In a world that moves so quickly, it’s easy
to understand the challenge of pricing your services and negotiating with clients in a
way that gets each party exactly what they want. Pricing is a word so important, we contracted
Industrial Light & Magic here at San Francisco’s Presidio to digitally motion track this entire
sequence. Except we didn’t actually do that. We’re at ILM because it’s a pretty good
example of a services-based company. It’s particularly challenging to price visual
effects, especially since there are so many subjective qualities. When George Lucas founded ILM back in 1975
it was born out of a need. Before it, there was no industry for special
visual effects, and it all started with their first project, Star Wars. Beyond that, back when ILM started there was
no precedent for price. But as they generated more and more work,
they got a better understanding of the cost of doing business, and more importantly, the
value their work brought to motion pictures they contributed to. Starting out as a freelancer or even growing
an existing freelancing business, it can often feel a lot like that. A lot of question marks at the beginning,
but unlike ILM back in the 1970’s, today there is a good amount of information about
pricing that helps freelancers of all types better price their services. So, we’re going to cover a lot of that. We’ll start with valuing our work. We’ll need this for what we’re sending
Rebecca. Then we’ll dive into three different types
of pricing structures: hourly rates (getting paid by the hour), flat rates (this is payment
per project), and the recurring or subscription model (recurring fee over time). Then we'll cover free work, and finally testing
your prices on multiple clients. After we’re done with all of this, we’ll
choose the route that’s best for Hayes Valley Interior Design so we can get that email over
to Rebecca. We’ll start with valuing the work, and it
can be pretty easy to fall into the trap of undervaluing ourselves. We don’t place enough value in the work
we’re doing. So, what’s a fair way to start pricing? Well, there are some things we can do before
getting started. You can check existing rates for the kind
of work you want. Some of these are hourly, some of these are
annual salary. If you want to convert annual salary to an
hourly figure you can do what the US OPM does and divide that salary by 2,087, that’s
the effective hourly rate. Price can vary a lot if you’re doing local
work. It can really depend on your location, but
if you’re just starting out and you’re not sure, it can help to do earlier projects
on the lower end and price your way up over time. We’ll cover this a bit more when we talk
about testing different price points. To be clear, there’s no right or wrong way. In this video we’re covering three options
and different freelancers structure pricing differently. That’s the beautiful thing. You can price these things however you want
to price them. So, how do we figure it out? How do price a particular project? Well, let’s start with the first pricing
model we have here, hourly rate. We can take the number we settle on and charge
that per hour of work we do on a project. If we charge $40 dollars an hour and the project
takes forty hours, we charge $1600 dollars. Hourly rates are great for freelancers who
might not be sure of the time it will take to achieve a particular goal, to finish a
project. It’s a transparent option for the client
because they often get to see where those hours are going. That’s why it’s important to keep meticulous
detail of what you’re working on when. Is there such thing as too much detail? Yes, but, keeping details and timing yourself
can work for all types of pricing, and can be a phenomenal way to keep yourself focused
and accountable, something especially important if you don’t work with a team of experts
who can edit you if you start rambling and going on about things nobody really cares-
Now that’s hourly rate. What about flat rate? Flat rate is often a good choice. Everyone knows what the expectation is upfront
regarding the scope of work, what’s being designed or built by the freelancer for the
client. But we have to be extraordinarily careful
to specify precisely what’s included, and even more importantly, what’s not included
in our scope of work. We have to set really clear limits, otherwise
we’re bound to get clients who expect ten rounds of revisions, hundreds of hours of
work, and a potential effective rate of .12 cents an hour. But the great thing about a flat rate pricing,
is once you understand what’s involved in the project, and if that’s communicated
to the client, you can start optimizing your effective hourly rate. By the way, what’s an effective rate? If you're using a fixed price, a flat rate,
you can still track the hours you put into each project. And you can even start competing with yourself
regarding how long it takes to achieve specific goals. That includes the planning and organizing
you’re putting into a project. We’re not just budgeting for material costs,
we’re budgeting our time. Let’s say we’re charging $5,000 dollars
for a project, and we expect it to take eighty hours to complete. And those hours don’t have to be consecutive,
in fact we can block off a larger chunk of time, like six weeks, so we have plenty of
room for that natural feedback and revision process that we’re including. So, what does that mean? It means if we take the time we spent, divide
by the number of hours, that’s an effective rate of about $62 dollars an hour. Now our effective rate is an internal rate,
because we’re the only ones who care about it, because if this is a flat rate project
