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Maximise your freelance income by learning the art of effective pricing

By Niclas Thelander

Maximise your freelance income by learning the art of effective pricing

As a freelancer, your income isn’t just about the hours you put in; it’s about the value you create. In an ideal world, your pricing should reflect this. Whether you’re a seasoned independent pro refining your strategy or new to the world of non-permanent careers, understanding how to price your services is crucial.

Below are some tips that we think will help you come up with the right decisions for you to decide on how to price your work.

Pricing your services: A balanced approach

Striking the right balance between fair compensation and client satisfaction/ acceptance is important. This quest leads to three main pricing approaches: Time-based, Fixed-based, and Value-based.

The time-based method suits projects with evolving scopes and flexible needs, adapting compensation as work progresses. Conversely, the fixed price or value-based approach is ideal for well-defined projects, providing clarity on costs upfront. Within these approaches lie various pricing models, demanding an understanding of client needs, market norms, and self-value.

Below, we have discussed three broad methods you can use to price your project as a freelance professional, available pricing options, and the pros and cons of each method: Time-based, Fixed-rate, and Performance-based.

Option A. Time-based pricing

  1. Hourly rate: Working at an hourly rate implies you charge the customer as per the number of hours you work for them. Hourly rates are a regularly utilised pricing option among specialists around the world. Hourly estimating is a decent strategy for loosely defined projects where clients aren’t sure about what they need.
    • The benefits of using an hourly rate:
      • Simplicity in pricing: Hourly rates offer a straightforward approach to pricing, avoiding the complexities of valuing an entire project
      • Adaptability to changing scopes: Particularly suitable for projects with fluctuating scopes, hourly rates accommodate alterations in project requirements
      • Flexible compensation: Hourly rates provide the advantage of adjusting charges if the project takes more time than initially anticipated, ensuring fair compensation for additional effort
    • The drawbacks of using an hourly rate:
      • Incentive misalignment: The system may inadvertently encourage prolonging work to maximise earnings, potentially undermining the motivation for efficient and timely completion
      • Experience limitation: With increasing expertise, there’s a risk of reaching a pricing ceiling, deterring potential clients due to rates that seem excessively high
      • Capped earning potential: The finite number of billable hours restricts long-term earning potential. Eventually, there’s a plateau where further income growth becomes challenging using an hourly pricing model
  2. Daily rate: When you set a daily rate, you are charging clients for each full day you work. This could be a traditional 9-5 or 8 hours of work based on the company policy. Daily rates are typically used while outsourcing for large multinational organisations regularly.
    • The benefits of using a daily rate:
      • Simplicity in calculation: The daily rate offers an uncomplicated method for freelancers to compute and clients to foresee costs
      • Potential for higher compensation: The lack of detailed hourly breakdowns often enables the possibility of charging a premium rate for services
      • Enhanced cost estimation accuracy: Measuring projects on a daily basis rather than hourly leads to more precise and easily understandable cost estimates
    • The drawbacks of using a daily rate:
      • Income cap: With a maximum of 365 billable days in a year, there exists an inherent limitation on earning potential
      • Incentive misalignment: The structure can sometimes encourage extending project timelines unnecessarily. Yet, it’s ethically inappropriate to bill a full day’s rate for only a portion of work done
      • Subject to variability: Projects based on a daily rate remain susceptible to time approximations. If the completion takes more days than expected, client satisfaction might be compromised
  3. Monthly retainers: A monthly retainer agreement specifies a fixed amount that the client will pay to retain your availability, whether they need your services or not. A retainer fee is usually paid upfront.
    • The benefits of using a monthly retainer:
      • Simplicity and predictability: A monthly retainer offers a straightforward and predictable arrangement that benefits both you and your client. It’s easy renewability makes it an ideal mechanism for cultivating steady, long-term revenue streams within your freelance enterprise
        • Elevated perceived value: Shifting to a retainer-based model can empower you to command higher rates. For clients, an investment of Rs. 80000/month might carry more perceived value compared to an hourly rate of Rs. 400
        • Elimination of estimates: With a retainer, the need for constant estimations diminishes. Clients have the flexibility to commit to several months in advance, streamlining the planning process
    • The drawbacks of using a monthly retainer:
      • Uncertain workloads: Some clients might hesitate to pay for sustained availability if they cannot accurately foresee their future workload. Many prefer to remunerate you solely for the active hours worked
      • Opportunity cost of reserved availability: By earmarking your time for a retainer client, you might forego other lucrative paid opportunities, potentially limiting your overall earnings
      • Limited earning potential: It’s important to acknowledge that due to the constraint of 12 billable months per year, there exists a ceiling on your potential earnings within a retainer arrangement

Option B. Fixed-rate pricing

Fixed-rate pricing sets a specific price for a defined scope of work or project, regardless of the time it takes to complete. Ideally it should be based on the value of the project delivered to the client.

