How much do you charge for you? That’s a head-scratcher for startup and freelance entrepreneurs alike. What is reasonable? Is modesty your downfall?
Michael Janda and Sonia Harris ponder these questions every day.
Janda is a business coach for creative professionals, designer and author of “Burn Your Portfolio.” He “shares systems and strategies to help creative freelancers and agencies run their businesses with confidence and make more money.”
Harris is an independent planner, event manager, exhibit manager and chief operating officer of the ad design agency and video production company Vizbrandent. She specializes in leadership, communication and membership.
In a We Talk Biz conversation, Janda and Harris weighed approaches freelancers should use to price their work and still remain profitable.
“It all starts by understanding your cost to produce the work,” Janda said. “I refer to this as ‘production cost.’”
He relies on this simple calculation:
- Ideally, you know your cost to be in business. Add up all of your overhead costs per month — office space, your salary, software costs — all of the costs you need to run your business.
- Divide that number by the amount of work hours you have available in a month. Let’s say your business costs $5,000 per month, and you can do 30 hours per week of billable work hours. Divide 5,000 by 120 (30 x four weeks). This yields $41.60 per hour.
- Now you know your hourly cost. You can calculate a production cost. Take $41.60 per hour and multiply it by the number of hours you expect the project to require.
- If you estimate that the project is going to take you 20 hours, multiply $41.60 by 20, which is $832. This is your cost — not the amount you charge to the client.
- To be profitable, you must know your production cost — in this case $832. Now you can propose a profitable price to the client. For example, charge $1,500, $1,700 or whatever markup you want to put on your project.
No lucky guesses
“The point is that you cannot price your work to profitability if you don’t understand the production cost of the work,” Janda said. “How much will it cost you to make the project?”
Coaches, for instance, might consider charging for the value they contribute rather than time.
“I do not advocate charging hourly,” Janda said. “You need to understand your production cost so you can bid higher than that amount for the project. Many freelancers have no understanding of their costs, which makes profitability a lucky guess.”
For their part, consultants should understand where their clients are financially and ask what their budget is. That determines if it’s worth negotiating or walking away.
“This is a good strategy,” Janda said. “Understand their budget. Know what it will cost you to make the project and what the going rate is — the market value. If those numbers don’t find harmony, you walk.”
Pricing work according to how much it costs to make is a good first step.
“Figuring price according to production cost is one component,” Harris said. “Other factors include your experience, your unique quality and the average going rate for your services.”
It helps to keep an eye on the competition.
“You don’t want to be designing $200 logos if all of your competitors are charging $2,000 — even if you can make a profit at $200,” Janda said. “You have to know the market value of the work you produce.
“Price yourself based on an analysis of three variables: production cost, market value and client budget,” he said, explaining his process:
- Calculate your production cost so you know your bottom line number for profitability. You can never price below your production cost and make a profit. You need to know that variable first. Let’s say our production cost number is $832, as mentioned earlier.
- Next you need to know market value — the amount other people charge for services like what you offer. Let’s say you are designing a logo and your competitors charge $1,500 for logos. This becomes the market value.
- Finally, we have client budget. Ask clients for their budget during the discovery phase of projects. Let’s say you asked clients, and they said they have allocated $1,400 for the logo design.
- Next you take those three variables and determine your price. Remember, $832 is your production cost, so you won’t go lower than that. If $1,400 is client budget, you could try to sell them higher, but that is a range they hope for. The $1,500 is market value.
Variables of market value
“In this case I would probably price the project near the client budget of $1,400,” Janda said. “I know they are not far off from market value. I also know my cost to produce it is $832. So, I will make a decent profit margin at $1,400.
“Knowing these three variables, you can price work with confidence,” he said. “For example, if your cost to produce the work is $2,000 and the client budget is $1,500, you know that if you take the project at their budget you will lose money.”
Janda gave other comparisons: If the market value is $10,000 and the client budget is $5,000, but production cost is $4,000, consider doing the project even though the client is far below market value.
“In this case, you may need to work and still turn a profit,” he said. “These three variables — production cost, market value and client budget — become your guide to pricing work with confidence.
“Remember that cost is the point determiner for us in making profit,” Janda said. “Cost includes transport plus calls plus materials times a percent of them to equal profit.”
A great strategy requires heavy mental resources and great amounts of human-centred design. While charging for products, experienced entrepreneurs guard against over promising.
“Be very careful about guaranteeing results,” Janda said. “This is risky. Personally, I don’t ever guarantee results. There are too many variables you can’t control.”
