Hourly Pricing vs. Project Pricing

Published on 
July 26, 2020
Updated on 
July 28, 2020
Hourly pricing vs project pricing article cover photo

Pricing plays a key role in any freelancer’s or agency’s success. To run a successful business, you need to price your work effectively. There are several pricing options that you can use, but the most common options are hourly pricing and project pricing.

Hourly pricing may seem the most straightforward, but project pricing (or fixed pricing) can lead to much better profits. This means that you work less to make more money.

Let’s take a closer look.

Hourly Pricing (or Billing by the Hour)

Hourly pricing, or billing by the hour, is straightforward: you sell your time for money. For every hour that you work on a project, you get paid a fixed amount.

For example, if your rate is $100 per hour and it takes you 100 hours to complete a project, then you walk away with $10,000.

There are many agencies and end-clients who want to work with freelancers who bill by the hour. They want to know your hourly rate and your estimate for how long it will take you to complete the work.

With your estimate and hourly rate in hand, they multiply the two and arrive at a  “do-not-exceed” limit for the project. This limit may or may not be written into the contract, but, at the very least, it will be agreed upon verbally. The message is clear — if you exceed the limit, then the client will be unhappy (unless it’s due to circumstances on their end). 

In other words, your estimate sets a fixed-price “maximum” for the project. Completing the project faster saves the client money. 

Let’s break it down. If you estimate that the project will take you 100 hours (and your rate is $100 per hour), then the “do-not-exceed” limit is $10,000. If you complete the project in 80 hours, then the client pays $8,000.

And therein lies the problem with hourly pricing…

Hourly pricing punishes efficiency

When you’re billing by the hour, you find yourself in an unfortunate dilemma: the more efficient you are, the less money you make on any given project.

Here’s an example from my experience: as a new instructional designer and eLearning developer, it may have taken me ten hours to build a highly complex eLearning interaction. Billing those hours at $50 per hour would net me a total of $500.

Now, after spending thousands of hours on similar projects and with template files to pull from, I could build the same interaction in less than one hour. Even if I charged $250 per hour, I would make half as much building that interaction than I would have made as a brand new freelancer.

When you price hourly, your time is the commodity — not the deliverable. 

Some clients (mistakenly) use hourly rates as signals for how much they’ll need to spend to see their project through from beginning to end. If many professionals are charging in the $50-75/hr range, then they may scoff at hourly rates that are $200+. 

This is what people mean when they say that hourly pricing is a “race to the bottom.” Freelancers sometimes try to outdo others by competing on price...driving their hourly rates lower and lower. This makes higher-end professionals look absurdly expensive in comparison.

However, as we saw in the example above, paying someone a higher hourly rate may result in a lower net spend.

When to use hourly pricing

If you’re new to the field or if you work slowly, then hourly pricing may be a solid option. It’s a straightforward way to get paid for your time. 

You may also use hourly pricing when the scope is unclear. For example, if a client continues requesting changes that are outside the scope of a fixed-price agreement, then you may revert to an hourly rate to work on those change requests as they come in. 

Another thing to note about hourly pricing is that you usually bill for your time after you’ve worked the hours. You usually submit your invoice at the end of the month, and the client will take anywhere between 30 and 90 days to pay the invoice. This means that you often need to wait months before getting paid for the hours that you worked.

Does hourly pricing still sound appealing? I’m happy to tell you that there is a much, much better way.

Project Pricing

Project pricing, also known as fixed pricing, is often a much better pricing option for both freelancers and clients. Freelancers are rewarded for their efficiency, and clients know exactly how much they’ll spend to deliver the project.

Let’s consider an age-old story about a plumber and his hammer.

A man is having plumbing issues in his home, so he calls a plumber. The plumber goes into the basement and spends a few minutes looking at all of the pipes. Soon after, he hits one of the pipes a few times with his hammer.

“Your problem is solved. That will be $1,000,” says the plumber.

The man who owns the house is outraged by the price. “$1,000 to hit a pipe a few times with a hammer? That’s ridiculous! I demand an itemized bill!”

