Six Pricing Models for Your Freelance Business You Should Know About
Posted
Hey folks.
When I started freelancing I didn’t know how to price myself. I thought that there were only two ways to price my services and that is per hour rate and per project rate. I had this impression because I started freelancing via Upwork and these were the only two ways of payment.
Now I’m a bit more experienced and I will tell you about six different ways you can charge as a freelancer.
Hourly
I’m sure most of you are familiar with charging per hour but here is a quick rundown for you that aren’t.
You and your client agree to a certain amount of money on how much an hour of your time is worth. You track your hours via tools like Toggl or Bonsai Time Tracker. When you send your client an invoice, you list out how many hours you’ve worked on the invoice and you attach a report that you exported from your tool of choice.
Advantages of charging per hour are:
- You get paid for every hour you worked on a project
- You don’t need to worry about whether will scope of the project will change
- Per hour rates look cheaper than per project rates
- You get paid for every revision of your work
- It’s super simple for everyone to understand
- You can usually find out an average hourly rate for each industry so you don’t have to think hard about how much you should charge if you’re just starting out
Cons of charging per hour are:
- Just because you are working more efficiently, it doesn’t mean you get paid for that
- Client might think you are scamming him of his money if you overestimate how long will you be working on something
- If you’re a beginner, this method can easily transition into a “race to the bottom”
- It’s not that easy to up your rates with existing clients if you don’t have a compelling reason
Regarding my personal opinion, I will be a heretic of the freelance community and say that I prefer an hourly rate over the per-project rate.
My reason is that I’m not freelancing full-time right now so I can’t give out a good estimate of how many days will something take for me to make.
It’s also because I mostly work with people that already have a project built and they hire me to build more features and fix bugs. I like to call myself a “support software developer”.
Per Project
Charging per project is pretty straightforward.
You talk with your client, you agree on a budget and deliverables and you start working.
It’s important to emphasize that you should always take 30-50% upfront with new clients.
Taking upfront payment serves a couple of purposes:
- It’s a client litmus test. If a client is hesitant to pay up it usually means that there is something wrong and you should treat this as a major red flag
- Serious clients are used to this. Some may even think of you as unprofessional and think you don’t know what you’re doing if you don’t ask for an upfront payment.
- If the project is canceled, you will at least get some money from it.
- Clients will be more committed to working with you since they already gave you money
Cost of the project, payment dues and deliverables should be clearly stated in a contract so both you and the client are aware of what will you be getting and when. I use Bonsai to generate contracts.
Pros of charging per project:
- Less friction while converting a lead to a client since he knows the price upfront and can allocate the budget properly
- You don’t have to worry about time tracking
- You get paid for efficiency since the less time a project takes you to finish, the sooner you can start working on the next
- You can charge for how much value you bring to a client
- There is no cap how much you can charge
Cons of charging per project:
- It’s easy to underestimate the scope of the project and not get the money you wanted
- It’s harder to land clients with per project pricing than per hour pricing
- You must prepare a solid argument of why the project costs X amount of $ instead of Y amount of $
Monthly Retainer
The monthly retainer is about the closest you will get as a freelancer if you were working in a 9-5 job.
In short, the client pays upfront a certain amount of money for a certain amount of hours you will put into a project for a given month.
You can choose whether the hours bought can transfer to the next month or not. This is all up to you and your client and what you state in your agreement.
Monthly retainers are usually in place after a project is finished but will need long-term support. Some examples might include:
- Writer delivering a certain amount of blog posts per month
- Developer responding to hotfixes and unexpected bugs
- Social media manager posting a certain number of posts on Instagram and Facebook
- SEO generating a certain amount of backlinks
Pros of charging a monthly retainer:
- Recurring payment each month with a possibility of not needing to work at all
- You get paid upfront
- Client most probably has allocated budget for you
- Less spent chasing prospects since you know you will get paid either way
Cons of charging monthly retainer:
- It’s hard to estimate a retainer fee
- Once in place, it’s hard to change your fee
- Clients might expect you to be available 24/7
- There’s a limit of many clients you can have on a retainer
Revenue Sharing
Revenue sharing is a type of agreement between you and your client where you will work for a smaller rate than usual in exchange for % of the Revenue from the project.
I’ve always been against Revenue sharing since most of the offers I received are from people that are not serious or don’t want to invest or have the budget.
I changed my mind once I was offered to work on a browser game that was 80% done and well designed but the developers didn’t have the budget. I was too busy with other projects at the time but I’d seriously consider the offer.
Pros of revenue sharing pricing:
- Theoretically there is no limit of how much money you can make
Cons of revenue sharing pricing:
- It rarely works out
- You’re essentially gambling your time
Revenue sharing is a double-edged sword. I just wanted to list it here because I’ve heard from people that made ten times the money they would usually make from working on the project for just money.
I’d personally just the hell away from this.
Package Pricing
If you ever been to Fiverr, you’d notice that every offer listing has different tiers. They differ in price and what you will be getting. That is essentially package pricing.
You put up a predetermined price for a predetermined amount of work. For example, you might charge $700 for a 5-page Wordpress site, $1200 for a 7-page site and $2000 for a 10-page site with a custom theme.
Pros of package pricing:
- You set up expectations upfront
- There’s a high chance you can automate at least one part of your work
- You could probably reuse something from the previous project on a new project
- You can limit the number of revisions so the client will be urged to give you out as much details upfront as possible
Cons of package pricing:
- There’s a high chance you would be very cheap or very expensive for different clients
- Projects are either very time-consuming or not time-consuming at all
- If you limit the number of revisions, clients might be frustrated with your work if they used up all of their revisions
Package pricing is the true double-edged sword of freelancing. Regarding my personal opinion, I’m not sure if this is that good strategy in the long run but I don’t see why you shouldn’t use it.
Performance-based Pricing
Performance-based pricing is the pricing model where you get paid based on much impact your work had on the project.
Performance-based pricing is common in marketing projects such as doing SEO of a website or optimizing landing pages for PPC campaigns.
Pros of performance-based pricing:
- Theoretically you can make way much money than you’d made from upfront payment
- The money you make is directly tied to metrics rather than estimation
- The money you make is not tied to the number of hours you’ve worked
Cons of performance-based pricing:
- It’s very risky
- There’s a high chance you won’t make the money you expected
In essence, performance-based pricing is a great model for experts and people who know what they’re doing. I’d stay away from it until you’ve got a couple of clients under your belt.
Conclusion
These different pricing models will work differently for different freelancers. Some work excellently in one niche and awful in another.
I would love to hear back from you on what’s your preferred pricing model. You can send me an email or send me a DM on Twitter.
