This is an excerpt from You're On Your Own, by Mark Nichols. You're On Your Own is 20-years of agency building experience distilled into a 90-minute read.
Links to purchase the full eBook can be found at the bottom of this excerpt. As a thanks for reading this sample, take 20% off with the code 20OFF :)
Before we move on, let’s take a moment to celebrate your progress so far. At this point in your journey, you’ve accomplished a lot: you carved out your niche, found some prospective clients, and hopefully gave that audience a good introduction to who you are and what you’re all about. Maybe you even hopped off a successful sales call, during which you were able to cogently describe what you do and how you do it. And maybe they replied back with something, like, “Sounds great! By the way, can you send over your pricing list when you get a chance?”
This is the point at which many people in your position start to panic. Putting a price tag on your services can spike your heart rate for a number of reasons. What if your quote is too high and the client walks away? What if your quote is too low and they take advantage of you, and you end up losing money? Should you charge per hour? Per project? A set rate based on monthly output?
First, take a deep breath. Pricing your services can feel daunting, sure, but applying some thinking and structure to it up front will save you a lot of hemming and hawing each time the subject comes up.
What you charge depends on what you provide
There is no one-size-fits-all approach to pricing your services. How you do it depends entirely upon the service you’re delivering, and to whom you’re delivering it.
For example, let’s say you’re selling straightforward consulting services. In this case, you have the luxury of being able to provide a very uncomplicated pricing structure. You mostly just have to decide what your hourly rate is and get to work.
However, if you find yourself bidding on projects as opposed to straightforward services, you’ll need to put a lot more thought into how you price your work. This requires some math to help you arrive at your project costs. Overall, deciding on a business model will help you immensely in figuring out your pricing.
Finding your business model
Before you put any hard numbers down, spend some time thinking about how you want to package your services.
You can start this during the sales process. Pay close attention to what seems like the best outcome for your clients. It will be different for each industry — possibly even for each client. For what it’s worth, I think it pays to be flexible and open to working in different ways.
Here are just a few of the potential engagement models you may want to consider offering:
- Retainer: In this model, you offer a simple package of your time, set at an hourly rate. This is often best for clients who need immediate senior guidance. It’s the simplest agreement (the client is literally just buying your time), but it’s also often the most transactional. Retainer clients often have a high volume of short-term requests and may not be as interested in relationship building.
- Project-based pricing: This model works well for clients who have a specific project they need done — think building a website, designing an app, overhauling the user experience for a product, or designing an ebook. It’s most commonly seen in creative services.
- Subscription: This is an emergent model that I’ve seen more of lately, wherein clients pay a single monthly fee in exchange for “unlimited” time with a contractor. The promise of this model is unbeatable and can set the stage for meaningful relationship building. However, the risk is high for an entrepreneur like yourself. To put it another way, this model potentially gives several clients access to your “unlimited” time. This can get overwhelming pretty quickly, especially when you don’t yet have the experience to accurately forecast your capacity. This model is also somewhat similar to a retainer in that you’re essentially on-call to the client, so proceed with caution.
Regardless of which model you elect to use, a key part of pricing your services is figuring out your hourly rate.
Finding your hourly rate
It’s a truth universally acknowledged: when trying to land on an initial hourly rate, almost everyone starts too low. There are three reasons for this:
- You never thought about your salaried work in the context of an hourly rate, so any number higher than what you made when you had your last part-time job seems like a lot of money.
- You hear that people charge more, but you aren’t yet convinced that you’re worth it (you are).
- You believe that any triple-digit hourly rate will be scoffed at in amazement by people working salaried jobs.
My advice? Let go of any/all of the above ideas that you identify with. There are a couple of smart ways to find your hourly rate, and once you land on one, you’re not allowed to go lower. Deal?
- Option 1: Find people who do what you do, and ask them what they charge. This is a simple one. There are plenty of people out there who are more than willing to share their tips and tricks with you (and maybe a few who aren’t. Don’t waste your time talking to them). This exercise can be as simple as doing a quick search on LinkedIn and reaching out to five people whose profiles match what you aim to do. Once you get a few responses, you’ll have a much better sense of what the market rate for your services looks like.
- Option 2: Figure out your “HQ costs”. How much money does it actually cost to run your business (hopefully not much)? And most importantly (especially in the early days), how much income do you personally need to make? Find those numbers and work backwards from there. It could be as simple as saying, “I want to make $150,000 in revenue this year and work 20 hours a week.” That statement alone gives you a pretty good idea of what your hourly rate needs to be.
You might try both of the exercises above and land on a number somewhere in the middle. You might also decide to adjust that number drastically after a few months. It will likely take some trial and error to get to a number that feels right, but you have to start somewhere.
Hint: If you’re getting a lot of yeses early on, that may be a paradoxical symbol that you aren’t charging enough. You don’t want to find yourself slammed with work and feeling poorly compensated, so nudge the number up until you start getting some sticker shock in return. Then you’ll know you’re close to your upper limit.
Deciding on project costs
If your work is more suited to charging based on project costs, two things can help you land on the right quote: the client’s budget and your breakeven costs.
And before we go further, a quick note on that: you should never be worried about asking a client straight up about their budget for project-based work. If they don’t tell you—which, it should be said, many do not—then feel free to start high and let them negotiate you down.
OK, now that that’s out of the way, let’s dive further into project costs.
Fixed costs vs. time and materials
If you ask me (and I guess you kind of are, since you’re reading this ebook I wrote), services business should use fixed cost pricing over charging for time and materials, no matter what.
With fixed cost pricing, the price presented to the client is a single, flat number — regardless of the math or planning that went into getting there.
What you’ll learn pretty quickly is that most clients, whether they know it or not, love nothing more than to run your costs down — both at the estimation stage, and over the duration of a project. This is where fixed cost is king. It allows you to maximize your revenue (and profit) on a project, and reduce the number of moving pieces involved in the estimation process. You give the client a number based on the information you know, and they either agree to it or not. You can negotiate on the big number, but not the pieces within it.
Many clients seem to value clarity during estimation: they want to know your hourly rate and the cost of each individual component or phase of the project. Unfortunately, this is just a trap to start picking away at your costs, and usually ends with the client looking at your costs estimate as an a la carte buffet.
The bottom line? Put as much complicated math into your proposal as you’d like, factoring in your hourly rate, the client’s budget, and your own costs. Then roll all of that into one number and present only that number to the client. Future you will thank you for it.
Remember: you can always change your pricing
You are about to enter a near-constant cycle of learning. You’ll have projects that unexpectedly go way over budget, and clients who continually add things to your scope and expect to pay the same amount. This will frustrate you. It will also galvanize you. Over time, you’ll learn both how to scope things properly and how to build buffers into your pricing to protect yourself from unexpected surges of scope.
Pricing is complicated, even for big, established agencies. It is yet another frontier where being agile and adaptive should be at the front and centre of your practice.
No matter which pricing method or model you choose, it will shift and change over time as you gain experience. Just like every other aspect of your business, you’re still at square one—the perfect place to happily learn some mistakes about pricing your work.
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