Service pricing: Hourly rate or fixed fee?

If you provide copy, design, consultation, or any kind of service to advertisers, you already know how difficult it is to deal with pricing.

One of the hardest decisions to make is whether to charge by the hour or to charge a fixed rate.

This is just one of many issues I’ve been thinking about lately after reading Steve Slaunwhite’s definitive book on the subject, Pricing Your Writing Services. It’s written from the professional writer’s perspective, but the principles apply to graphic designers, Web professionals, consultants, and many other service providers as well.

The short answer to this quandary is that it’s better to charged a fixed rate in most cases. Why? Well, that requires a longer answer.

Quoting hourly prices seems more natural when you’re starting out. That’s because we’re all used to the hourly concept. People are often paid hourly. And it’s an easy answer to the question “What do you charge?” But hourly rates present problems for professional level service providers.

First, clients tend to dislike hourly rates. If you quote $75 per hour, a prospect might think you’re charging too much if he or she earns less.

Second, hourly rates are inherently unfair. They’re unfair to you because the better and faster you get at providing your service, the less money you’ll make. They’re unfair to clients because if you don’t know what you’re doing or have a bad day, the client has to pay for it.

Third, both you and the client will be looking at the clock all the time. The client will want you to hurry while you’ll want to slow down.

The fixed rate or project rate solves all these problems. There is a set fee for a given piece of work, so you and your client know what money is involved. Your client can’t make a head-to-head comparison of what you earn vs. what he or she earns. It’s more fair all around. And everyone can forget about the clock and focus on doing good work.

Are there any circumstances where hourly rates are called for? Yes.

If the scope of the project is unclear or if the project is open-ended, hourly is the only way to go. Sometimes a client may ask for it, though in the ad and marketing business this is rare. And hourly rates make sense if you offer add-on services such as consulting.

In my experience, fixed fees are also a lot simpler to quote. Over the years, I’ve built up a fee schedule for dozens of projects. So when someone asks what I charge for something, I just consult my schedule.

One more thing. A fixed fee helps you avoid difficult situations with your client. Service pricing in this business is all over the lot, from ultra cheap to astonishingly expensive. If you’re designing a brochure and your client assumes it will cost around $500, sending an invoice for $2,500 is going to cause a problem.

Pricing is a hugely important and complex issue. What I’ve covered doesn’t begin to scratch the surface.

If you want to know more, I highly recommend Pricing Your Writing Services regardless what services you offer. I consider Steve the guru of pricing and his book covers this subject clearly and in great detail.

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8 Responses to “Service pricing: Hourly rate or fixed fee?”

  1. John Lepp on August 1st, 2008 10:09 am

    Great post Dean. I’ve completely stopped mentioning my “hourly” rate if it can be avoided. If a client can only afford $1000 for a brochure – what does it matter what my rate is – I can either agree to that or not. It’s a trust issue – I know. Especially with charities – just because they have $1000 set aside for it – doesn’t mean that’s what they want to spend – and I certainly try to respect that. And your point about how you work is quite valid – I have been taught to be a quick and creative thinker – why should I be penalized for that?

  2. Ted Grigg on August 5th, 2008 12:24 pm

    I regularly hire creative people to create work for my clients.

    As a direct marketing consultant, I know that consultants — and copywriters — make far more money on a flat cost per project than an hourly rate. And the less I pay for subcontract work, the more I make.

    Paying creative teams by the hour allows me to question why that direct mail package costs $5,000 if the rate is (for example) $75 per hour. That translates into nearly 67 hours! You and I both know that it did not take a week and a half to write that package. Especially when I write the creative brief with the benefits, competitive overview, product facts and so forth.

    If your rate is $100 per hour, then 50 hours is still excessive in most cases. If the rate is $200/hr, then I will probably seek out another writer.

    I charge the client a flat rate. Paying creative suppliers based on time works best for me. And paying for 50% of the project in advance also helps me to negotiate better rates.

  3. Dean Rieck on August 5th, 2008 1:40 pm

    Ted: I guess it depends on whether you are buying someone’s time or someone’s expertise. I don’t sell my time. Nor do most top writers.

    It’s like the old joke about a lady who hires a handyman to fix her squeaky floor. The handyman walks into the house, takes out his hammer, drives a nail into the floor, and instantly eliminates the squeak. The woman balks at the $100 bill. “All you did is pound a nail into the floor.” The handyman says, “It’s $1 for hammering the nail and $99 for knowing where to hammer it.”

  4. Ted Grigg on August 5th, 2008 8:29 pm

    I understand. But clients will only pay so much for a project and that varies by client.

    Top flight consulting firms sell their services both by the hour and by the project. And the higher hourly rates are justified by the level of the expertise they bring to the table.

    The writers I use are top flight and their hourly rates are high. We usually agree on a flat rate. But ultimately, that rate is based on an hourly rate. The bigger the job, the more they get paid.

    I am both a client and a provider of expertise. So when I bring a project to a creative team, the only way I make money is to buy their services wholesale. The creative people realize that they have zero sales cost when going through me. I also manage the client and the billings. So they love this arrangement.

    This works well in my situation and has for nearly 17 years.

    There are a few writers (very few) who get all the work they can handle. But that often has more to do with how effective they are at selling their expertise rather than their higher level of creative talent.

    As you know, a high rate does not necessarily equate or guarantee excellent quality. So I look for talented AND hungry creative people as partners.

  5. Sean Star/neoCaptiva marketing on August 9th, 2008 2:01 pm

    First, there are a few reasons why clients don’t like to be quoted at hourly rates:

    1. Pricing unpredictability. The client feels that they might not be able to control what the final price will be.

    2. Price bias towards agency. The client might feel that the agency won’t be as fast or efficient as they would be, than if there was no time value benefit to them.

    3. Perception of value. Your contact themselves, probably doesn’t make near the hourly rate you are charging, and therefore feels the pricing is too high; especially if they are contributing to the project ideas.

    4. Over budget possibilities. Your contact has to manage the project a little more carefully and closely. If not, your contact is risking her job if billing gets out of control.

    The problem with fixed pricing, is that it can enable the client to take advantage. Some clients will make endless changes and reworks, and the project can be significantly delayed. The solution for this is having a very clear, signed agreement that spells out how many changes can be done. I recommend writing a solid contract that considers all potential problems, and then submitting it to an attorney to strengthen and finalize it.

    A different option I like to do is called a “convertible clause”. What I do is price them a low fixed rate that includes 1 or two concepts or versions, and 1 set of changes for the concept they approve. If they need more and have more demanding needs, then it converts to an hourly rate from there. This is fair to reasonable clients, and makes more demanding clients pay for their additional time usage. This also relieves stress, and gives the control to the client. Most importantly, this gives you a better chance to win more bids and have the perception of the fairest price. Always give them the complete details on both the quote, and the contract- and never rely on anything verbally.

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  8. Creative Services on November 23rd, 2010 10:33 pm

    Great post. Thanks for sharing, I agree with your second point that hourly rates are inherently unfair. I’ve had some projects that felt undervalued/underpaid only because I managed to finish it fast.

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