A common struggle for freelancers is how to price and charge for services (or products). Two of the most common pricing policies are per hour and per project pricing. Neither pricing policy is inherently better than another. Rather, it’s just a matter of which is the best for you. Deciding between the two approaches seems daunting until you break down the methods, pros, and cons of each pricing approach.
Per hour pricing is a defensive strategy where the focus is internal (ignoring the client) and on time. Risk is feared and the pricing policy is an attempt to insulate the freelancer from risk. Profitability is limited to the number of hours in a day and an hourly rate which can be realistically sold. This model is highly impacted and limited by the customer’s perceived value of one hour of work.
While using per hour pricing, it is, within reason, in the best interest of the freelancer to capture as many hours as possible. Therefore, efficiency, automation, innovation, and technology are largely ignored. Advancements in these areas only serve to increase the hourly rate a freelancer can capture. Because an hourly rate can only go so high before the customer rejects it, advancements in efficiency and impact have a limited and diminishing return. As such, the Project Management Triangle is interpreted as saying, “a high-quality project, costs a lot because it takes a lot of time and effort”. In short, it is a lower-tech, “allow work to take longer” approach.
The sales process for a per hour model is somewhat pigeonholed by its policies. The pricing itself is rigid, only allowing an increase or decrease in the hourly rate to leverage sales technique. Cost-plus and market-based pricing are generally the only models a business can apply when charging by the hour. These are both inherently limiting pricing models and ignore the value delivered to the customer. The one exception here is “rush” pricing, in which the customer might approve a higher hourly rate for a specific project.
The sales process is generally longer and more complicated. The value of one hour of work must be negotiated. An estimated number of hours must be produced and legitimized to give an idea of a total budget. Regardless of if the total budget will be respected, the customer needs an idea of what the projected total will be to approve the contract. The Cone of Uncertainty is largely un-leveraged because the actual total cost is generally irrelevant to the freelancer.
Details need to be argued and documented as to who is responsible for properly scoping the project, keeping the project on track, and how hours are charged if the project runs over the ideal budget. In a pure per hour agreement, the customer would simply pay for every hour required to complete a job, but that is unsettling to the customer for obvious reasons. At almost every turn of the sales process, the freelancer must elevate concern for the consumer, because the risk is pushed onto them via the defensive pricing model.
All told, the sales process takes longer and is harder. Similarly, opting for a per hour pricing policy impacts the way a business leverages project management.
A reliable time tracking and reporting system must be in place to, as best as is possible, alleviate customer concerns about fraudulent invoices (invoices with inflated hours). Depending on the contract, properly determining scope and remaining within budget may or may not fall on the plate of the freelancer. The concept of pricing per hour generally ignores the ability to prevent scope creep and pushes that responsibility back to the consumer. In this way, Hofstader’s Law (inherent underestimation of scope) and Parkinson’s Law (work expands so as to fill the time available for its completion) are ignored or mitigated.
Per project pricing uses a collaborative approach that focuses on the customer, primarily budgets and deliverables. By accepting to provide certain deliverables for a fixed price, risk has shifted from the client to the freelancer. This risk, properly leveraged, rewards the freelancer with higher profits. Furthermore, profit is theoretically unlimited because automation and impact are rewarded and pricing is not tied to a fixed item, such as the hours in a day. The Project Management Triangle is interpreted as saying, “I can deliver a high-quality product, in a short period of time and at a reasonable cost, because I leverage technology, automation, and innovation”.
The pricing model itself is simple, which makes the sales process less complicated and more flexible. Cost-plus, market-based or value-based pricing models may be used, which gives the most freedom and the fewest limitations. A producer and consumer work together to document deliverables and a budget. The collaborative yet simple process reduces fear, confrontation, and negotiation. There are fewer question marks and caveats to discuss and record. The simple “X items for Y dollars” nature of this pricing makes the sales process easier and tidier.
The other side of this coin is that the sales process, although simple, requires more skill and technique. The Cone of Uncertainty must be understood and embraced. Properly scoping a project and knowing that you, as the freelancer, will be profitable at a certain price requires a higher level of skill. Although value-based pricing model is available, and is the most profitable model, value-based pricing requires the most skill to properly sell. Under a model of value-based pricing, the freelancer can capture a higher amount based on what the customer values most. Highest quality, fastest turnaround, ease of business, or reliability are examples of ways to leverage what the customer values most in order to capture the best price possible.
Similarly, per project pricing often requires much more project management skill. Hofstader’s Law and Parkinson’s Law must be fully understood and mitigated through technique. Scope creep is the ultimate enemy of per project pricing, and must be addressed in one way or another. Innovation, automation and efficiency must be continuously invested in to combat scope creep. Ultimately, scope creep is only an issue if the freelancer has failed to properly understand and document the scope. Furthermore, scope creep can be extinguished via value-based pricing.
There is a lot to consider when debating per hour or per project pricing. The differences in overall strategy, sales and project management are stark and should bring things into focus, making the decision much easier. You must weigh your skills and abilities against the limitations, risks, and rewards of each model.