Time to put the gloves on: today we are discussing a debate that has raged on among freelancers since the beginning of the profession.
Of all of the topics I’ve covered on freelancing, from pricing mistakes to marketing, this is definitely the topic with the most division, and today we are going to settle this issue, once and for all.
Your opinion will be incredibly important in this post, so make sure that your voice is heard after I’ve presented the evidence.
So, what are the strengths for hourly rates and fixed rates? What are their weaknesses?
Below, I’ll show you the insightful cases made by two prominent freelancers who take opposing sides on the issue, and I’ll add my thoughts on each.
Let’s get this thing started!
The Case for Fixed Rates
There are certainly some amazing benefits that freelancers can only access by charging fixed rates.
When you are getting paid for complete work and not for being “on the clock,” the experience is quite different for both you and the client.
When it comes to deciding how you should price your services, charging by the hour is one of the worst mistakes a
freelancer can make. There are two key reasons for this…
1. It Limits Your Earning Potential
If you charge by the hour, it will only be natural for you to work less efficiently than if you had priced on a per job basis. And given that you only have a certain number of hours available in the day, you are essentially capping your maximum earning potential.
You can of course raise your hourly rates, but you will still only have the same number of hours to work with (literally and figuratively).
If on the other hand you price on a per job basis, you are limited only by the speed in which you can complete your work. You will learn to work more productively, and in turn, will earn a higher equivalent hourly rate (and impress clients with your efficient style and quick turnaround).
Tom makes a bold statement here, but from talking with him extensively on Skype, this system seems to work really well for him (note: he is a freelance writer who mainly works on blogging projects & content strategy).
From Tom’s perspective, if you can get a $500 job done in 2 hours, you’ll find yourself at a very respectable rate of $250/hour.
If, however, you agree to hourly pay, you may have a hard time getting a “rate” similar to that, especially if you are new to freelancing and don’t have a lot of previous references or a strong personal brand.
Interestingly, Tom also argues that an hourly rate (while seemingly good for clients in the above example) is actually bad for clients since it clouds their perception of value…
2. It Clouds Your Clients’ Judgement
An hourly rate is a big psychological hurdle for many prospective clients. The same job priced in two different ways can provoke wildly different reactions.
Let me explain. Say you’re presented with the opportunity to write a 1,500 word article on a complex and technical topic that you just happen to be well-educated on. Given the nature of the content, the client is happy to pay $150 for the article. He assumes it will take 3 hours, and deems $50 to be a reasonable hourly rate (but you don’t know that).
Consider these two different pricing approaches:
- State that the article will cost $150 to produce
- State that the article will take you around an hour to produce, and will cost $150
The client would happily accept option 1. He would almost definitely balk at option 2.
It’s simple psychology – the perception of value. Chris Guillebeau touched upon this in The $100 Startup. He paid $50 to a locksmith for an ultra-quick turnaround in an emergency, yet he felt shortchanged by the transaction. Chris remarked on his illogical reasoning:
“…I realized that I secretly wanted him to take longer in getting to me, even though that would have delayed me further. I wanted him to struggle with unlocking my car as part of a major effort, even though that made no sense whatsoever. The locksmith met my need and provided a quick, comprehensive solution to my problem. I was unhappy about our exchange for no good reason.”
Tom makes some solid points here, and his case for the client’s perception of your work is interesting in that I agreed with him (in general) when I evaluated the 4Ps of marketing — it’s far more important to sell on perceived value than anything else.
In the example I mentioned above (finishing a $500 project in 2 hours), the client will almost certainly balk at the idea of paying out $250/hour (not premium clients, but many clients will feel this way).
However, if they are getting $500 worth of value… why should they be mad?
Why should they want you to work more if you can competently complete a job in less time than expected?
Tom argues that this limiting factor can clog up your time, whereas productive freelancers can benefit from fixed rates by doing great work quickly.
This argument is FAR from over though…
The Case for Hourly Rates
Definitely the most popular pricing option, hourly rates in turn offer some advantages that a fixed pricing structure can never touch.
When you are billed by your time, you control the rate and each hour of your time is now resulting in guaranteed (well, almost guaranteed) coin in your bank account.
Unless the estimate is perfectly accurate and the scope never changes, there is a huge amount of risk for you in fixed bid pricing.
Chances are, you assumed a lot of things when preparing an estimate. A long book could be dedicated solely to the art of the estimate (I actually recommend Agile Estimating and Planning).
But these assumptions will often lead us to oversimplify a feature, and then spend a large amount of time getting it to be in line with the client’s expectations.
Conversely, the client likely doesn’t have a clear understanding of exactly what they ordered, and thus will ask for a number of revisions — with each revision taking more of your time and thus cutting further into your profit.
Highly subjective requirements, like design, are most susceptible
Brennan also makes some great points here, and there is even research that backs up his claims.
For instance, the Kellogg School has published multiple papers that show we are generally very bad at predicting things like “productivity” for our future selves.
So 3 weeks ago when you told yourself that this upcoming project would only take 2 weeks, you were overestimating your ability to produce.
Far more important than that, you have even less control over some of the wacky things that clients can demand midway through a project!
Most freelancers that have been doing this for a while have at least a few crazy clients that they can reference here as evidence.
While you can definitely get lucky with great clients, as I have with people like Ruben and companies like Unbounce, this is hardly the norm: client personalities (and expectations) are all over the place.
It is primarily for this reason that I agree with Brennan over Tom.
(There, now you know where I stand )
One thing to note here is that Brennan specifically cites web design as an industry where this can be a huge problem, and I think that this is where Tom’s advice may be more tailored to his own work and abilities.
Since I’m involved in content strategy, I’ve found that when it comes to marketing related jobs that involving a lot of writing, clients aren’t as picky since they are usually more concerned about the results over the details.
Tom benefits from this because he is a great writer, so he probably doesn’t run into a lot of clients who ask him to change a ton of things around.
Brennan, however, knows what it’s like for folks like web designers — a project can quickly can quickly turn into “design hell” as clients demand more and more specifics that are way out of line:
(via The Oatmeal)
Brennan continues his case from the client side…
However, the client is also at risk with fixed bid.
Especially when you’re working with a smart freelancer. Seasoned freelancers know from experience and frustration that endless series of 26 revisions or scope modifications hurt their income.
Therefore they’ll be more resistant to change and learn to live by the phrase every client dreads to hear: “This is out of scope.”
As a project evolves, it’s often advantageous to the business to change scope. And as a premium freelancer charging a premium rate for our services, we want to over-deliver on value. When we’re locked into a scope of work, this isn’t always possible.
I agree with Brennan here, but less so than above.
I feel like when clients run into the problem, it’s most likely (though not always the case) the they are asking for too much, and thus usually bring the “out of scope” response on themselves.
Again, that’s not universal, but from my experience it is usually a bad estimate on the client’s end that results in this outcome.
This Debate Ends with You!
We’ve seen the evidence, we’ve also seen some compelling arguments from very smart freelancers on both sides of the argument, so now it’s time to hear what you think!
Since this debate will always have different opinions on each side, I only have one question for you today…
As a freelancer, which payment system is the best — hourly or fixed?
Leave a comment below with your thoughts!
I’ll see you down in the comments…