We as humans have been conditioned to work for an hourly wage for well over a century. It’s just the way things are done. That’s how (many) businesses pay employees, so it makes sense that people transitioning from the E quadrant to the S quadrant would expect the same thing.
However, you’ll quickly find that the most successful freelancers you’ll meet in person, see on social media or read about in books abhor the hourly rate. Today, I’ll explain why this is, what you should be doing instead of billing hourly, and when it makes sense to bill hourly anyway.
The problems with charging hourly
There are four main problems with charging hourly:
First, if you bill hourly, it might not occur to you that you’re penalized for getting better at your job. As you become more skilled and efficient at delivering your service, you’ll earn less for each job and be forced to find more clients to earn the same amount of money. This is a problem. The only result you should ever get from getting more clients is getting more money.
Second, if you bill hourly, you automatically lack incentive to work more efficiently. It doesn’t make sense for you to work quickly on a project because you will earn less money while the client will earn more. This seems obvious when said like that, but I know many freelancers who continue to bill hourly anyway. If this is you, you need to be aware of it.
The third problem with charging hourly is the direct result of this lack of incentive: focusing more on milking the clock than on doing good work. This is just a nauseating feeling. You probably decided to go freelance specifically to avoid the drudgery of the 9-5, and if you’re billing hourly, you’ve failed at that entirely. You’ve just created another job of your own making. And the worst part?
The job you’ve created for yourself has a hard income cap.
That’s the fourth problem. There really are only so many hours in the day. The millionaires whose ranks you hope one day to join did not get there by selling their time in one-hour chunks. If you bill hourly, you can only make as much money as you have hours to work, and regardless of your hourly rate, that figure is going to stop going up eventually. (However, your stress levels will keep going anyway).
These four points add up to one hugely important, irrefutable fact:
Your goal is to make money. Your client’s goal is to get results. If you’re billing hourly, you’re trying to delay the client’s goal for as long as possible to meet your own goal. This means that there is an intrinsic misalignment between your goals and your client’s.
You need to be charging by the project
Instead of billing $65 an hour and quoting 40 hours to fulfill a service, you should—at a minimum—multiply 65 by 40 and bill a fixed price of $2,600. Charging a fixed price for your services is the first step on the road to becoming a millionaire freelancer. I’ll say that again. Fixed price is the first step. Here’s why:
The exact problems mentioned above cease to exist.
Truly a win/win situation
The better you get at your job, the fewer hours it takes you to fulfill your services. If it takes you 40 hours to fulfill a project at the beginning, it might well take you only 20 or even 10 after you’ve gotten very good at it. Even if you don’t raise your prices a dime, you’re now earning four times as much money while delivering the same work in a fourth the time. You win, and your client wins.
Better still, the more efficient you get, the more projects you can take on. Instead of spending 40 hours to fulfill a $2,600 project, you can now take on four projects and make $10,400. You win, and four times as many clients win too.
You focus on doing good work
It also makes you focus on doing good work more than anything else. Think of it this way: many clients would be willing to pay an hourly rate to a freelancer for a project that might not guarantee them results. It’s a natural human assumption that everyone deserves to be compensated for their time.
However, if you’re asking $2,600 for something that only takes ten hours of your time, you’re only going to get repeat work and referrals if you can deliver results. If someone is confident that spending $2,600 on you will make them $50,000 back, they’ll pay that (and considerably more) without hesitation. If you’re ethical, you’ll take this responsibility seriously and get VERY good at your craft.
Another less-talked about benefit of charging fixed price is that both you and the client know exactly what’s involved. There’s none of the ambiguity of an hourly project. You know how much money you’re going to earn, and your client knows how much money they’re going to spend.
Further, you know exactly what your responsibilities are (as far as deliverables), and your client knows exactly what they’re going to receive.
If you’re still not sold on the idea of fixed price being the way of the master freelancer, here’s a quick personal story:
I had a long-term client who wanted to add a job board to their website. When I first started doing job boards, they would take about 12 hours of work to build. At my rate of $85 an hour, this worked out to $1,020. However, instead of billing hourly for the service of building and installing a job board, I billed it at $1,000 flat.
Over the years, I built a lot of them and got very good at doing so. I saved the components I built and the code that I wrote so that I could instantly install the foundation work on each new site. What once took me 12 hours to do from scratch now took considerably less time.
When I installed the job board for the client in question, it took me only 90 minutes. The $1,000 they paid me was a reasonable price for the result they got, but in order to get the same money with an hourly rate, I’d have had to charge $750 an hour. Now—I know my value, but NOBODY would be able to avoid sticker shock on $750 an hour.
The moral of the story? You need to be charging for the value you provide rather than the time you invest in creating it.
And the way to do that is by charging fixed-price.
The risks of charging by the project
Charging a fixed price for your work does carry some risks. You probably noticed one of them earlier. Now I’ll address those risks and present solutions for the common problems you’re likely to encounter.
The first is probably obvious:
Risk 1: Scope creep
When you’re working for a fixed price, it’s probable that the client will ask for a few things that weren’t included in your scope of work. If you agree to take it on, you’ll get paid less for doing more work. There are three ways to deal with this: do the work for free, charge for the work, or don’t do the work at all.
If you’re a good businessperson, option 3 goes right out the window. If you just refuse to do the work because it’s not in the scope, you’re probably not going to be in business for yourself much longer. It’s unprofessional, unhelpful and will never ever ever get you a referral. “But John, you don’t understand. I’m standing up for myself, and my clients will respect that.”