The plumber quickly writes an itemized invoice:

Hitting the pipe with the hammer - $2

Knowing where to hit - $998

This story exists in many different forms, but the message is clear — value doesn’t just come from performing the action. It also comes from the hundreds or thousands of hours of training that helped you perform the action well.

This is where project pricing comes in. With project pricing, you’re no longer selling your time. Instead, you’re selling a deliverable. You present a single, fixed price to bring the deliverable to life. 

This is good for clients because they know exactly how much they’ll pay, and this is good for you because your efficiency is rewarded — not punished.

The biggest challenge with fixed pricing is ensuring that the scope is defined well. If you give a price based on one understanding of the scope, but then it turns out to be way more work than you expected, then you may have been better off with hourly pricing.

To avoid this issue, you need to do up-front work with the client to clearly define the scope. You also need to clearly define the review cycle, and you need to let the client know that if changes are required after a stage of the project has been approved, then it will incur additional costs.

For my eLearning design projects, I present the project in three “stages” that require approval before moving forward:

  1. Text-based storyboard
  2. Interactive prototype
  3. Final product

Each of these stages undergoes review. Stage 1 leaves us with an approved script, Stage 2 leaves us with an approved look-and-feel, and Stage 3 leaves us with an approved final product. If the client requests script changes during Stage 3, for example, then it will cost them more money.

Ensure that the scope and review cycle language is clearly defined in the contract. Having been bait-and-switched early in my career, trust me when I say that getting all of this in writing is extremely important!

How much to charge?

Determining how much to charge is the other big challenge with project pricing. If you price too low, then you may be working for even less than you would have if you were charging hourly, and if you price too high, then you risk losing the project.

I’ll list several approaches to pricing here, but note that pricing is as much of an art as it is a science. You will get better with pricing as you gain more experience bidding and winning projects.

An Anecdote: My First Fixed-Price Project

During one of the early semesters of my graduate program, an alumni from my program reviewed my portfolio. She liked what she saw and invited me to give her a quote for an eLearning development project.

This was the second project I’d be working on as a freelancer. Saying that I was in over my head with pricing was an understatement. Giving her an hourly rate would have been simple enough, but she wanted a fixed price to see the entire project through.

I tried asking about her development budget, but she wouldn’t budge. She wanted me to give a price. Whether she knew it or not, she was forcing me to deal with the pricing discomfort and learn from the experience.

You can probably relate to that early discomfort — you want to work on the project because you know it will be a great opportunity, but if you price too high, then you risk taking yourself out of the running.

So, I consulted all of the online resources I could find. Most of them suggested extrapolating your project price based on the number of hours or days that it would take you. This, in essence, is a glorified version of hourly pricing.

I also spoke to my professors. One of them said something that will always stick with me. I was voicing my concerns about not wanting to price too high and accidentally insult the consultant who was giving me this opportunity.

“You also don’t want to insult her by pricing too low,” he said. And that’s when it clicked for me. If you’re confident in your abilities, then your price needs to back that up. 

When I first learned about and scoped the project, I think that, in my naiveté, I would have been happy doing it for a few thousand dollars.

After struggling with it for a week or so and doing as much research on pricing as I could, I quoted a range of $8,000 - $11,000. The top end of her budget was $8,000, so we wound up seeing the project through for $8,000. 

The point of this anecdote is that project pricing is hard, especially if you’re just getting started. It’s going to feel scary quoting big numbers, but if you quote too low, then you risk sending some worrying messages about the quality of your work (or, at best, regretting taking the project on down the line).

WIth this anecdote out of the way, let’s dive into some approaches that you can use to arrive at your fixed price quote. 

Flipping the Equation

In the typical hourly pricing equation, you and the client set a dollar-amount “maximum” for the project. If you complete the work faster, then you make less money.

When you’re transitioning from hourly pricing to project pricing, a good way to start is by flipping this equation. The goal here is to identify the budget that the client has available for hourly work and then proposing to see the project through for that fixed amount.

For example, if the maximum that the client wants to spend on hourly work to see this project through is $10,000, then you can propose doing it for $10,000. This way, it no longer matters if it takes you 100 hours, 50 hours, or 30 hours. All that matters is that you get it done.

