As a freelancer, your business depends on your ability to effectively sell your services. But although the pricing strategy most freelancers adopt is hourly pricing, there is another option.
Breaking the Time Barrier: How to Unlock Your True Earning Potential shows the power of value-based pricing for freelancers. It’s all about breaking the vicious cycle of hour-based pricing.
“It’s the eternal struggle of the freelance worker: how do you price your work in a way that’s fair to both you and the client? Nothing less than your career success and personal happiness hinges on this question…” – Daniel H. Pink, best-selling author of Drive, A Whole New Mind and Free Agent Nation
Let’s discuss this approach before digging into specific strategies. Basically, it comes down to the following five steps:
Every pricing scenario works when you draw on this basic method. It doesn’t matter if you’re working on a small or large project. It’s all about uncovering your value and pricing you services accordingly.
In today’s article, I’ll address some of these common pricing scenarios that all freelancers face. In doing so, you’ll discover how to determine your value and set the proper prices for your services.
Establishing value with new clients begins with an understanding of the value of your service.
Let’s say you provide website design services. Open up the meeting with an exploratory conversation. Your goal here is to understand what type of value this project will bring to the client’s bottom line. Focus on actual numbers, not just abstract feelings.
For example, say your potential client needs a completely new website design. Your initial conversation reveals that this new design has the potential to increase their yearly profit by $100,000.
Now, the $2,500 you’d charge based on an hourly rate seems pretty miniscule in comparison. Looking at it in these terms, you could feel confident charging $20,000, as this is still just a fraction of what your client will recover.
Clients will also be better able to justify that type of investment when it’s put into a value perspective. It’s all about the way you look at it.
Aim to charge between 10% to 20% of the value you’ll provide. Back your value with confidence and a strong track record. That’s the key to landing clients that make those numbers a reality.
Existing clients need a bit more nurturing during your pricing transition. Don’t just spring the change on them out of nowhere.
Give at least 30-60 days notice for any pricing change that you make, including times when you raise prices.
Always provide a written announcement of the change, such as the one found in this basic template:
Hello [client name],
I want to thank you for your continued business. This email would take up way too much of your time if I went into exactly what it meant to me.
I’m writing you today to announce an exciting transition for my business. Effective [date 30-60 days in the future] I’m going to transition from an hourly rate into value-based pricing.
What does this mean for you?
Well, it’s great news because you’ll have access to all my value, not just chunks of my time. Under the new policy, you can expect the following:
Thanks again. And if you have any questions, please don’t hesitate to reach out.
Just like with new clients, you need to both uncover and prove your value for the client before raising your rates. Have conversations and do extensive research before you jump into this process with existing clients.
Recurring services work the same way. How does your monthly service affect the company’s bottom line each month?
Let’s say a client’s website generates $10,000 in monthly revenue. If they hire you to keep it updated, functional and free of issues, you should charge based on that understanding.
Some months, you may do more than others, but if you’ve priced your services correctly, it should all even out in the end. And if it doesn’t, you need to reevaluate how much value you provide for your cost.
It’s as simple as that.
As a freelancer, you’ll often find yourself competing with others that still sell their services based on chunks of time. This can seem discouraging at first. You may even feel like backing down, as your value-based pricing may lead you to charge far more than others.
But again, you’ve got to stick to your guns regarding your value.
When you conduct your initial exploratory conversations with potential clients, you’re already beginning to shift their mindsets – ever so slightly – to understand the true value of their investment.
And because you’ll be one of the only ones demonstrating that you understand the overall impact of the work you’re doing, they’ll look at other proposals from a value-based perspective. Other freelancers who quote based on time just won’t stack up.
You’ve opened their eyes to a whole new world, and now, they want more than just a website. They want a valuable service that serves their business objectives. And that, my friend, is how you beat out competitors.
At the same time, it can be helpful to provide different value options to potential and existing clients. Doing so allows you to provide different price points for different types of customers without compromising your overall focus on value.
Derek Halpern talks about the psychology behind this tactic. In a recent article, he says:
“Every business has three types of customers: customers who want discounts, regular customers, and customers who want the red carpet treatment.”
When writing your proposals, create three pricing options. A good rule for laying these out is to create tiers at 10%, 15% and 20% of the project’s value.
Freelancers using an hourly rate often provide quick-and-easy projects for free. That’s a huge mistake. You end up punished for your skill, while the client receives something of immense value for little to nothing.
To avoid this, take a few moments to put together a condensed version of your exploratory process. Understand the value you can deliver and charge accordingly. Remember, you spent years acquiring your skillset – and your client doesn’t have that.
Think of a plumber… He may spend just 20 minutes fixing a problem, but if he charged hourly, you could get major problems fixed for a small cost.
But instead, plumbers charge according to the solution – even if that winds up being several hundred dollars for a quick repair. And you’re fine with paying that because of the time, money and damage it saves you in the long run.
You provide that same type of value. Don’t squander it.
Don’t negotiate your pricing. You’ll only end up feeling defeated and underpaid.
Look within yourself and recognize the immense value you bring clients. Understand your worth and make it the foundation for your business. If you exude confidence with prospects and clients, they’ll understand your worth too.
You’ll always find people that want to pinch pennies. Find ways to pinpoint this early in the sales cycle. At the end of the day, these aren’t the kinds of clients you want to work with. And when you start by embracing your value, you can turn down clients that won’t.
Have you switched from an hourly rate to value-based pricing? If so, I’d love to hear how it changed your business. Please share your story in the comments below.
Or, know someone that could use this strategy? Someone you know could turn their business using these techniques. Help make that happen by sharing this article on Facebook or Twitter.