the client is paying us $5,000 for the whole thing. With flat rate, you don’t get more money
if it takes more time and you don’t get less money if it takes you less time. $5,000, flat rate. If it ends up taking you 120 hours to do the
same project in which you thought it would take only 80, that’s an effective hourly
rate of $41 dollars. But what if you’re able to do that same
high-quality work in say, 60 hours, instead of the original 80 hours you blocked off for
yourself, your new effective rate is now $83 dollars an hour. What if you do it in 20? That’s $250 dollars an hour. Flat rate is good if you’re pretty confident
about what’s expected in terms of the time you’re investing into the project. It’s good for the client because they still
understand what the scope of the work is, what’s included and what’s not included,
but they don’t have to review each hour you bill them as they might in an hourly rate
deal. This is good for some freelancers, it’s
good for some clients, but there are freelancers and agencies everywhere that do hourly, and
there are a bunch that do flat rate instead. It’s smart to pick what works best for you,
but that’s flat rate. What about a recurring revenue model? Like a monthly subscription service? And this is one of the most interesting pricing
models, but it also comes with the most variables. In short, a retainer or subscription model
is based on the idea that you’re charging a recurring fee, whether that’s monthly,
quarterly, annually, to build and maintain content for your client. It’s attractive to the client because it
can mean less money down at the start, but it can also mean limited short-term compensation
for the freelancer. As an example we can charge a hypothetical
law firm $500 dollars per month. Most of our work is frontloaded, meaning for
the first month or two we’re spending a lot of time and resources to get the website
up and running, but over time the potential dollars we can take in, we can do a lot more. That’s $6,000 a year in recurring revenue. If we have a two year minimum, that’s $12,000
dollars over twenty-four months, but there’s another variable here with retainer or subscription
models or any type of recurring payment, whatever you want to call it. If you don’t set an explicit limit, and
you don’t clearly define what’s included and what’s not included in your contract,
you could be opening yourself up to a ton of work you might not originally anticipate. And that can cost a lot in the long-term. An interesting hybrid approach some freelancers
do when they’re setting up a deal like this is to charge an upfront cost, a down payment
on the services you provide, plus a recurring monthly fee on top of that. $3,000 dollars upfront plus $300 per month
for a 24 month minimum, the client gets a great site, two years of updates you agree
upon, not a bad deal for either party. The idea with a recurring revenue model or
any type of subscription model is that. The value you provide to the client carries
far beyond setting up the initial site; there’s a component of that revenue that’s recurring. This is good for freelancers who want a steady
source of revenue and are okay with what often ends up being a smaller amount upfront. And it’s a good value for clients who want
to make sure you’re there for them over time. With this model, or any of these models, it’s
important to make sure that freelancers seek legal advice to make sure their rights and
expectations are clearly spelled out in a contract with the client. But that’s the last pricing model we’ll
cover here. Let’s talk free work. When is it okay to work for free? There are some flaky freelancers out there,
and chances are you’ll run across at least one potential client who’s been burned. They put up a certain amount of money and
the freelancer they worked with disappeared. And that’s not good business, but it’s
something to be empathetic about with your potential client. But that’s something you can separate yourself
from. Lack of trust in freelancers in general shouldn’t
affect your ability to get paid for the value you’re bringing to a client. And it’s not just freelancers, there are
clients out there who, if you’re not careful, can potentially take your work and run without
payment. That is unless you take active steps, a real
effort, to not invest any serious design or development time until you have everything
in writing, and even a deposit for your work if that’s part of the deal. Another point about free work, or doing work
on spec, is that a lot of times, especially if you’re starting out, potential clients
can attempt to push you into doing free work just because they think they can. They’ll attempt of course to sell it as
experience or building your portfolio or a positive review, and what do these three things
have in common? Not one of them, not remotely, has anything
to do whatsoever with buying food or paying bills. And saying no to free work can be paired with
an honest effort to steer the client in the right direction. Help reassure them. You can offer to send them examples of your
work if their confidence or trust isn’t there yet. You can offer to do a smaller part of the
work at a smaller fixed rate, or even offering to make yourself available for another call
or meeting to answer their questions and give them a consultation. It’s efforts like this that clients recognize. There are always options, but there’s another
reason not to do free work: saying no to free work demonstrates your value. Not just to yourself, but to anyone who’s
doing business with you. There are clients out there who will ask you
