...
If this work is just a task, it's basically a commodity.
Don't waste your time figuring out why people charge what they charge. Be candid about what you need, your budget, and your expectations. If someone charges too much for you (remember, "expensive" is relative), see if they're flexible. If they're not, either adjust your expectations or move on. Don't devalue people’s work because it isn't in your budget. Your budget is your problem, not theirs
If this work is valuable to you and your business...
Set your expectations, try to keep it reasonable, and add some buffer.
Do you want it done in less time than what reasonable people would describe as “humanly possible”? Then you’re looking at contracting for the work. If you're going this route, it's going to be more expensive than hiring; that's what contractors are for. They help you in a pinch.
If you want to hire a full-timer, expect that hiring process to take an appropriate amount of time (AKA more than four seconds). Hiring the right person who is going to add value in the way that you want is hard. Don’t rush it.
What should I do as the designer?
My general advice for freelancers is to run your freelance career as if it were an agency (whether you think of yourself that way or not). Doing this sets you up for success in many ways. When you do this, pricing decisions are clearly about business, and not about you personally.
If it's about you, the client can ask (rude) questions like what your rent is, why you need the money, and really insensitive stuff like that. I don't know if that's legal, but it's definitely happened to me multiple times. It's a shitty relationship and a pitfall I learned early on. Clients easily consider you as a person who has bare-minimum expenses, and that is a really low starting point. You don't want that.
There are also often some weird expectations that the client's work would be good for your portfolio, or that you’re desperate for work. Well, you’re adding value to their company. If you do a good job, it’s mutually beneficial by default — or it should be. You have no penance to pay to some random company telling you that it’ll be great for you.
Agencies have overhead and these costs are often mysterious. Even if you are an individual, if you're perceived as an agency, then you (the person) aren’t as much of a focus. You aren't expensive. The agency is and they are taking care of your fee for service. This gives you some separation from work and boundaries for the client to respect. There are so many questions when setting up a contract gig, so clients usually stick to the easiest one: "What's your hourly rate?"
Whether or not you’re actually an agency is less important than the fact that you are providing a service. I’ve run an agency and freelanced. I used the same pricing model in both capacities and it made life easier.
We used block-based pricing at the agency and I’d recommend designers try this model.
Clients tended to find timeblocks easy to understand and it made the benefits of our hourly pricing clear. We could tell them what our hourly rates were, while also saying, "Of course, it depends on what you need."
Using blocks of time as a commodity gave us control of the expectations for both our time and pay. This did two things: It set expectations and gave us levers to control when managing clients.
A client could pay $275 by the hour, and basically have no scope defined. That's our "hourly rate" if the client asks.
But if a client booked a project over the course of a week, the hourly rate dropped to $250/hour. A two-week project meant an hourly rate of $225, and a project running four weeks or more dropped the hourly to $175.
This model gave clients an incentive to work with us for longer periods of time, which created more certainty and stability for us. Even though it's an agency model, I'd apply the same framework to freelance gigs.
It's also totally fair and reasonable to offer value-based pricing for specialty work. Plenty of people pay a premium for experts to do what they're good at. If you're a pro at design systems, charge an insane amount to consult on that. But, you can't just do that willy-nilly.
People have to trust you before going into that arrangement. No one wants to do that with a stranger they've never heard of whose work they've never seen. There's a big difference between hiring a junior designer you don't know to work on design systems for $50 an hour and paying an expert $1k to talk on the phone for an hour about it.
What's an insane amount? It depends on the work. At the agency, we paid some consultants $10,000 for a two and a half day executive coaching onsite session. And I’d say it was valuable. Was the cost high? Sure. But that’s relative. It was high for us at the time, but it wasn’t high for the value provided.
5. Practical realities of pricing.
Pricing is an art in itself. I'd break down pricing into three practical realities that'll lead you to a decent agreement.
- Expectation Setting
This is the dating portion of this game. It's just as important for your client to qualify you as it is for you to qualify them. Asking questions like this can help:
- Is the client right for you? Does their product/service fit with work you’ve done before or want to do going forward? Do they align with your values?
- Do you know the person reaching out?
- Have you worked with them before? How did it go?
- Are you right for the client? Can you provide what they’re looking for?
- Do they like you?
- Do they like your work?
- Do they value your work?
- How does your experience set you up for success (or not) with what they’re asking of you?
- How much experience do they have working with contractors like you?
Setting clear expectations should be the easiest part, but it's not uncommon to be annoyed by it. Expectations and limitations often include:
- The client only has so much time (rushed, short turn-around times, etc.).
- The client only has so much money (and they want more from you than they can get at that rate).
- You only have so much time (you’re managing multiple projects).
- You need money to be alive (capitalism, man…).
- You only have so much availability (isn’t part of the point of freelancing to have a bit more spare time?).
- Deadlines aren't always possible (yours or theirs).
- You want to under-promise and over-deliver (be real here though).
Assuming both parties are happy with the arrangement the following should happen:
- You'll finish the work and think, "That was worth it."
- The client will see the work and think, "This was worth it."
- You'll have established trust with one another.
- You'll be able to work together again in the future.
Assuming all goes well, you should have a repeat client. That means another opportunity to charge what you charged, or adjust your rates and try something new with someone else.
Thanks to Christine Sirois for reading this in a draft state, helping edit it and add some useful bits!