Freelancers develop pricing guidelines, should freelancers charge by the hour?

If you provide services as a freelance developer, then you have a lot of say in how to price the project.

In this article, we will perform some analysis on the different pricing options available to developers to understand which pricing option is better for you.

Which pricing strategy to use usually depends on the specific scenario, your time, your customers and your level of enjoyment, but here are some general methods.

What I want to do is to show you the advantages and disadvantages of hourly pricing and value-based pricing so that you can make more informed decisions on the pricing strategy you choose.

1. Hourly pricing

Hour-based billing is the most popular and easiest billing method to understand and start.

However, I will not share the advantages of hourly billing, because I believe there is a better way.

Before showing what I think is a better method, I will discuss the disadvantages of using hourly-based pricing.

1.2 Hourly billing is harmful to your customer relationship

Hourly billing can be very harmful to your working relationship with customers.

Well, to put it simply, the longer a project takes, the better it is for you and the worse it is for your customers.

If your estimates are inaccurate, this will cause a crack in trust that will erode your relationship over time.

This can be achieved in several ways. However, because the customer does not know how long it takes to implement a function, this often makes the customer think that you are deliberately slowing down your work.

Another possible situation is that if the project plan is not completely consistent with the actual situation, this often happens during the development process.

If the project starts longer than originally planned, you will be considered to be taking advantage of the customer. Your customers will start to review the timetables you send them to find the differences, and trust will be weakened.

Generally speaking, if you bill by the hour, you can't really work with your customers, which means you can't do your best job. This means that your customers do not get all the potential you provide.

Yes, some freelancers do do it, but this is only a small percentage.

You also need to consider if you are sick-what then? During the 2 weeks you are sick, you will not get paid.

1.3 Hourly billing is not conducive to efficiency and innovation

You will not be rewarded for finding an effective way to complete a project. If there is, you will be punished financially.

If you price projects by the hour, as a more experienced developer, you will complete projects faster, which means you earn less per project.

So you want to make up for it by increasing the hourly charge?

Well, this may only scare away your future (or even current) customers and turn them to other developers who charge lower hourly rates.

1.4 Hourly billing reduces efficiency

Certain network projects may indeed take a day or so to complete. If you charge by the hour, what motivation do you have to find a way to complete the project in the shortest time?

If so, even if you do not deliberately do it, your work speed and efficiency will not be the optimization objects you care about too much.

This is an example to illustrate this:

Imagine that the project you are developing has similarities to previous projects. You want to reuse parts of the components you built for the previous project, but doing so will reduce the time you spend on the current project.

In this way, you directly reduce revenue because you have built components in a reusable way.

Or if you are using Tailwind UI or WebFlow, you can create a website in 1 hour-should you only charge an hourly fee?

1.5 Your income is restricted

Hourly billing sets an artificial limit on your income!

Let me explain.

By offering hourly prices, you limit the amount of money you can actually make each year.

If you suddenly decide to increase the hourly rate because you want to start earning more money, your customers will most likely not understand.

"Why?" They asked: ""For the same job, the value of your service suddenly increased so much? "

Even before you explain your reasons, you are already at a disadvantage in the conversation with them-and this is just your current customer.

Potential clients will only turn to another freelancer who can provide them with the same service at a lower hourly rate.

If you think you can get more income through more work, ask yourself:

Is that sustainable?

If yes, please do so.

But you must know that one day, there will be no more time to complete more work in a day.

There is an upper limit on how much you can work, so there is an upper limit on how much you can earn. At the end of the day, both you and your customers will benefit from not using hourly-based pricing.

Switching from hourly billing to value-based pricing is tricky, and if you are used to hourly billing, it will take some time.

It needs to change the way of thinking, but once you realize how ineffective it is to use money for time, you will find that your profitability is greatly improved.

2. What is value-based pricing?

The main conclusions of the difference between value-based pricing and hourly-based pricing are:

• In hourly-based pricing, you can waste time.
• In value-based pricing, you are selling results.
• In hourly-based pricing, you need to ask them what they want to build.
• In value-based pricing, you have to ask them why they want to build something.

If you change the hourly-based pricing model, this will be a real game changer.

With the focus on the results, you suddenly have more advantages for you and your customers.

When you and your customers understand the "why" (value obtained), a higher price based on value will be reasonable.

Before we start the discussion, let’s take a look at how to apply value-based pricing

1. Find out the potential value of a project to customers within a year.
2. Determine your price based on these (potential) income returns.

The main thing you need to do is figure out the value of the site to the business .

This is an example:

A company sells 3D printers and they want a website.

This is the system I follow:

1. Find out if the company has a website
2. Understand what their competitors are doing and they are not doing
3. See if the business has an active AdWords campaign
4. Check the ranking of the business on Google (SEO)
5. Check if the business has a social media profile
6. Find out the cost of an average 3D printer
7. Find out how many printers the company sells each month

With this information, I can calculate whether I can really increase the sales of this business, and I can know exactly how much the project is charged.

Therefore, if the company sells an average of 10 3D printers per month at an average of US$2,000 (US$20,000 in sales per month), after calculating that I may increase sales by 30% month by month, then it is equivalent to 3 more sales per month (or $6,000).

Then, I mentioned this to potential customers and said that even if we only make two additional sales each month, only through the changes and improvements I will make, we can add $48,000 a year.

Therefore, it is obvious that a one-time spending of US$8,000 on the website can increase sales of nearly US$50,000 within a year.

Now, let's look at the advantages of value-based pricing.

3. Advantages of value-based pricing

3.1 Freedom to create great products

You can focus on creating something great without worrying about exceeding your client’s budget or calculating every hour. This gives you the freedom to work, and it also means that how you proceed with this process is up to you.

3.2 Incentive learning

This method not only encourages you to find the best solution, but also encourages you to keep the latest technology and tools to make your workflow easier and more efficient.

3.3 Customers have no hidden costs

Since the price has been agreed in advance, you have assumed all risks. This means that customers will not have financial surprises, which helps to increase trust. In other words, customers experience less risk.

3.4 More customers you like

Value-based pricing means you may get more benefits. You can now start working with fewer customers and provide each customer with the same or more and better services than using hourly-based pricing.

Once the project is defined based on business results (for example, increased traffic, more sales) rather than deliverables (such as changing the font size of navigation bar items, password reset forms require ReCAPTCHA), it is fairly easy to control the scope. This is because business requirements do not change frequently, and random requests from clients can be judged based on the expected results.

The key element of value-based pricing is: It’s up to you to make companies see your service as a necessary investment rather than a cost.

You need to show that you are the right person by explaining how both parties benefit from the pricing method you have adopted.

Focus them on the importance of the results and what value the project will bring to them.

Ultimately, this method requires a lot of trial and error, but believe in this process, your future self will thank you.

Determine your value-based quotation based on the customer's perceived value of the project results rather than your estimated labor. This allows you to set higher costs, provide more effective results, increase customer satisfaction, and more.

You have to charge for your mind, not for your hands. Wisdom, not labor. Results, not deliverables.

4. So which pricing method should you use?

It is obvious to me that value-based pricing is the best way to price a project.

Of course, the method you choose is up to you, and for many people, hourly pricing is very suitable.

There are other pricing methods, such as fixed pricing, that is, you calculate your hypothetical cost, plus profit, and then provide this pricing to customers, but in contrast, I generally prefer value-based pricing.

If you really choose to switch to a value-based approach, remember that this new approach will take some time to adapt, but it will definitely be worthwhile in the long run.