to do free work to determine your value, even as a negotiating tactic. Doing free work for others may diminish your
value as a freelancer, think long term. You don’t need to earn your dream salary
right out of the gate, but working for free does a disservice to you. It does a disservice to your value, and if
freelancers are working without pay what makes you think it’ll be different the second
time. They’ll often just go to the next freelancer
who won’t be able to cash any one of the no checks they get from doing another project
for free. By doing free work like this, it can be seen
by other freelancers as forcing them to offer free work as well. And economically, enough freelancers doing
quality work for free forces prices for these services down across the board. If someone continues to pressure you, if you
don’t feel like you’re being treated fairly, politely decline and walk away. Having said that, if your goal is to sharpen
your skills and build your portfolio, a great way to do this, we mentioned this earlier
in the course, is a redesign of a popular site online. That’s free work. Finally, let’s cover testing your pricing
process. You might find that your starting rate is
low, or maybe after a few client interactions, you might find it’s too high. And client interactions can feel like a lot,
especially the first ten or twenty clients you have. Sometimes it feels like we’ll do anything
to not lose the client. But as long as you’re making fair pay, over
time, it’s worth exploring an increase to whatever pricing model you’re choosing. If you signed five clients at $50 an hour
for your first five projects, consider what might happen if you try $55 an hour. But, small tests like this might not be enough. If you only flip a coin once, you might land
on tails. So, next time you’d expect to g- and it’s
tails. Surely, this time it’ll be heads. But, it’s not. Why? Well, we planned these shots in pre production. But even if we didn’t, no one would think
twice about a result like this. After all, three coin flips all landing on
tails isn’t that much of a stretch. Each coin flip has a 50 percent chance that
we’ll land on heads or tails. That’s the law of large numbers. As the sample size increases, the actual result,
how many heads versus how many tails gets closer and closer to the expected result. We expect 50/50. It’s the same for your pricing and pricing
models in general. You might try a new price out and the first
client says no, or you end up negotiating and arriving on a different figure. A lot of people think that means they’re
stuck on a specific price forever, but just as the coin flips didn’t come out to a perfect
50/50 at the start, your sample size of one client might not be large enough. Try it on another, and then another, record
your data, keep track of what you’re offering. If you’re negotiating and you end up lowering
your price, track what you first offered and what you lowered it to. As you offer better and better work to clients,
you’ll often see a long-term upward trend, whether that’s calculated in an hourly rate
that you bill your clients, or is the result of you charging a flat rate or a recurring
fee over time. Now, it’s not uncommon for some experienced
freelance web designers and developers to command rates in the hundreds of dollars an
hour, these are US dollars. But only you and your clients can determine
what’s best over time. In short, it could be a good idea to start
where you’re confident and work your way up. Take notes of these changes and track your
progress over time. As for us, we’re going to offer Hayes Valley
Interior Design a couple options. We’ll offer them a flat rate, or a subscription,
and we’ll make sure to include with that a breakdown of everything we’ll do, a scope
of work. A few more words on pricing, and then in the
next part of this course we’ll put that document together. When you look at a single frame of work that
the team at Industrial Light & Magic has worked on, it’s nearly impossible to put a dollar
figure on it, especially because some of the best work they’ve done makes the final product
look like they did nothing at all. And that’s the point. Our perception, our expectation regarding
the value of something can be wildly off. Just like ILM, it’s the quality of your
work and your reputation over time that current and potential clients care about most. But imagine this: imagine ILM spent ten years
researching and developing a breakthrough way to do motion capture. They spent ten years focused on perfecting
this technology. Now imagine their first client, their first
big project that uses this technology, uses it for only an hour. Is it fair to expect ILM to bill the client
as if the only work ILM did was during that one hour? Or is it fair to bill for the ten years they
spent making that technology, building those skills they’re using now? In other words, do you charge for that one
hour, or do you charge for the ten years? There’s no right or wrong answer. It’s usually something in between, but your
value isn’t just the time you put into a single project. Your value over time is made up of your experiences,
your learnings, even your mistakes, and that’s the big picture. Value your work. Consider different pricing models, like an
hourly rate model, a flat rate model, and a recurring fee model. Always be careful around those who want you
to work for free, and test your pricing so you can better track and match your increased
value over time. And the next part of this course is applying
these pricing models to our scope of work document for Rebecca and Hayes Valley Interior
Design, but that’s it for now. That’s valuing and pricing your work as
a freelancer.
