Freelancers: The Best Pricing Models for Creative Services

Jul 8

Freelancer working on his laptop. — Photo by Jonas Leupe

Six Common Freelance Pricing Models—Two Are Better Than the Rest

Here are the six most common pricing models for creative services such as copywriting, graphic design, front-end programming, photography, and filmmaking:

1. Hourly-rate pricing

2. Project-based pricing

3. Billing by retainer

4. Value pricing

5. Performance-based pricing

6. Equity-based payment

All have their place, depending on your level of experience, the project, and the client.

Note, you don't have to price your jobs the same way for all projects or clients. You should choose whatever works best for a particular situation.

Hourly Rate Pricing is Usually the Worst Way Unless You're Just Starting

The Benefits of Hourly Rate Pricing

Many freelancers start this way. You give an hourly rate to the client. You ballpark the number of hours it will take.

The benefits are simple. In theory, you get paid for every hour you’re working. If the client has revisions or the project changes direction, you just add on the hours.

The most significant benefit is that you’ll learn how long it takes you to do different types of projects. For example, you’ll discover that with a proper briefing, you could write a 500-word blog post in half a day.

This is why hourly rates work when you’re starting to freelance.

But as soon as you’re confident in knowing how to estimate and deliver projects, you should make a transition. Here’s why…

The Drawbacks of Hourly Rate Pricing

Giving rates and number of hours leaves you exposed twice over. For example, you give the client a rate of $75/hour. They ask whether you’ll reduce it to $50/hour.

You say the project will take between five and eight hours. The client claims another person did a similar job in three.

Now you’re quibbling over both rates and hours, and the only direction is down.

Also, you’re often penalized for being fast. What if you completed a big job in just three hours? Do you bill 3 X $75 = $225? Looking at that project, you know it’s worth at least $1,500.

You may also be penalized for being “slow”. The client may insist on limiting the number of hours you can bill. They may say they’re willing to pay for 10 hours. Because of the job’s complexity, it takes you 15. You just gave away 5 hours of your time.

Or the client has endless changes and doesn’t want to pay for the extra hours. Because you thought the hours were unlimited, you didn’t talk about how many rounds of revisions you included. Now you’re doing the extra work but not getting paid for it.

Billing hourly is also more casual. Often, it’s open-ended with no defined finish. So, you probably didn’t ask for a deposit or bill by deliverable either. That means you don’t bill until the job is done. And that’s when the negotiating over the number of hours starts…

Information You Need to Quote Hourly Rates

You’ll need a reasonable brief from the client.

You’ll need to establish clear communication. In addition to quoting your rate, you should give a verbal estimate of the number of hours. You don’t want to surprise a client with an invoice for 20 hours when they expected a maximum of 10.

You should get an agreement for a deposit, ideally half or more of your estimated invoice. If you’ve never asked for a deposit, it can feel intimidating. Here’s what freelancers said about getting deposits on their projects.

The Benefits of Hourly Rate Pricing to the Client

Clients feel they have some flexibility. They can shop or negotiate for cheaper rates and/or fewer hours.

They can also easily kill a project at any time if it’s not going right for them.

Tips for Hourly Rate Pricing

Use hourly billing as a learning experience to understand how long it takes you to do typical projects. Then switch to project or retainer billing.
There is no good reason for you to continue with it. All the advantages go to the client.
In my experience, clients who want hourly billing are too focused on price rather than the project’s benefits. They turn into clock-watchers. It’s not fun when you have to justify every hour because you want to get paid for it.

Project-Based Pricing Works Best for Many Freelancers

The Benefits of Project-Based Pricing

A clarification: many people refer to project-based pricing as value-based pricing. They’re similar, but not the same. We’ll cover value-based pricing in a moment.

For project-based pricing, you create a project estimate. In doing so, you’ve turned a service into a thing. It may seem like a slight distinction, but it feels much different.

