Kay, how do I price hourly? (Pricing 101: Part 1)

Waddado Every’body today we’re gonna learn about pricing.

Pricing was a tough thing for me when I started out. I used to get so weird when it came to talking about money, it made me uncomfortable. Basically the whole cliche of heart racing, excessively (greasy) sweating, and all that type of shit used to happen to me when it came to talking money.

So I did what I always do when I’m insecure about doing a particular thing, I try to master the whole damn thing (which might explain why I do so many things). So I learnt all about pricing, read books, read books again, and read books the third time. I took courses, I took workshops, and anything I could find on the face of the earth about this thing that was making me feel insecure.

Today we’ll discuss all the things that I’ve learned from these books and my small experience in the “industry”. We’re gonna learn about different pricing strategies, when to use which, their pros and cons and all that shit.

Pricing In A Nutshell

This line sums up pricing in a nutshell for both parties.

“Is what I’m getting better than what I’m giving up?”

That’s the question you ask when you part with your time and you get money.

That’s the question your client asks when they part with their money for what they’re getting.

Pricing Inputs: Charging Hourly

What pricing inputs means is that the estimates are based on time, material, availability yada yada. You price based on your “gut” feeling, to sum up.That’s what everyone does when they are starting out right? You sell your time. Bob’s charges $80/h, Kate charges $140/h…. and you chat with a couple of friends and get an idea of what they charge. You average them out, round ‘em up and you have your market rate.

When you charge this way you roughly estimate what the project is gonna cost by multiplying the estimated time by your rate either that or you charge based on what projects like this have costed in the past.

How to master pricing inputs

If you are charging this way (whyyy seriously whyyy….?) here are a few things you can do to optimize this:

1. Chunk (onion skin) projects into 3-5 phases or milestones:
   • For motion graphic projects it could be: storyboard keyframes, rough edit, animatics, 1st pass animation, finish animation, final color grading.
   • For web projects it could be: information architecture + site map, wireframes, visual design, development, QA.
   • For video projects it could be: script, shot list + storyboards, shoot, edit, post-production
2. Charge for all the shit you do:
   Charge for creative supervision • Charge for project management/coordination • Charge for art direction • Charge for multiple team members • Charge for research/curation of stock images • Charge for machine rentals • Charge for render times • Most of all, include a profit margin
3. Define assumptions— what is the client responsible for? What are you responsible for?
4. Define all this shit:
   What are kill fees? • What are payment terms • Hours of operation • Overtime/rush fees • Project delay fees • Feedback cycles

Finding it messy right? That’s why I quit charging hourly.

The problems with charging hourly

Don’t get me started… it’s an endless list, but still here are some of the things you’ll face:

• They don’t scale as you gain more experience. The minute you become better and more desirable than your peers and competitors, you’ve outgrown industry standard pricing. Lemme walk you through a lil story:
  
  “There was Mary. She came to you 3 years ago when you charged $50/hour to design a flyer. You took 10 hours to design that flyer, you got paid $500. Mary happy, you happy.
  
  3 years later Mary comes back to you. She trusts you, and she needs a new flyer. But your rate has doubled to $100/hour now with all the experience you’ve gained over these years. But she still agrees, you’re proud. With all your new experience you finish that flyer in 5 hours, half the time it took you 3 years ago. You’re living the drea….. WAIT A SEC.
  
  You made the same amount you made back then? How does that make sense? Why are you being penalized for your experience and efficiency?
  
  Now redo the scenario. To turn a better profit, you quadruple your rate to $200/hour. But this time, Mary refuses"
  
• These market rates are good… but only if you’re at the bottom of the pile. Did I hear you say: “Well, I’m not worse than anyone else."
• When you charge hourly it’s all about you, nothing about the client. No talk about quantifiable success metrics to reach. 90% of the time the scope and deliverables are unclear when you're charging hourly.
• Waterfall-style project management
• You often find yourself self-negotiating and bidding in the dark.
• It doesn’t factor in profit and invisible expenses like project management, client coordination etc…
• For a guy like me, who wore multiple hats and would design develop strategize and manage, I would be just getting paid and encouraged to just wear one hat. You basically max out somewhere around $200/hour and beyond that, it’s questionable territory.

• There were these artificial ceilings. If you worked 50hrs a week and charged $100/hour that max you can earn in a month is... (do that math)
• Not a good experience for my clients. Imagine this:

You open the menu and none of the items has a price next to it, so you order your favorites: an heirloom tomato salad, the surf and turf, a side of seasonal vegetables, a bottle of wine, and a cheesecake to top it all off.

It’s one of the most delicious meals you’ve ever had. And then you get the bill.

It’s hundreds of dollars more than you expected to pay. Suddenly, you second-guess your choices. Perhaps you could have had an eight-ounce steak instead of the surf and turf. Perhaps the seasonal vegetables were overkill after the salad. You didn’t really drink that much wine, so maybe you should have gotten a glass instead. And did you really need that dessert?

People like knowing the price of an item or service before they commit to purchasing it—it’s how we assess what’s worth paying.

“You’re the travel agent of your client's project. No one pays a travel agent to lead them into circles, and that’s what time-based rates give you permission to do: work without an end in sight.” - Dan Mall

Enter Output-Based Pricing

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* Wanna read more about hour billing? Try this.