Hourly vs. Value Based Pricing – Which is better?

Wondering which pricing system is best for your creative business? Let’s explore each option so you can move beyond indecision and quote with confidence.

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How do you price creative work?

Want to get involved in a lively conversation, ask a creative entrepreneur about pricing. It seems we all struggle and second-guess ourselves when it’s time to quote a client… and many of us are looking for a system or method that will eliminate awkward conversations and make things simple.

For many of us, the debate starts with questions about value based pricing vs. hourly pricing. When should we charge an hourly rate? How should we price out a project? How do you know – when quoting – that the project will be profitable? Let’s tackle some of those questions…

Effective pricing begins with time.

Regardless of whether you bill clients by the hour or quote a project price based on value, you need to understand how much time you invest on each project and the basic rate you need to charge per hour in order to make a profit.

Back when I worked in corporate accounting, I learned a basic accounting term. That term is “burden” and it refers to the amount of overhead carried by each productive unit of time. So, every hour that machine runs has a monetary value assigned to it just to carry the expenses of the business. Just as in manufacturing, it’s important that you assign a monetary value to each productive hour of your time.

Are you bored yet? Sorry for throwing some accounting in here… but we need to consider the numbers when we are considering pricing.

Your business has a “burden” rate too. It’s the amount of money you have to earn each productive hour of your month in order to cover your expenses. You can discover your burden rate by taking the total of your expenses per month and dividing it by the number of productive hours you work each month. (Pro tip: hours spent on Facebook or doing admin work don’t count. For this equation, productive hours = hours spent doing client work.)

total monthly expenses / total hours doing client work = hourly burden rate

But wait! If you’re like me, you’d love to be profitable too. That means you need to consider a slightly different equation. You need to calculate your internal hourly billing rate. For this calculation, you just add the amount of profit you need to your monthly expenses, and then divide by your client work hours.

(total monthly expenses + monthly profit) / total hours doing client work = bill rate

So, let’s say you have $1,000 in monthly expenses and want to generate $2,000 in monthly profit. And – let’s say you normally work about 15 hours per week on client work (a total of 60 hours per month). You’d have a bill rate of $50 per hour. Here’s what that looks like…

($1000 + $2000) / 60 hrs = $50/hr

Whether you use value-based pricing or bill on an hourly rate, it’s vital that you understand how much money you need to earn during every hour you spend doing client work in order to set your pricing effectively.

The case for value based pricing

Value based pricing (sometimes called project pricing) is defined as setting a price for a project based on the value your work provides to the client. The client isn’t concerned with how many hours the work will take you to complete. The amount they pay isn’t based on time at all (from their perspective) and is instead based on the deliverables you provide.

Value based pricing is often recommended for creative service providers like us (designers, developers, copywriters, graphic artists, etc.) because it has a lot of benefits for both us and our clients.

Value based pricing:

  • Allows clients to budget properly because they know in advance the total cost of the creative project, thus eliminating variables.
  • Allows creative service providers to systematize their work (becoming more efficient) while protecting the amount they charge per project.
  • Removes time from the conversation, allowing both client and creative service provider the freedom to explore options and be creative inside the set scope.

But, here’s where value based pricing can trip you up… When you fail to consider how long something will take you, estimate incorrectly, or allow scope to expand without charging for it.

When you fail to consider how long a project will take you basically give up control of your profitability. It’s tempting to simply price a project based on what other people are charging… because it feels safe and easy… without considering what YOU need to be paid in order to do the work. We fall into the trap of arbitrarily setting a dollar amount without ever calculating the time required to do the work.

I’ve done this myself. I once charged $900 to write content for a big website. I was pretty confident I would be profitable at $100/page and the site required 9 pages. Ta-da – easy quote to put together. Um – yeah. I lost money on that site based on the total time required.

When you estimate the time required incorrectly because you haven’t really explored how long it takes you to do the work, you are shorting yourself. That job above required a lot of time educating the client, making changes during the revision cycle while he changed his mind and got clear on what he wanted, and extra time wading through source material. I quoted based on two hours per page… 20 hours of work… but spent close to three times that because I didn’t consider anything other than writing time.

When you allow scope to expand without charging for it you are basically working for free. There’s no difference between doing a website for your brother for free and allowing a client to “just add one more thing” without adjusting the price. You get exactly the same amount of money – and depending on your family dynamic, it can feel just as thankless.

The case for hourly pricing

Hourly pricing is pretty simple for everyone to understand. You bill $X for each hour of work you do for a client. You can sell prepaid blocks of time (10 hours at $X / hour, for example) or you can simply do the work and then send periodic invoices. You can even create some kind of retainer system where the client pays you a set amount each month in exchange for X number of hours of your time.

The simplicity of hourly pricing is definitely part of the appeal. You don’t have to worry about estimating the time you’ll spend in advance. You don’t have to struggle with expanded scope. You can just do the work and get paid for it. Easy, peasy.

Hourly pricing is great for ongoing client work. I have clients who ask me to generate content for them each month. The requirements vary from month to month, so they pay me using prepaid blocks of time. When the work comes up, I make time for it in my schedule.

Of course, there are a few drawbacks to hourly pricing. The big ones are – – > Talking about your hourly rate with clients, scheduling issues, and client requests for estimates.