Pricing by project becomes less personal and removes the element of $/hr, or how many hours you’re working. That’s good. You want the estimate to be about the project, not about you.

This “thing” you're creating (blog post, photograph, website layout) costs $X. It's like buying a shirt in a store. The shirt costs $100. It's not about how much the storekeeper gets paid or how many hours it took to make the shirt. It’s simply the cost of the thing. See the difference?

Estimating by project provides a clear beginning and end. You define the project and the steps you take to create it.

With project billing, you charge what you think the project is worth (that’s why some refer to this as value pricing). Although your time is one input, it’s not the only one. You may have expertise, processes, and systems that allow you to command a premium. For example, you may have proprietary software that enables you to do a project quickly. That’s no reason to charge less. The benefits of that software should go to you.

A critical section in your project definition is putting a limit on your deliverables to prevent scope creep. In your estimate, you should include Terms & Conditions. They might say, “Includes up to two rounds of revisions; further revisions will be estimated if necessary.” Here’s a post on creating detailed estimates that win big projects.

Explicitly review limitations with the client, so they understand how you work, what’s included, and what would be extra.

If you're showing options, say for a logo design, you'll want to specify how many. “Includes three design concepts, up to two rounds of revisions, etc.”

The big benefit of estimating this way is that you and the client will be clear on the deliverables and your process for working through the job.

Your estimate should also include a timeline. You want a schedule that both you and the client can stick to. You don't want a project that goes on forever. It’s not an efficient way to work.

The Drawbacks of Project-Based Pricing

It takes practice to estimate by project. You have to become good at defining each deliverable, the steps you’ll take, and then figuring out how to charge for them.

You’re essentially giving the client a fixed price with explicit limits. If it takes you longer than you thought, well, that’s on you.

You have to take control of the project. You’re not on the clock by the hour. You’ve defined the project, and the client has agreed. Now you have to deliver according to your process. Again, if you’re new to this, it takes practice.

Information You Need to Price by the Project

You need a detailed written brief from the client to turn into an estimate.

If you get a weak briefing, work with the client to tighten it up. You don’t want ambiguities to come back to haunt you.

If you’re working towards a set budget from the client, you need to know that. Otherwise, this becomes your first cut at a budget for the project.

The Benefits of Project-Based Pricing to the Client

Clients have the security of knowing how much the project will cost, assuming everything goes to plan.

They can budget with more accuracy.

They’re not worried about how many hours you’re spending.

Tips for Project-Based Pricing

Turn everything into a project. Figure out a process and how to break the project into deliverables.
We all hate timesheets, but keeping track of time is essential to give you a basis for your estimate. You're not billing hours, but you want to have an idea of how you're allocating your time. You need to be good at estimating your costs for the various phases of the project.
How much should you charge? The typical answer, “that all depends”. It's a subject for another blog post.

Billing by Retainer Gives You Predictable Revenue

The Benefits of Billing by Retainer

In a retainer arrangement, you and the client agree on a monthly fee. The fee could be for a set of pre-defined deliverables every month or a number of hours at a rate of $X per hour.

Retainers work well for recurring work, for example, writing blog posts, managing social media accounts, or maintaining websites.

A retainer saves you from having to write estimates for each project. Once you and the client agree on a project, it simply falls under the retainer. Billing is also simplified—same retainer invoice, every month. A considerable time-saving!

You don’t have to worry about scope creep. If the project grows, you simply do it within the hours of the retainer.

Typical payment arrangements for a retainer are 100% paid on the first of the month or two payments a month. In either case, it’s predictable. No chasing after payment and much better for your cash flow.

With retainers in hand, you can hire either freelancers or full-time, knowing you have predictable income.

The Drawbacks of Billing by Retainer

Retainers aren’t easy to get. Often it takes a long-term working relationship to grow into a retainer arrangement once you’ve established trust.

It may be difficult to grow within a client. They get used to paying $X per month and don’t want to pay more. The retainer may have the unintended effect of limiting their budget.

