Pricing Strategies for Designers

Recently,  a friend of mine decided to take on some consulting work for a start up here in St. Louis.  He reached out to me and asked:

I was asked to put together a plan to increase a startup’s average revenue per user — which I did — however, now I need to give them a set number of hours to get the project done. As I’ve mentioned before, I don’t do a lot of consultant work so I have absolutely no idea how to determine this.

My response was:

The first is I might reject the premise of the question altogether – Hourly work is fine and all, but you just put together the game plan for them to make a lot more money. So I might try a value pricing approach, something like 10% of the expected growth in AR/U multiplied by their user base – I’d use round numbers so the math is easy for them to understand when you pitch it. Like

(example)
Current AR/U = $100
New AR/U = $110
change = $10
10% of change = $1
Multiplied by Monthly Average Users (10,000) = $10,000. 

You can then break that amount up into as many payments as you think you’ll need over the course of it.

If they can’t grasp that you have earned a share of the reward, then you shouldn’t pursue the project further. (IMHO)

If that’s not kosher, I might just try a fixed price bid.  A fixed price can be a wild ass guess for all they know.  The nice thing for them is they know what you think it is worth and they know what they will pay. The bad news is, you now just have to make it work on that amount.  (For small projects this is not a bad thing – companies routinely outsource things they are inefficient at to experts who are.)

If that’s not going to work because the project is too big, estimate a timeline and establish a monthly retainer, i.e. 3 months at X amount of dollars paid each month by the 5th.  Monthly retainers are great because everyone knows where they stand, the bad thing is you have to deliver every month you have them.

Last, Hourly you need to break the project down into it’s smallest pieces, guess the time for each piece, pad it appropriately (to account for project management time, setbacks, workarounds, etc), add it up, and then I give them a range, like this.

“Based on my estimate, this project should take between 180-240 hours of my time and will cost between X-Y.”

Giving them a range is important so they can budget appropriately and account for changes during the project.

The conversation was in an email, and went on a little bit past that.  He’d never heard of value pricing, but was intrigued.  I cautioned him against going all in on just one pricing strategy:

All of the pricing models work and have been around for a long time.  The only right answer is the one that works for you and them that you can agree to.

The only other things I tend to do with contracts are:

1) a non-refundable deposit
2) a kill fee (an amount they agree to pay if a project is cancelled or indefinitely delayed) usually 1/2 of the remaining balance paid as a lump sum. In exchange,  it acts as a final payment on a contract and you hand over your work.

both of these are non-negotiable in my contracts.

the deposit works just like an airline ticket – it will reserve the time, headspace, and resources you need to start a project. Most importantly it allows you to say No to other offers (b/c you’re in demand, duh). Kill fees are project insurance –  if something goes wrong, you still get paid for your work.  You don’t buy a car without money down and without buying insurance, and working with me is the exact same thing.

To recap, there’s 3 basic ways for designers to price their work:

  1. Value Pricing, where the designer estimates the value add to the business the client – which is an ideal scenario because the incentives are aligned.
  2. Fixed Price, where both parties know exactly how much the project will cost (and then the designer is on the hook to make sure it is profitable for them).
  3. Time and Materials, where the designer knows how much it will cost (rate x time), but the client doesn’t know how long it will take.

Retainers are a kind of bastard child of fixed price and time and materials, in that X dollars buys the client Y time.  There are many many ways to price your work, and ultimately you don’t need to choose only one.  There are many prominent designers, like Dan Mall, who swear by value pricing.

I tend to agree with them.  As a designer (and really, just a competitive person), I’m always confident betting on myself.  I’m confident defining problems and building solutions, and when I make a value pricing proposal I’ve already done both.

Pricing Strategies for Designers reviewed:

Sometimes a fixed price is a necessity; especially when dealing with governmental and NGOs who often have RFP (request for proposals) that require an all in bottom line number. Fixed price does have the drawback of scope creep.  Like any business, designers have to make a profit. Every additional minute not estimated for in a fixed cost eats into that profit. From the jump, a client’s incentive to get their money’s worth is at odds with your incentive to maintain your margin.

Time and Materials inverts those incentives,  but can work out for everyone (if they are honest). Sometimes hourly makes sense too, but I will say that for experienced designers, it can be a raw deal both due to efficiency and rate resistance.

Efficiency is just being better at something than the next guy.  If it takes a less experienced designer 10 hours at $50 to do an assignment, and a more experienced designer only 3 hours to do the same task but $100/hour, is an experienced designer really supposed to be paid less for their work? How does that make sense?

Rate resistance is similar.  There are very few professions that Americans are comfortable paying more than $150/hour for. Lawyers can charge more –  but there’s significant barriers to becoming a lawyer. There are far fewer for a designer.  There’s also the simple fact that you have to bill hours to get paid. With just hourly pricing, if you aren’t working for whatever reason, your cash flow stops.

I know that I am personally moving more toward value pricing as more dominant strategy.  I am finding it requires more trust on a potential client’s part to figure out how much value I can add, which is a good way to determine if they’d be a client I want to work with in the first place. Later, I can point to how much value I created for them as part of my marketing and sales to future clients.  To me,  I think this is a method that takes a little more thought up front, but is ultimately the best strategic play for a designer.