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The value of value-based pricing
Should a creative professional charge on an hourly basis,
or a project basis? Here's the answer by Valarie Martin
Stuart |
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We creative professionals tend to
be a right-brained bunch, harnessing our creative talents to
create practical solutions for our clients. Creating pricing
structures, estimates and invoices are not high on our enjoyment
list. But we can avoid some common pitfalls and potentially
unhappy clients by pricing our work based on project value rather
than an hourly rate.
Many creative professionals are tempted to price their work
on an hourly basis. After all, when we were young and working
for pocket change, that's the way it was done. Our job at the
local mall paid us hourly wages for showing up and performing
our duties.
However, we are no longer acting as a body in a retail store,
ringing up sales and sorting merchandise. We are creating a
tangible product for our clients. This product is created for
a specific reason, and our clients expect to achieve specific
results if they purchase our product.
Pricing our products
I recently went shopping for a new television. I had a specific
result I wanted to achieve by buying this product: I wanted
to watch television in my living room. I wanted my television
to be reliable, easy to use and simple to understand. I wanted
it to work with my other components. As I shopped, I compared
prices and features. I knew how much my budget allowed me to
spend for a television, so I shopped accordingly.
Did I care how many hours it took Sanyo or GE to make a television?
Of course not. I wanted a quality television, and I didn't care
if it cost them $10 per hour or $100 per hour to produce. I
wanted to pay a fair price for the product, and it was up to
the manufacturer to determine how to set a price to be competitive
in the marketplace while still earning a profit. Naturally,
I expected different models to vary in price, depending on their
features.
Creative products are no different. It does not matter to the
client how long it takes me to create a website or an annual
report. What is important is the final product, not whether
it took me two hours or twenty hours to achieve it.
I learned this lesson the hard way. I specialize in production
of financials for annual reports. It's very tedious work, creating
dozens of perfect charts and hand-ragging every single line
in a book that's anywhere from 24 to 72 pages. When I began
this work, I was working on a independent contractor basis through
design studios, at acceptable hourly rates. I'm fast and efficient,
and became an expert at this type of project, both from a design
standpoint and a production/software standpoint.
I soon learned that I was an idiot. I should not be charging
hourly, but per page. Next, I'll explain why.
The pitfalls of hourly pricing
Let's look at some hypothetical numbers to illustrate pricing
structures. Assume that I make $500 per annual report when charging
hourly. Now, the freelancer sitting next to me does the same
work, is paid the same hourly rate, but annual reports aren't
his specialty. While he's a fully capable professional who produces
excellent work, it takes him twice as long to do the annual
report. He makes $1000 per book. I just got screwed. Why? If
I were worse at what I did, I'd be rewarded! And the client
got screwed as well. He's paying two very different prices for
the same product, thanks to an hourly pricing structure.
Instead, let's charge on a value-based structure rather than
an hourly structure. I'll charge $20 per page for a 48-page
book. The designer sitting next to me will also charge $20 per
page. Our client is receiving the same product no matter who
does the work, and the $20 per page fits his budget. As long
as deadlines are met, it's irrelevant how long it takes to complete
the 48 pages.
Assume it takes me an average of 15 minutes per page to complete
the 48-page financials. My effective hourly rate is $80 per
hour for 12 hours of work. It takes the other designer 30 minutes
per page, and 24 hours to complete the work. His hourly rate
breaks down to $40 per hour. Is this important? Yes, but only
to the designer. Each designer is being rewarded based on his
experience and talent level for a given project. Is this important
to the client? No! The client is interested in the final product
and the ultimate results achieved by the product.
From the client's perspective, value-based pricing is advantageous
because client is assured that he will pay an exact amount for
the creative product. He will not suffer because it takes one
designer three hours to create a concept, while it takes another
designer ten hours. The client is no longer at the mercy of
the production speed of a creative professional. There are no
surprises when the invoice arrives. As long as the deadline
is met, the client should have no interest in how many hours
the creative professional sits at a desk to complete the product.
Determining project pricing
But how do you determine pricing for a project if you don't
base pricing on your hourly rates? Naturally, your hourly rates
and the amount of money you need to make to put food on your
table will play a part in your project quotes. But you might
also want to take a look at the Graphic
Artists Guild Handbook: Pricing and Ethical Guidelines.
This invaluable resource lists pricing information based on
industry surveys, including pricing structures based on the
client company's size and strength in the international marketplace.
While the New York City prices in this publication may be extreme
for some markets, you'll note that the book prices a logo based
on the logo as a product, and doesn't tell you how many hours
the Graphic Artists Guild thinks it should take you to create
that logo!
And let's face it, it's virtually impossible to determine if
it will take you two hours or twenty hours of concepting and
thumbnails to finally hit upon the perfect solution to a creative
problem. It's not your client's responsibility to pay for the
exact number of hours it took you to reach that design; they
are paying for the final product. If it takes you two hours,
then great! Go play a round of golf that afternoon, or better
yet, work more to refine that concept, or go out and generate
additional business. If it takes you twenty hours, that's fine,
too. Your profit margin may be less for this particular project,
but your main objective is to meet the client's expectations,
no matter how many hours it takes you.
In the end, you want your client to be pleased with the final
project, and be happy that they are paying exactly what they
expected to pay based on your original quote. There's nothing
worse when you're buying that television than to be told, "Well,
it took Sanyo ten more hours to make that television than they
originally thought it would, and since they price their televisions
on an hourly basis, you owe an extra $400. Thanks for shopping
at The Hourly Electronics Store - we appreciate your business!"
© 2004 Valarie Martin Stuart |
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All contents © Copyright 2003 Creative Latitude
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