Thursday, 11 February 2016

Which pricing method to use?

We have picked three different methods by which you can determine a price for your work. Unfortunately, there is no universal solution for it. It depends on the person and on a series of circumstances. However, we think this will help you find the best method for you:

1. Hourly rate


How it works:  you track your time and calculate how much the job costs based on your hourly rates (be it client-specific, by activity, a general rate, etc.)

Advantages

  • An hourly rate may look more inviting for the client, making it easier for both sides to negotiate. It also offers the feeling of more malleability in terms of payment if compared to a fixed price.
  • A freelancer can decide how much effort to put in a project according to the hourly rate agreed.
  • It is likely to increase productivity, since it requires time tracking and time management, therefore, more organization.
  • Less risk of ending up underpaid if a job takes long.

Disadvantages

  • An hourly rate may seem high in comparison with a monthly wage.
  • It can happen that your time tracking and the client’s estimate do not match. That can be solved by previous agreements and arrangements, though. 
  • Gives the customer more control over your working process, which may hinder your freedom to work and the client will most likely expect the same excellent result regardless on the limitations imposed to your working time.
  • Some people argue that this system punishes those who are able to work well and fast (which can be solved by rearranging hourly rates, though)

How can time tracking help: besides making the whole process more agile and the billing much easier, it will provide you with a fair income and the flexibility to organize hourly rates according to what each activity demands.

2. Fixed price


How it works: a price is set from the start. Either agreed with the client or based on a standard price list.

Advantages

  • You can put a price and just agree with the client on the steps of the projects and stick to it.
  • It is easier to set conditions and establish time frames.
  • More flexibility to create a price list for additional activities, should the customer need some.
  • If you finish faster than expected, you still get the same pay.

Disadvantages

  • Clients have a harder time accepting extra expenses, since they understand the price agreed is for you to work for them regardless of the kind of job agreed for the project.
  • At the beginning of a project, the customer has no idea about how much extras can be necessary and how much they will cost unless a time tracking system is agreed on.
  • Negotiations about what is and what is not included in the total price can demand longer negotiations, for which you will most likely not be paid.
  • If it turns out the project was more complicated than you thought at first, you still get the amount agreed with the client.

How can time tracking help: tracking your time, with or without hourly rates, will provide you with data, which can help setting prices, and providing more precise time estimates in the future. In addition, it makes it much easier to come up with a report if required.

3. Price ranges


How it works: a price range is set with a minimum and a maximum price for the job.

Advantages

  • It makes the client feel safe since it provides a boundary over which price will not go. 
  • Gives you flexibility to work and staying under the limit makes the client happy.  
  • You know the minimum you are supposed to receive.  
  • You have room to arrange prices according to the market.

Disadvantages

  • Clients may believe you have a price set and the flexibility is just a sales pitch.
  • It makes it complicated to negotiate over the maximum price even if very necessary to meet the client’s request. 
  • May require further preparation and negotiation so the possibilities are covered, in case there is a need to go beyond limits.
  • You might have to stay closer to the minimum more often than you found you would at first.

How can time tracking help: Tracking time will help you know where in that interval you should place your final price. With a set of hourly rates you create, you can come up with a price you consider fair and adjust it according to clients or the market.

These are of course our suggestions. Try the method that seem to fit your needs best and share with us, we might have forgot something. Thank you and have fun. :-)

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In short, a pricing strategy refers to all of the various methods that small businesses use to price their goods or services

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