Talking about your hourly rate with clients can create problems. Most of these have to do with the perceived value of money, and the client’s ideas about what you “should” charge vs. what you actually charge. I’ve found that most of my clients have an opinion about what I should make per hour. It’s often based on what they pay their in-house employees or what they have earned themselves on the job. They don’t factor in the costs and risk associated with owning a business…and this makes things awkward. There’s nothing worse than quoting an hourly rate to a client who makes half that much in his role at ABC Company.

Scheduling issues arise with hourly clients. When you book a big project, you typically block out time in your schedule for the work, right? When a client is paying you hourly, something happens in their brain. Somehow they suddenly think you are on-call and can respond really quickly to minor little requests. I’ve had hourly clients get a little grumpy when I quote a delivery date that’s two weeks out. But honestly, the same issue doesn’t come up with project-based people.

Client requests for time estimates are difficult to navigate when you’re billing hourly. It’s natural for a client to say “how long do you think this will take?” But, be careful how you answer. You might say “Um – probably 2 or 3 hours” and mean it sincerely. The client, however, will hear “2” and believe it’s a promise, not an estimate. When you bill for 2.5 (perfectly within your estimate) someone might just feel cheated. It’s happened to me.

I use a mix of both value based and hourly pricing in my business.

Before we get too involved in what I do for my business, I want to share a little disclaimer. There is no “one size fits all” perspective on pricing. You need to find the balance, mix, and pricing strategy that best fits you and your clients. Why? Because you need to feel comfortable and confident when you explain your fees to potential clients. « This is absolutely essential!

I’ve discovered that my business runs best with a mix of pricing strategies. I know what my hourly internal billing rate is, and every price I quote is based on that rate. But, the way I structure the pricing varies depending on the client and the work.

When quoting a project with a well-defined scope and timeline, I always use value based pricing. Typically, I meet with the client on an initial inquiry call and we discuss the project. We determine the scope and the timeline in general terms and occasionally also identify some “nice to have” options the client may want to add at some point. Then, I create a standard proposal for the project and quote a value based price.

Now, understand… I don’t quote that price lightly or casually. As I’m creating the proposal, I estimate the hours I will spend at each stage of the project. I factor in how well I know the client, how much discovery time will likely be needed, and if I will need to collaborate with other people on the client’s team. I have a type of “menu” I use with hourly estimates for various tasks – based on the time I’ve spent on previous projects.

Once I have a complete estimate of the time, I multiply by the hourly rate to get my lowest possible pricing. (Typically I round up to the nearest $50 just to make it pretty.) I price out the “nice to have” options as well and list them on the proposal as ala carte items the client can add if desired. This process might sound elaborate, but it’s actually pretty streamlined for me.

Then, I look at what I’ve charged in the past for similar work and compare the lowest possible pricing I’ve calculated with my “going rate” for other projects. If my calculated pricing is lower, I will often charge the higher price – or even raise my past price by 20%. Why do I do this? This is the “value” component of the pricing…and it takes into consideration the value my work on this project will deliver to the client. My business is profitable as long as I don’t go below the number I’ve calculated. But there is often room to build in some additional profit within value based pricing. I take advantage of this if I can.

When quoting work that doesn’t fit nicely into a project or ongoing work that will change over time, I typically quote using hourly pricing. I have a standard hourly proposal that offers clients the opportunity to purchase a 10 hour prepaid time block. The proposal also shares a few terms that honor the way I like to work and make a few things clear right up front.

Here are some terms that are important to me:

  • Purchasing prepaid time does not create a “retainer” situation. I am not on-call.
  • I require a 1-2 week lead time. When work is requested, I will respond with my availability and commit to a deadline.
  • When 2 hours remain in a prepaid block, I will automatically generate an invoice for the next 10 hour block.
  • At the completion of our work together, the value of unused time will be refunded within 14 business days.

Do you need these terms? Nope. These are my terms, developed over time based on how I prefer to work. Notice I am not on retainer or on call. I personally don’t enjoy the urgency of those situations, so I avoid them.

Working with me on an hourly basis is positioned as a privilege. I typically offer this hourly arrangement to copywriting clients who have worked with me on a previous project and have an existing relationship with me. Occasionally I will offer this type of arrangement to a new client, but I position it as an “onboarding period” we can both use to get to know one another and determine our fit together.

There is not a “right” way to price your work. You get to decide.

I’ve seen posts out there that share the “right” way to price creative work and I find them frustrating. Most make a few good points, but then try to pressure the reader into a system that might not fit. When it comes to pricing, I believe there are no rules, there are only a few guidelines to consider.

  • Pricing should be as simple to understand as possible.
  • You should feel comfortable and confident quoting.
  • The pricing structure you use should support the profitability of your business.

As the business owner, you get to decide how to charge for your work. That’s part of the freedom of this entrepreneurial life. If pricing is a challenge for you, I recommend you experiment a little. Try something different with your next client and see how it fits. You’re sure to learn something about yourself, and your clients, in the process.

Do you struggle to confidently quote your fees? Are you unsure how to profitably position your services? Head over to the Drama-Free Design Community and share your thoughts.

Author: Michelle Hunter

Michelle Hunter is a business strategist and copywriter with a gift for connecting entrepreneurs and their clients using great writing. She is a regular contributer to the DtD blog and co-creator of Designing Success Bootcamp - Helping designers create a strong marketing engine to power business growth. Visit MichelleHunterCreative.com to contact Michelle or learn more.

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