Anyone in business deals with pricing conundrums all the time. They field requests for proposals and negotiate contracts that undervalue the service being hired by ridiculous amounts. They search and find little—if any—consensus on an “industry rate” for their work. Entrepreneurs who have recently jumped from regular, full-time employment to working for themselves find temptation in charging clients based on what they made in those jobs. In short, their rates depend upon guesswork.
The tendency to “guesstimate” fees doesn’t stop with freelancers working for themselves; it affects business owners with employees. Surely, somewhere there’s a chart or table that can make pricing easier?
One method for determining price is to decide what hourly fee you wish to earn and then determining fees accordingly or, as Paul Boag states, knowing the minimum amount you need and then using that as the basis for your rates. Remember those fees must cover costs of materials, resources, outside vendors, taxes, and so forth. Be aware that you cannot charge for every hour you work; therefore, the rates you charge must cover those unpaid hours you spend hunting down new new clients, writing proposals, managing administration, etc.
Another method is to deliver X times what you charge. For instance, a value engineer could say, “I’ll save your company $100,000 for every $1,000 I charge.” Or something to that effect.
Project-based fees determine the value of the project and/or the service provided and then charge accordingly. In such scenarios, if project delivery takes less time than anticipated, then you’re ahead of the game. Noah Kagan notes that “It’s easy to set your price too low and work 2-3x more hours than you priced. This is why I recommend you start with hourly until you’re more familiar with your industry and client project requests.” The key here is having a good estimate for how long a particular project will take and a good tracking methodology for what you previously charged for similar work.
Advanced business owners should take a look at tiered pricing, which essentially establishes different price points that meet the needs of different markets and budgets. Cobloom describes flat rate pricing, usage-based pricing, and tiered pricing. Flat rate pricing offers simplicity. Some businesses lure customers with a lower-than-expected price for core products, then charge extra for the necessary add-on services to get the most from the final product deliverable. These add-on services, often referred to as menu pricing, can be mixed and matched to address the client’s spendable budget.
At the basis of setting fees is the psychological aspect of value. The preliminary premise of value analysts is that value equals function divided by cost (Value = Function/Cost), such that value represents the “optimum balance between function, performance, quality, safety and cost.” Worth, says the value analyst, is not price but what the buyer is willing to pay. This puts the vendor into a delicate balancing act between a customer’s desire to pay as little as possible and the vendor’s wish to charge the maximum possible.
Pia Silva boils down the justification between high-bid and low-bid providers to two aspects: control and responsibility. Those who take responsibility and exert control—discipline—don’t offer excuses. If they miss a deadline or fall short of a goal, they accept the fault and lay out a plan to fix the error. Silva says, “If you want to be a high-end service provider, every client should feel like they are your only and most important client. That means it’s your full responsibility to manage expectations, the project, and the outcome, no matter what. Anything else is unacceptable.”
The Heggen Group helps companies analyze their costs to operate and produce and the costs of typical projects so they can determine the real cost of work and the value it brings to the client, so they can price their products and services accordingly.
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