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.