When you open a retail store it is fairly easy to figure out what to charge for specific items. You can check out your competition and lower your prices a bit to offer customers a better deal or you could determine what the item costs and charge a certain percentage over that to be sure you will make a profit.
But how do you establish competitive, yet fair, service fees? Let’s say you are a public relations specialist. You think $85 for a 2-page press release is a fair price. Then you start calling around and discover that another firm in town is only charging $50 while a third firm is charging $150. With such a large spread, you may be wondering exactly what to charge to bring in new clients.
Some businesses like the one described are fairly varied in what they can charge. This is mainly due to the fact the provider’s experience and track record within the industry account for so much of their success. This allows a more experienced firm to charge a lot more for the same service than a lesser experienced one.
With this in mind, what is the best strategy for calculating your own fees? First you have to decide whether or not to charge an hourly or a set fee.
The Hourly Rate vs. the Flat Fee
Most people want to quote by the hour since they think it will offer them the most equitable way to get paid. While it may seem simple, easy and fair on the surface, hourly pricing does offer some definite negatives which need to be considered.
Hourly rates look too high to the client
When a client looks at an hourly rate of $40, they rarely consider how the contractor came up with that figure. There is a lot more that goes into a fee then just the price of the job. Remember, when you are calculating a rate you must include an appropriate amount for your time plus expenses like insurance, taxes, office overhead, research, etc. In most cases these “extra” expenses can add up to 30-45% of your income. This means if you need to make $20 an hour to make ends meet, then you should actually be charging between $30-$45 per hour. Since clients will often look for the lowest hourly rate possible, you could be keeping your company from having the chance to actually show off what you can do by bidding too high. Offering a fixed rate may actually make your bid look lower even though it isn’t. This allows the client to figure out whether or not “the job” is worth a certain amount versus whether “you” are worth a certain amount.
Clients worry that charging by the hour gives them little control
Clients often worry that a provider who charges by the hour will pad his workday or take longer than is needed to finish a job simply to make more money. This can leave them feeling taken advantage of. If, however, you both agree an hourly rate is the best way to bill, you can make the client feel more comfortable by capping the number of hours charged for a certain project contingent on the client sticking with the original specs for the job.
Hourly rates can’t benefit both you and the client.
Here is one thing you may not have considered; an hourly rate can either benefit you or it can benefit the client, not both. Here’s why: if you quote $20 an hour for a job that should take about 10 hours and you work quickly and efficiently, you could be shortchanging yourself. Just because you are able to work quickly does not mean you should make less. On the other hand, if you work slower than you should, the client will feel taken advantage of. Either way, someone loses. Fixed pricing enables both parties to agree on a price that seems fair.
Hourly rates cheat you out of unbillable time spent on the project
There are a lot of things that eat up your time which can’t be billed to the client: correspondence, research, marketing, bookkeeping, etc. While yes, you can pad your hourly rate to help recoup these losses, the odds are you will lose some money on certain jobs because of unforeseen unbillable time spent. Fixed rate jobs allow you to factor in these extra time wasters so you aren’t giving away your time and talent.
Hourly rates do not accommodate unreasonable deadlines
A client calls you on Tuesday morning and needs a job finished by Thursday afternoon. Normally you would schedule at least a week for this kind of job, but this is a good client and you want to be accommodating. If you charge by the hour you will have no leeway when it comes to these types of rush orders and clients may take advantage of that. Fixed pricing allows the provider to “tack on” a premium for quick turn-around projects that may require overtime hours.
As you can see, hourly pricing is not always the optimal way to work. Figuring out a fixed price for each project often allows you the provider to consider how long the project will take to complete, how difficult it will be, how difficult the client is to work with and other special details that may need to be considered. These are all important considerations that may affect a project’s price.
Often a fairer way to do business, fixed pricing offers safeguards for both provider and client. Plus it also allows the client to set and stick to a budget, which is always better for their bottom line.
Of course, every rule has exceptions and hourly versus fixed pricing is no exception. There are times when charging by the hour works best. Here are some of them:
- When the size and scope of the project are unknown. It’s impossible to quote a project fee when neither the client nor the provider has a clear grasp of the scope and size of the project. Since time commitments can change as the project is fleshed out, it is always best to work on an hourly scale for these uncertain projects.
- When You Fear Unlimited Changes. Some clients simply can not stick to the plan. If you know a certain client is always changing the project guidelines or asks for multiple revisions throughout the process, you may want to consider charging by the hour to make sure you don’t lose money on the fee.
- When The Client Insists on an Hourly Rate. Some clients want to pay by the hour. When this is the case, simply figure out the best rate you can to ensure that both you and the client are happy.
Once you have figured out whether or not to charge your clients an hourly rate or a fixed rate for your work, you will have to calculate what the best fee will be. Here are some basic tips to setting your fees:
- Figure out the average price for the service you offer. If you are inexperienced in your field, opt for an amount lower on the pay scale but if you have the experience and know-how that your clients want don’t be shy to set your charges on the upper end of the industries pay scale.
- Consider all of your business costs in your fees (insurances, taxes, office overhead, etc). Too many service providers fail to consider the real cost of doing business when they set their rates and end up losing money on some jobs.
- Take into account a clients personality and the depth of the job. If a client is especially difficult to deal with, don’t worry about charging a little more. Also, more complicated jobs or jobs with tighter deadlines should command a higher fee.
- Consider the opportunities. Do you really want to get into a certain field or client base? Is there opportunity for repeat work if you do this one job well? If there are extenuating circumstances which would lead to more or better work in the future then by all means cut the client a break. Just be sure the client understands you are offering him a reduced rate this time. Instead of quoting a lower amount (which will signal the client that future projects will also be bid at a similar rate) offer a bid with a discount. For instance, maybe your bid would normally be $1,000 but you are willing to do it this time for $800 simply to win the project. Clearly state on your bid sheet the original price minus a 20% discount (offer any explanation you want for the discount). This way the client understands that this is a one-time only offer. You can do the same for future work if a client wants a break on certain jobs. The key here is to not lock yourself into a lower than normal rate on all repeat projects.
Setting your rates is not always an easy task, but it is one you should consider carefully. Too many inexperienced providers offer deep discounts to new clients simply to land a job rarely thinking about the consequences of their actions. Remember, what you quote today may follow you for years so be sure you are getting the fees you need – and deserve.