However, the underlying driver of the cost of the project is still typically an assessment of how long it will take, and the cost per time unit. The difference to a pure time-based pricing is that the client don’t take any price risk in case it takes longer than expected to deliver the project, whereas the independent has an upside if s/he can deliver the scope quicker than expected.

Fixed-rate pricing is best for experienced freelancers, who often charge relatively high hourly rates, who are good at determining the efforts involved in the project, as well as how much it’s worth to the client.  

  • The benefits of using fixed-rate pricing:
    • Streamlined focus: By centering on the value delivered rather than tracking time, fixed-rate pricing simplifies the process, allowing you to concentrate fully on providing effective solutions
    • Unlimited earning potential: The correlation between the value your solutions bring to businesses and your earnings is direct. As your solutions become more indispensable, your income naturally escalates
    • Transparent budgeting: Clients gain clarity about project costs upfront, fostering a shared sense of assurance and confidence between you and the client
  • The drawbacks of using fixed-rate pricing:
    • Complex pricing determination: Setting the right price requires estimating project duration accurately, adding a layer of complexity to the pricing process
    • Scope creep management: In cases where projects extend beyond initial expectations or clients introduce additional requests, there’s a need to renegotiate rates or accept the agreed-upon price
    • Understanding the value of the project to the client: If you are trying to de-link your fee from the hours spent, you need a deep understanding of what a successful project is actually worth to the client

Option C. Performance-based pricing

In performance-based pricing the fee is directly linked to specific outcomes or benchmarks achieved by the consulting work. This could include metrics like increased revenue, cost savings, or other key performance indicators agreed upon at the outset.

In theory, it might be the fairest way to price certain projects.

If the independent delivers more than expected, the client will gain more, and a proportion of that upside is shared with the consultant. If the outcome of the project is not as good as you planned, they will pay less, and you will be penalised for having over-promised.

Suppose you are a digital marketing consultant, helping a client increase online sales. Instead of charging per hour, you assess the potential revenue increase your strategies could bring. If your campaign could potentially increase their sales by $1,000,000, you could charge a percentage of that value, justifying it by the substantial return on investment for the client.

Alternatively, you can agree a hybrid model with a fixed fee, plus a percentage of anything above say a $500,000 sales increase.

As you understand, this method requires a deep knowledge of not just your own area of expertise, but also your client’s business, as well as external factors potentially influencing the success of your project, to be able to assess the likely scenarios.  

  • The benefits of performance-based pricing include:
    • Alignment with client goals: Your pricing is directly tied to the results you provide, creating a partnership-like relationship with the client.
    • Higher income potential: Since you’re pricing based on value, not time, your earning potential can significantly increase, especially for projects where you provide substantial value.
    • Client satisfaction: Clients are often more satisfied as they pay for results, not hours, leading to a better understanding of what they’re investing in.
  • However, there are challenges too:
    • Difficulty in quantifying value: It can be challenging to assign a monetary value to certain outcomes, especially intangible ones.
    • Attribution of success: It is often hard to attribute a project’s success directly to a single source. There could be a long list of factors impacting the outcomes positively or negatively, and it is complex to document and agree a consulting contract for this reason
    • How competitors price their projects: Even if a value-based approach is a logical method, if all or most competitors offer a fixed or time-based price, in reality it is often hard to convince clients to agree, especially if they have limited previous experience from value-based pricing
    • Variable income: Since your income depends on the perceived value you provide, it can fluctuate more than in time-based models.

Decide your pricing model with your eyes wide open

Whichever pricing option you want to offer, do so with open eyes.

Choosing the right pricing strategy for a client project requires understanding their specific needs and evaluating the pros and cons of each option. While each pricing method is excellent on its own, choosing one is subjective to the kind of project you would be working on, and each has its pros and cons.

If you go down the route of time-based pricing, don’t forget to negotiate your rates, adequate to compensate you fairly for the job at hand while helping you build repeated business with the client.

You can also go through our insights on How to negotiate prices as a freelancer” to make positive changes to your negotiation style and ensure you get your merited pay.

About the author

Niclas Thelander is the Founder & Chief Marketing Officer at Outsized. He started his career in banking with leading Nordic bank SEB, then worked as a strategy consulting manager at KPMG. He later held in-house strategy and corporate development leadership roles in banking and insurance in Germany and the UK. Before founding Outsized, he was Director of Value Creation at emerging markets private equity fund LeapFrog Investments, driving growth, impact, and efficiency projects in portfolio companies across Asia and Africa.