You are locked into your deliverables per your agreement which may limit your flexibility in managing your time.

You have to keep track of time/deliverables and likely write a summary report for each billing period.

If your retainer is hourly based, you have to decide how to handle unused or extra hours. In some retainer contracts, unused hours roll over to the following month. In others, they expire at the end of the month.

What about needing more hours? You could give them at the hourly rate of the retainer. Or the project could wait until the next month starts.

Information You Need to Bill by Retainer

Like any other billing arrangement, you need clear briefs from your client. You may want to write an estimate to clarify how you’re going to handle the project, and how many hours it will take.

You need a clear payment arrangement.

You should also be clear on requests for more hours or leftover hours.

The Benefits of Billing by Retainer to the Client

Their costs are predictable for agreed-upon deliverables.

The client can count on agency availability for their projects.

Administration on the client side is easier too—the same payments every month.

Tips for Billing by Retainer

You need clarity about what work is covered under the retainer. All of it, or just certain types of projects?
Retainers require accurate timekeeping and reporting. You’ll need some type of timesheet software.
Look for opportunities to expand the scope, and therefore the amount of the retainer.

Value Pricing—Is it the Holy Grail?

The Benefits of Value Pricing

First a definition: value pricing is based on the perceived value that a project brings to the client. It is similar to project-based pricing, except that it takes into consideration the expected delivered value. That generally means it is premium priced.

Value pricing assumes that you and the client agree on the value of the project to the company, and your fee will be relative to that value. The higher the value, the greater your fee.

The key benefit—you charge more because you're delivering extraordinary, agreed-upon value.

A caveat: I don’t know anyone in our business who is able to use value pricing consistently. Examples I’ve seen all seem to be one-off projects. I would be most interested to hear pure value pricing success stories.

The Drawbacks of Value Pricing

Actual value pricing, as opposed to simply project pricing, assumes that the client can determine the value of what’s being proposed.

Based on that, they agree to a fee relative to that value. For example, you and the client may agree that your project will add $1 million to their bottom line, and you can charge 15%, or $150,000.

I have many questions about this.

In most cases, I don’t think it’s possible to pre-determine project value with any degree of accuracy.

Even if it were possible, why would the client share this information with you?

Why would a client agree to pay you a premium? Perhaps it’s because you either have proprietary systems or processes or a track record of extraordinary success that you're worth the premium.

Is there a guarantee that the project will deliver the agreed-upon value?

Will the negotiations for the fee cause the client to search for a better deal from another vendor? This is a real risk when you offer premium pricing.

Information You Need for Value Pricing

In addition to the project’s scope, you have to determine and agree to its value to establish a relative price.

You have to be confident that your proposed solution delivers the value. What if it doesn’t?

The Benefits of Value Pricing to the Client

Like project billing, the client is assured of a fixed price for the project.

One assumes that the vendor is working very hard to deliver the promised value.

If the value pricing is based on proprietary systems or processes, it may be a competitive advantage.

Tips for Value Pricing

Some see value pricing as opportunistic—the client defines the value of the deliverable, and you have the ability to create a highly successful project.
It takes a certain profile within an industry to consistently use value pricing. Think of the global consulting companies that work with C-suite executives. Based on their reputations, they charge premiums.
This is for very sophisticated, experienced vendors.

Performance-Based Pricing—Put Your Money Where Your Mouth Is

The Benefits of Performance-Based Pricing

This way of estimating is most often applicable in direct-to-customer web-based sales. It's similar to commission-based compensation. You earn $X per sale.

You are confident that you can earn more using this compensation method.

Depending on your contract, you have more control and can try various techniques to boost your sales.

The Drawbacks of Performance-Based Pricing

Generally, you bear the cost to build the solution. Your compensation comes in as sales progress. It may take a long time to earn back your investment.