Yes, that’s true, but you’re still creating a problem. As a freelancer (or any kind of business), you’re supposed to be finding solutions. If you create problems and don’t take responsibility for solving them, you will never achieve the level of success that you could otherwise. So that leaves you two options: do the work for free, or charge for it.
Both of these depend on one thing: having a clear scope of work.
Define every single thing you agree to do for the client and every single deliverable you agree to provide.
If you guarantee results, specify everything the client needs to do in order to qualify for the guarantee. If you’re a lead generation agency and just say “you’ll get ten clients or your money back,” with no qualifiers, you’ll give a lot of refunds. That is, unless you’re personally responsible for every part of the journey, from sourcing the lead to calling them and booking the job. Your clients have to do SOME of the work to earn their desired outcome, and it’s important you outline these expectations in your scope of work.
So when your client inevitably has an ask that falls outside the scope of work, you’ll be able to call attention to this (tactfully) and let them know how you’d like to proceed.
Solution 1: Do the work for free
This is what I do personally about 90% of the time. I’m a web designer, and in this business, the client is naturally going to have requests for changing the design. Most web designers offer a few “rounds of revisions,” when the client makes revision requests and the designer fulfills them.
In my early days, I had a lot of prospects worrying about these rounds of revisions before closing the deal. Additionally, I knew myself well, and knew that I would do as many rounds of revisions as it took to make my clients happy. So I decided to remove revisions as an objection altogether.
Now, I offer unlimited revisions. After I deliver the design prototype, I’ll give my clients a week to request as many changes as they’d like. Even if it takes me 6 months to fulfill them all (which it never does), I’ll fulfill all the revisions they make in this one-week period for free. I’ll even do the same thing again after the initial build of the website is done. That way, they never have to worry about how many changes they can make.
I also sometimes provide 2 hours of labor per week for an entire year after the project is done. That way, the miscellaneous changes my clients inevitably request (and that I would do anyway) are included in the fixed price.
Solution 2: Charge for the work
This is where charging hourly comes into play. If you decide to charge for work outside the scope, or just want to have the option to do so if you choose, this is how it’s done.
In my proposals, I have a line item that states any requests that fall outside the scope of work will either be A), quoted separately in a new proposal, or B) billed at my hourly rate. The option will be agreed upon between the freelancer and the client.
I also clearly call attention to this before the agreement is signed so that my client knows to expect it when/if they request features that fall outside the scope.
Risk 2: Client/freelancer disappearance
This is more a problem for the client than it is for the freelancer (assuming the freelancer is charging a deposit before beginning the work, which they absolutely should be).
Once the client has put down some money, there’s nothing stopping the freelancer they hired from taking the money and running. When hiring a reputable freelancer with a good work ethic and a strong portfolio of work, this is typically not a concern. And that’s exactly the solution for this problem.
Solution 1: Stack up a large body of social proof
Social proof is the #1 thing that reduces skittishness from your clients. It’s especially helpful if your social proof is visible on a third party that you can’t tamper with. This is why Trustpilot is so thoroughly trusted by the public—because businesses can’t pay to remove negative reviews, or influence the quality of the reviews. There are also numerous statistics that are visible that will help users decide whether the reviews are generally coming from real customers or from less trustworthy sources.
For example, I use Upwork for some of my social proof. As of this writing, I have a 100% Job Satisfaction Score and the Top Rated badge. I have dozens of great reviews left by my actual clients, and I make sure that even my non-Upwork clients see them. On my Upwork profile, my clients can see a very accurate snapshot of my quality of work and the customer experience I provide. Creating a similar snapshot for yourself will do a lot to make your prospective clients feel confident in hiring you.
Solution 2: Have a strong guarantee
Remember earlier when I said that you have to be able to deliver results to command high fixed prices? That’s because you have to be able to deliver results to command high fixed prices. Or rather, you have to be able to make your clients BELIEVE you’ll deliver results.
It doesn’t matter if you can deliver results if you can’t make anybody believe it. The best way to create this belief is with social proof that shows you’ve been able to do it before. If you pair that social proof with a strong guarantee, you’ll be unbeatable.
For example, as a web designer, I sometimes meet prospects who are just not sure I’ll be able to create a design that they’ll love. This is where my guarantee comes into play. I design the homepages for my websites first. If my client doesn’t love their homepage design, they have the option to request a cancellation. If they do, I’ll refund 100% of their investment with no questions asked. That way, their only options are to either get a design they love, or get their money back. That’s the money-back guarantee. (Note: I’ve never once had a client request a cancellation at this stage.)
Further, I also offer another kind of guarantee. Page speed is a big concern with my clients, and I guarantee them that they’ll get a loading speed under three seconds, or I’ll keep working until they do. This is called a labor guarantee. I’m obviously not going to refund the client’s money after they have a design they love and I’ve done all the work of building it. But website optimization is generally pretty simple to do, so a labor guarantee is more than enough to make the client comfortable.
If you can offer a similar guarantee that the client will get the result they want, you’ll be able to ease a lot of their concerns at the beginning of the project and command higher fixed prices.
But remember, the guarantees are supposed to make the client feel safer in hiring you. They are NOT supposed to be used. You have to be able to deliver the results you promise.
Risk 3: Pricing becomes more difficult
Charging for an hour of your time is simple. However, the idea of charging $1,000 for something that takes an hour and a half of work is difficult (for new freelancers especially). In order to justify that price to yourself, you have to understand the actual value of your service. This will be the subject of next week’s Pursuit Of Freedom Letter. In the meantime, understand this:
The value of your work is NOT equal to the amount of time it takes you to do it.
Have a killer week, friends.