Last week, we discussed the numerous pitfalls and scant benefits of billing for your work on an hourly basis. In case you missed it, here’s the gist:
Getting paid hourly = what poor people do.
Obviously, there are some exceptions to this. High-dollar specialists come to mind—I once knew an attorney who billed $750 per hour, on top of his hefty retainer fee.
However, generally, charging a fixed price for each project is the way to achieve the fastest results as a new (or relatively new) freelancer.
Now, the question that remains is this:
How much should I charge?
In today’s letter, I’m going to show you exactly how to determine the value of your work and how to price it accordingly.
Value-based pricing
I’m sure you’ve heard this phrase before. If you’ve heard it so often that it’s become a buzzword in your mind, recall that scene from the movie 2012 when the Zen master kept pouring tea into the scientist’s cup even after it was full.
Empty your cup for a moment, and approach this with an open mind.
Because this is important.
Value-based pricing is what helped me go from billing $50 for my first Upwork job to billing $8,750 for my primary web design offer (175 times more).
My first step into fixed price billing was to take any job I could possibly find and accept whatever pay was offered. If you’re a brand new freelancer, this will probably be your first move as well. You might even end up working for free.
A quick aside—I actually believe working for free is a better choice. Taking jobs for repulsively low pay is more destructive to your self-worth, the general public’s expectations of what your work costs, and the industry as a whole.
But sometimes, especially if you don’t have another source of income, you’ve got to do what you’ve got to do. My first Upwork job was to build a Shopify website for a client who had just started a tee shirt business. They had a $50 budget for the website.
Even though it was just $50, I was elated. This was the first time I’d sourced a contract from a complete stranger online. I ended up taking many similar basic web design contracts for $100-$500 each that year.
The reason I was charging so little?
I was using the wrong method to determine what my work was worth.
I was assigning myself an hourly rate that I imagined was fair (around $30 – $40 an hour if I remember correctly), multiplying that rate by how long I expected the job to take, and charging the resulting fee.
Which meant I was still basically charging hourly.
Here’s the mindset shift I experienced that allowed me to charge what I was worth:
Your work is not worth what it costs you to produce, or how long it takes you to produce it.
Your work’s worth is equal to the value it creates for your client.
Don’t think of yourself as an employee working for the company by exchanging your time for money. Think of yourself as a sales rep being paid on commission for the money you make for your company.
That’s all value-based pricing means.
If you expect your work to produce $10,000 – $50,000 in gross revenue for the company, your work is worth $10,000 – $50,000, even if it only takes you an hour to do the work.
Now, this doesn’t necessarily mean that you charge $10,000 – $50,000. There are a few different ways to approach your pricing. The two options I usually use are to charge a portion of gross revenue, or a portion of gross profit. Next, I’ll show you how I use those pricing structures to charge $8,750 for my primary offer.
How to sell based on value
Incorporate the following into your sales process, usually during the demo of your product on a two-call close structure.
The key is to get the prospect to TELL you the value of your service.
Give them a low-end return on investment to expect
For example, assume I’m proposing to build a website that I know can make the client 10% more money. I’ll ask them if it’s reasonable to assume that the website will make them just 5% more money. They’ll almost always say that it’s a reasonable expectation.
Get their gross revenue and profit margins
Next, ask them what their gross revenue for the last year was. (This is pretty personal information, so it’s critical to have built a solid rapport with your prospect by this point). For a company doing $1M per year, 5% more money is $50,000. Ask if it would be reasonable to ask for an “expected revenue share.” I usually “ask” for 20% of the first year’s expected revenue, which would be $10,000 in this case. Again, they’ll almost always say that it’s reasonable.
Alternatively, I’ll ask for their profit margins as well. For a company doing $5M per year at a 20% profit margin, a 5% increase to gross revenue would mean a $50,000 increase to profits as well. In this instance, the figures were identical, but in the field they rarely will be. Use whichever method will make your service seem more valuable, or whichever you feel is appropriate for your prospect.
Make your asking price a no-brainer
Once you’ve gotten your prospect to tell you what your service is worth at a minimum, show them the price of your service. Ideally, this would be less than what you arrived at together in the previous exercise. This setup phase makes your asking price a no-brainer.
Example
In my niche (construction), clients can usually expect my primary website redesign offer to bring in 2-3 new jobs per month. This equates to 24-36 jobs a year. I give them a low estimate of just 9.
If their average job value is $8,000, I ask if it’s reasonable to assume that I’ll be making them $72,000 additional revenue per year at the very lowest. They almost always say yes.
I then ask if 20% of this would be reasonable to ask for, which is $14,400. There’s usually a little hesitation here, as $14,400 is a lot to pay a freelancer. But I almost always get a yes to this as well.
You’re totally welcome and encouraged to bill that. However, I currently take it one step further. I price my primary package at a fixed, constant price of $8,750.
At this point in the process, I drop that price. The previous setup makes it seem like exactly what it is—a screaming deal.
Caveat: You have to be able to deliver results
If you can deliver desirable results with a relative degree of certainty, you’ll be able to charge a premium for those results easily.
However, learning to deliver results is difficult. If every freelancer out there could actually make their clients money, they’d all be millionaires. But most of us are still learning.
If you can’t deliver results reliably yet, it’s acceptable to continue billing hourly. In fact, this can be an easier sell, because most people believe that a person should at least be compensated for their time, regardless of the results they produce.
But if you do this, it’s important to spend at LEAST 20% of your working hours learning how to deliver results and make measurable impacts through your skillset.
As soon as you feel confident in your ability to deliver results, start stacking up proof. Get glowing reviews, screenshots of Google Analytics data, Stripe deposits, video testimonials. Everything you can imagine that would help a stranger believe that you can do what you say you can. Add this to your website or landing page. Begin to charge fixed price, and sell the price with value.
Don’t bill for your time, bill for your results.
Tl;dr
Charging hourly is almost always a poor people move.
Charging a fixed price based on your service’s value is the way to riches.
When you divide your fixed price by the amount of hours you actually put into the job, getting a number well into the hundreds (or even thousands) is achievable—if you’re high value.
If you’re not high-value, spend at least 20% of your working hours learning how to become high-value.
Learn to create ultra-high value results, and charge a fair percent of them.
It really is that easy, friend. The money is out there, and the clients who have it are just waiting for you to find them.
Get out there and figure it out.
—John