However, this is ideal if you’ve already built a solution that you can use for many similar clients with just a few tweaks.

You need a very detailed and strong contract detailing ownership of the asset (likely a website), payment terms, length of the contract, responsibilities of each party, performance expectations, etc.

In many cases, you are dependent on the client to perform some of the work. For example, if you are driving online sales, the client is likely responsible for fulfillment, customer service, etc. That may affect your ability to sell.

Information You Need to Estimate Based on Performance

In this type of arrangement, you are indeed a partner with your client. You need to run this as if it were your company because, to some degree, it is.

You’ll need to determine fair compensation per sale. It’s easiest if the company or its competitors already pay on a commission basis to sales teams. That will be the starting point for your negotiations.

The Benefits of Performance-Based Pricing to the Client

The vendor, rather than the client, assumes the risk and responsibility for the performance and upkeep of the program.

There are fewer up-front costs.

Payment is based on success which helps cash flow.

Tips for Performance-Based Pricing

This arrangement is more complex than it initially appears. You need expert legal and accounting advice to ensure the best possible outcome.
Depending on the project’s scope, you may also need sophisticated systems to accurately track sales and payments.

Trading Your Work for an Equity-Based Payment

The Benefits of Equity-Based Payment

Equity-based payment means you get shares or some type of stake in the company in return for your work.

Here are a few items you should clarify before entering into this type of arrangement:

Is your compensation 100% equity or cash plus equity?
Are the shares liquid, in other words, you can sell them, or are you waiting for an event such as going public?
How much work are you doing?
Is this a defined project with a beginning and end or ongoing work?

This type of arrangement is prevalent in start-ups or companies being turned around.

Working for equity tends to be a high-risk arrangement, so you should be getting a significant premium versus getting paid. A rough number? At least 3X the amount you would charge as a fee.

Now that you're an owner, you will work hard toward success.

Many people have become wealthy through equity stakes.

Ideally, this is not your only source of income, or you are in a position where it is not crucial whether or not this succeeds.

The Drawbacks of Equity-Based Payment

History shows that most start-up companies fail. (You only read about the winners, not the losers.) It’s a long shot. You’re taking a significant gamble.

The chances for its success are likely out of your hands. Your contribution may be brilliant, but the company could fail due to other factors.

Information You Need Before Accepting Equity-Based Payment

Beyond the scope of your responsibilities, you need deep insight into the rest of the team. Is this the team that will make this project successful?

You want to know everything about the terms of the shares, their liquidity, expiry, and any restrictions.

The Benefits of Equity-Based Payment to the Client

There are two key benefits:

Paying in shares preserves cash when the company needs it most.
Equity ownership creates loyalty to the cause and motivates people to work hard.

Tips for Accepting Equity-Based Payment

It's critical to understand the nature of the shares you're receiving. Does their value depend on some type of event (going public, being acquired), or is this a company that will become operational with value being accrued through business activity?
Have an experienced lawyer and accountant by your side.
Get everything in writing.

Final Thoughts on Pricing Models

You should determine how you want to price your work. Don’t let the client do it. It doesn't have to be the same for each client or project.

Consider how strongly you feel about using any one pricing model. I know some people are flexible, or they use a couple of methods. But I've also spoken to one agency owner who will only accept clients on retainer, paid in full, first of every month. He makes it clear early in any discussion with a prospect. He has 100% of his clients on retainers.

If you start with one model and it doesn’t work for you, change.

Ultimately, the client must agree to your pricing, your terms, and limitations. If you can’t agree, you're not working together.

Some pricing models lend themselves better to long-term client engagements. These are hourly billing, project-based, retainer, and performance-based.

Value and equity-based tend to be opportunistic, for one-off projects. Think about that before you propose how you want to price.

In any case, be clear in your communications about how you estimate and bill and when you expect to get paid.

For the more complex arrangements, especially performance and equity-based, be sure to have appropriate legal and accounting counsel before signing the contract.

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