With the core factors in mind, he dove into value pricing.
“The idea of value pricing is that you price based on the value you produce for the client,” Janda said. “This idea is good, but the execution is often poorly done.
“You provide strategic services for clients and assume your ideas will yield a profit to them of $100,000 over the next year,” he said. “The idea of value pricing says to charge a percentage of that, say $20,000 or 20 percent.”
Costs on the menu
As Janda sees it, that leads to many problems:
- How do you know what the work will yield? At the time of the project it is only a guess by all parties.
- A lot of project types don’t have a tangible return. Let’s say you design a new menu for a restaurant. How much “value” does that have to the company in one year? It’s impossible to say — maybe $0 return on investment, but that doesn’t mean the business doesn’t need it.
- When you say your ideas will generate $100,000 of business and propose to charge the client $20,000 — but market value for the work is $10,000 — what is stopping the client from going to a competitor to save 50 percent? Most will do just that.
“My iPhone is probably worth $200,000 per year of value to me,” Janda said. “However, Apple can’t value price me by charging me $40,000 for it. I would switch to Samsung phones and save $39,500 per year.
“Not everything can be value priced, but many creatives poorly try,” he said.
Entrepreneurs need not adhere to market value price.
“Sometimes you can charge much higher than market value but only if you are selling based on reputation,” Janda said. “The client has to be thinking, ‘Nobody can solve this problem better than you.’
“When they think that way, you can charge big dollars,” he said.
Harris took a cold look at value-based pricing’s variables.
“Although you want to set rates according to what or how others perceive your product or service is worth, people are fickle,” she said. “Everyone doesn’t assign a uniform value to the same unique items.
“Customers can like something a lot one day and change up soon afterward,” Harris said. “Without ‘ceteris paribus’ — all things being equal — it’s a risky strategy to use value-based pricing in a for-profit business.”
She said including price options in proposals shows several things that reflect well on you:
- Preparedness
- You understand the client’s need for a bundle at contract time and periodic à la carte items.
- Clients see you’re willing to work with them while assertively showing your value.
“Always, always, always present your proposal and price,” Janda said. “Never, never, never just email them a number.
“Business is about relationships,” he said. “Build a personal relationship with your clients. Business is about trust. You have to explain to clients what you are going to do for them. Present your proposal. Explain your solution to their problem. Then talk price.”
Sell solutions
Start with the understanding that clients have a problem.
“Your proposal outlines how you will solve their problem,” Janda said. “After your clients are sold on your solution to their problem — through your proposal presentation — you are ready to tell them the price of engagement.
“Problem. Solution. Price,” he said. “When you present your proposal in this flow, clients should be saying, ‘Yep, that is my problem. Wow, I want that solution. I’ll pay whatever it takes to get the solution.’ If you do a proposal right, this is what happens.”
Janda then explained price options.
“This uses two sales techniques: price bracketing and price anchoring,” he said. “In summary, by showing clients a higher price option — a price anchor — they see the middle and lower option as more affordable.
“Try to sell your clients on increasing their budget for a project,” he said, using three price brackets:
- Option 1: What they are asking for, or lowest budget.
- Option 2: More value for not much more money.
- Option 3 is your price anchor, which makes others seem cheaper.
“By using brackets and a price anchor you can help clients decide on a middle package,” Janda said. “They think, ‘I get a lot more for not much more money.’”
Harris said work with clients starts far in advance of the first price discussions.
“Before we can have the conversation on pricing with potential clients, we have to determine the type of clients we want,” she said. “I am willing to forgo prospective clients who don’t understand paying for quality and value.”
These are Harris’ keys to master the pricing conversation with prospective clients:
- Use and insist on transparency with clear communication.
- Explain “win-win.” This is what you need, this is what I can provide. Plain and simple.
- Include a single-item option for mid-year purchases.
Power of numbers
“Know your numbers,” Janda said. “You must understand production cost, market value and client budget. These numbers empower you in pricing conversations.
“Write yourself a pricing conversation script,” he said. “Write down phrases you will use in a pricing conversation. Then practice the script. Just like anything, you can practice to improve.”
The final step might be the most crucial.
“Don’t be afraid of the client,” Janda said. “You have to muster confidence and self-esteem when talking about pricing. Knowing your numbers and practicing conversations can help you do both.
“Many people waste time in discovery meetings, creating proposals and pitching work to clients who cannot afford them in the first place,” he said. “You’ve got to ask the budget in the first discovery meeting. That will save you time — and money.”
