While there are many, many ways you can price your projects, for the sake of brevity we will be taking a look at the two most prevalent ones:

time-based billing, and

value-based pricing.

The almighty billable hour.

Time-based pricing as the industry standard: a measurable unit of work you’ve performed, billed at a certain rate.

When you think about time-based billing is a perfect measure of output, for someone not being able to impact his client’s bottom line. For repetitive tasks requiring little to no training or skill, time-based billing is perfect as it’s a pretty accurate indicator of how much work has been done.

When it comes to specialized services — design is often considered to be one — we find that it’s not so accurate after all.

Jon Lax from now defunct Teehan Lax design agency explains the history of the billable hour very well in this Creative Mornings session, so take a look at it if you’re interested into why we’re even billing by the hour in the design industry after all.

At Superawesome, we look at time-based billing as a necessary evil. We use it, but we know it’s not the best way to go about things.

It’s widespread, people are used to it (especially in the USA), and it allows you to get up and running quickly. Calculate your expenses, add them together, calculate an hourly rate against the number of hours you wish you or your staff to work per month, add a profit margin, and you’re in business! See, simple.

The major bug with this pricing model is that it puts you—the provider of services—and the client—the one who’s paying for them—at opposing corners. They will always want you to be as efficient as possible, while you will want to charge for as many billable hours as you can. It’s not a perfect way to start a relationship.

Productivity multipliers—a leg to stand on.

At Superawesome we’ve tried to tackle this issue of efficiency in our work—and client’s possible lack of trust in us—using what we call productivity multipliers.

We came up with a base rate that is considered the default rate we charge for the project. Each person working on the project can then — at their discretion — apply the productivity multiplier of 0.75 or 0.5 respectively, reflecting the level of productivity of their performance for a certain task.

A typical example of where a productivity multiplier would be used is when you had to do something you don’t have experience with and need to learn, or when you come in to work hung over and your head’s not in it 100%.

This moved things in a better direction as we now had a mechanism to reward ourselves by retaining our desired hourly rate for efficient performance, and be honest with the client when we weren’t as efficient as expected.

Lastly, there’s an issue of honesty.

The clients have no way but to trust you that you’ve put in the hours recorded in those timesheets, and you have to hope that the client won’t be using any chance they get to try and knock a certain amount of them off of every invoice just because your performance doesn’t fit their perception of your productivity.

All this said, in most cases the time-based pricing model doesn’t necessarily reflect the actual value you are providing to your client’s bottom line, and that’s our — and the entire industry’s — biggest gripe with this model.

As Jon Lax said in the video above:

You shouldn’t measure how efficient you are, but how effective you are.

Value-Based pricing.

A pricing method that is the true measure of your work.

Going back to the main problem with hourly pricing and the difference in the value provided to the client for the time spent working on the project, let’s take a look at an example.

For instance, improving a landing page’s conversion rate by a couple of percent during a short design sprint can make for a huge impact for your client long term. You will find that the generated ROI is unproportional compared to what you’ve charged for it, since it took you a short amount of time to do.

For this reason precisely—as the industry gets more and more aware of the effect design can have on a product or a company—many studios and individuals are moving away to this so called value-based pricing model.

Pricing your services based on the value you provide is a much more logical way to get compensated, as your efforts are directly aligned with your client’s goals.

If you charge according to the return your client will receive because of your work, you should aim to charge accordingly.

This model is much more suitable for a highly specialized service—you should be offering anyway—as clients:

can’t do what you do, and couldn’t care less how you spend your time at work as long as you get the job done and contribute to their bottom line.

Do we really need to choose?

The answer to this question is in the type of work you or your company is interested in landing.

We found that sometimes a project that is not particularly interesting or challenging is something clients will want to haggle on, as they are aware that there are many people they can find who will be able to get it done. On the other hand, a client may recognize and value your expertise, that they agree to a different (value-based) pricing model because they are confident you will get them the return they are looking for.

In order to apply value-based pricing to a project, you need to be able to justify it with the numbers, e.g. the ROI your client will benefit from after your services.

There are projects that are perfect for this, but not all of them. Some projects run perfectly well with a time-based compensation scheme, and these are usually the ones where the result of your work is not easily or directly measurable.

You can measure and prove how your efforts brought the conversion rate up by 2%, but try measuring how your proposal for a logo redesign will increase the clients revenues by 10%.

This said, there’s no reason why you would have to adopt or invent a single way of pricing and implement it across all your projects. At Superawesome we are successfully combining several pricing methods across many projects with successful results (hey, we’re still in business).

Standard time-based billing with our productivity multipliers.

Already explained above. We’ve implemented this at the beginning of 2015 and it resonated well with the clients that decided to adopt it.

Pricing based on fixed quotations.

We do a lot of really small projects that lend themselves well to cost and time estimation. This means that we are able to impose certain restrictions (project duration, number of change requests, etc.) and come out with a fixed fee for the job.

Retainers.

Clients pre-pay for a certain number of our hours every month, and in turn enjoy a drastically reduced rate. This model is excellent for working on long-term projects and can act as a stepping stone to value-based billing.

Three-Point estimates.

While this is still a time-based method of pricing, the clients enjoy a broader range of eventual cost which they have an ability to affect. We provide them with an optimistic, pessimistic, as well as the best guess/realistic estimate for the project, and explain how we came up with the numbers and what do they include.

Time-based estimates with contingencies.

This is something we haven’t seen a lot of folks do, but we think it’s a really good way of managing expectations up front, and allowing the client the benefit of knowing the total cost of their project while keeping some extra budget in there in case things go wrong, scope changes, etc.

Additionally we’re dipping our feet into value-based pricing and actively thinking about how we can implement it into our workflow more and more.

We believe all of these have their place, and their proper usage stems from years of practice and careful study of how we can work with our clients better, and maintain mutually beneficial relationships while delivering them the best work we possibly can.

—Dragan