Hopefully Solved: Freelancing Hourly Vs. Fixed Pricing Debate

Posted: June 1st, 2010

Photo by Dave Morris (Flickr)

Photo by Dave Morris (Flickr)

Last week, I read an interesting post on why you shouldn’t charge an hourly rate as a freelancer. I thought it was spot on and gave great insight on how freelancers can make a comfortable income.

What was really of interest to me were the comments though. While some appeared to understand the concept that an hourly rate can hold you back, it still didn’t grasp many. It even became hotly debated in parts with the author, Amber, having to justify her (rather enviable) pricing to clients.

So, in case you’re not convinced fixed pricing is for you or you don’t understand its real advantage, here is a little explanation.

The Hourly Rate Pricing Concept

If you charge by the hour, then consider that there are 2,080 billable hours available in the year to work (40 hours/week X 52 weeks). What you are doing, though, is essentially trying to sell each one of those 2,080 blocks of time to your clients. There are several disadvantages with this:

  • There is no way you will spend those 2,080 hours on projects. You are running a business, so there are those non-billable tasks such as searching for clients, promotions, invoicing and emailing that have to be done. Plus there will always be some downtime.
  • There is a cap to what is accepted as an hourly rate. Therefore, as your experience grows you’re rate will not necessarily increase.
  • You become vulnerable to fluctuations in your work. Since hourly rate pricing depends on you filling in your billable time slots available, periods of little or no work take a hit on your income.
  • The only way to grow as a business is to increase your hourly rate. Increasing your rate can turn away potential or current clients, though.

The Fixed Project Pricing Concept

Now, for example, let’s say you charge $600 to install a custom theme design for a WordPress blog. It’s safe to assume that the next time you perform the same project, it will take you less time. The next time, even less.

Putting this project to (sample) numbers, it may take you 15 hours for the initial project, 10 the next and, ultimately, 4 hours as you become a pro at this. Your hourly rates are then broken down as follows:

Initial: $600/15 hours = $40/hour
Second: $600/10 hours = $60/hour
As a Pro: $600/4 hours = $150/hour

This is all while charging the same price for the same exact service. The only difference is the time involved but, as your expertise increases, so does your “hourly rate” as it takes you less time per project.

A huge plus is that the resulting hourly rate never even has to be revealed to a client.

Not All Projects Can be Fixed Price

The whole idea behind fixed pricing is that you understand the entire project scope. In other words, you know exactly what to do and how long it will take. With experience and repetition of similar projects, this is done without a problem.

In some projects, however, the scope is so large or the scope can’t even be determined so giving a fixed price becomes risky. Extra time(and a lot of it) is often the result.

This is where pricing can get tricky but, again, this is where experience comes into play. A large project can always be broken down into milestones and charged per each one. The more experience you gain, the more it will guide you in determining the scope of more predictable milestones.

Sometimes there is no choice but to charge an hourly rate. If a new client has a broken website, there is no way to determine a price without taking time to diagnose then fix the issue.

Freelance In 40 Days [Day 14]: Project Pricing, Not Quite An Exact Science

Posted: September 21st, 2009

Photo by LU5H.bunny (Flickr)

Photo by LU5H.bunny (Flickr)

This is Day 14 of the Freelance in 40 Days series where you’ll learn to freelance just by taking it one day and one task at a time. Today we’ll go in depth on pricing projects and optimizing your earnings.

So What Should I Be Charging My Clients?

This is probably the biggest question a new freelancer has when starting out. The simple answer to that is whatever your clients are willing pay. You see, it is not just settling on a fixed hourly rate and taking it from there since you could actually be leaving money on the table or find no takers for your services.

I’ll try to explain the science of pricing here as best I can. We’ll first start from square one.

The Billable Hours

Your billable hours for the year can be simply broken down with the following:

Working a 40 hour week, 52 X 40 = 2080 total hours.

Minus two weeks of vacation, 2080 – 80 = 2000 remaining hours.

Minus 10% of time spent on administrative tasks (emailing, billing, estimates, etc), 2000 – 200 = 1800 remaining hours.

Your billable hours may vary but we’ll use the 1800 hour total as a rough estimate.

Your True Hourly Rate

Coming up with an estimate for a client is simple, right? Just figure out the hours it will take to complete then multiply by your hourly rate. Well, not quite. It is quite a large misconception that project pricing has to be done this way.

First, your hourly rate calculation should not be used for pricing a project, but should instead be a guide to determine if you are in fact earning what you want to. Let me explain further with an example:

We calculated the total billable hours in a year to be 1,800 which averages out to 34.6 hours/week. We’ll round up to 35 hours/week for simplicity. Now let’s say that in one particular week, you worked 20 of those hours on a project and earned $500 (charging your rate of $25/hour) and the other 15 hours were spent on marketing your business and client searching. With a little math you can determine your true hourly rate for this week of work:

$500 earned / 35 billable hours worked for the week = $14.29/hour average for the week.

Now can you see that the hourly rate you charged doesn’t reflect your true rate per hour? In this case the $14.29/hour is a huge difference from the $25/hour you thought you were earning. That’s why the $25/hour you determined as your rate should only be a guide to how much you should be earning rather than an actual rate you set for any given project.

Keep in mind you probably won’t spend such a high percentage of time searching for clients (though a new freelancer will). It’s essential to know the time, however, that is spent on billable tasks and on non-billable work for your freelance business. The goal is to minimize non-billable time and maximize the income per project.

The Break-Even Rate

The break-even rate is simply the minimum you have to earn per billable hour in order for your freelance business to stay afloat. This takes into account all your business and personal expenses including taxes and those beers on Friday. In the above example, if your break-even rate happened to be $15/hour, then you either need to step up your business or cut costs somewhere (lowering your break-even rate) in order to keep on trucking as a freelancer.

The Myth

It is a common misunderstanding that you need to figure out an hourly rate and multiply it by those 1800 hours to come up with a yearly income you desire. For instance, if you decide to charge $25/hour:

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