If the client doesn’t have a budget in mind, then you can approach this slightly differently. You can consider how long it would take an “average” person in your field to do the work, multiply it by your hourly, and then propose that as the fixed price.

This method works best if you know you’re efficient and the scope is clearly defined.

Pricing in the Profit

This approach requires slightly more business knowledge, but it’s a straightforward approach to growing your business with project pricing.

It works like this. First, you consider how much it would cost you to hire someone else to complete the work. You can arrive at this number with your industry knowledge or by getting quotes from freelancers who have the required skills.  

After that, you consider how much it would cost you (the project manager) to manage the project and handle client communications.

Adding those two numbers together gives you your cost for the project. If you do it for that price, then your business is breaking even. From there, you add profit. This needs to be a number that you’re comfortable with, but a 30% margin is generally considered good.

Let’s use an eLearning project as an example. Imagine that I will need to pay an instructional designer $10,000 to see the project through. I will need to spend about $5,000 worth of my own time to manage the project and speak to the client. To arrive at the final price for the client, I’d add 30% ($4,500) to $15,000, resulting in a final price tag of $19,500.

This method doesn’t require that you outsource the work. You can do it yourself or hire it out once you win the bid — the important thing is that, due to how you priced the project, you now have the option to hire it out. This is how you grow your business; it gives you more time to work on your business rather than in it.

Supply and Demand

Supply and demand plays a role in all of your pricing negotiations, but this pricing approach is tied to it directly. It’s actually quite simple — as you get more leads and your schedule fills up, you continue raising your prices. 

This way, you let the market decide the price for your deliverables. Let’s use an over-simplified example to demonstrate this point:

You design eLearning courses for $10,000. After you land a couple of clients and start getting leads for more work than you’d be able to take on, you start quoting $15,000. If your schedule continues filling up, then you start quoting $20,000. And so on and so forth.

Of course, each project will be different and the scope will impact price. Using the supply and demand approach, you let the market decide how much you can charge. You use price as a way to narrow down your client list. This gives you time to produce higher-quality work for the clients you do have, as well as more time for professional development and growing your business. 

Value-based Pricing

Finally, we arrive at value-based pricing. When you use this pricing approach, your fixed price depends entirely on the estimated value that you can produce for your client’s business.

For example, imagine that I’m producing an eLearning course to help salespeople sell a product more effectively. If the salespeople know the product’s ins-and-outs and can navigate conversations well with potential customers, then the business expects to sell many more units and profit an additional $400,000 per year.

When you use value-based pricing, you price your project as a small percentage (often around 10 percent) of the value that you expect to produce in this first year — in this case, the fixed price to complete the project would be around $40,000.

Naturally, this approach works best with projects that are results-oriented. This is because value pricing takes the focus away from the deliverable and towards the results. If the solution the client came to you for is not the solution that will best help them achieve their goal, then shifting the conversation to value can put you in a better position to provide the most effective solutions.

For this approach to be viable, you need  to ensure that 1) you’re talking to the right person, and 2) the project’s stakes are high enough that the value it produces warrants your fees. 

The right person would be a stakeholder who is directly accountable for the metrics that you’re hoping to change, and it’s someone who is willing to spend the money to make the change happen.

If you’re speaking to a lower-level project manager who was tasked to produce the project, then you’re probably not going to get very far with the value-based pricing approach.

Due to the nuance and contacts required to use value-based pricing effectively, you will likely need a good deal of experience and credibility to execute it successfully.

Conclusion

As you can see, project pricing often leads to increased profits and more control over your business. As you get more efficient with your craft, you will likely want to pivot away from hourly pricing. Project pricing rewards efficiency. Time is no longer the commodity.

There are quite a few ways to arrive at that magic fixed-price number for your project-priced projects, but the best way to get better with pricing is by gaining more experience with it.

Finally, as you get better with pricing your work and improving your profit margins, you will have more time to spend on professional development and growing your business. This benefits you and your clients in the long run, which is why I think that fixed pricing is the best option for all parties involved.

If you have any questions or would like to discuss the concept further, then head over to my Slack channel and let’s get the conversation started!

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