Figuring out how to price projects can be a learning curve for freelancers and small business owners but it’s a skill that’s crucial to the success of any venture. The good news is that with a little bit of research and number crunching, you should be able to pick the right approach and then get back to the important stuff: delivering your projects.
Do your research
Before you begin to discuss numbers with your clients, it’s worth taking the time to do some research. Find out the going market rate for your product or service by searching online for similar work or speaking to peers about their pricing models. Use this research to determine the low-end, average and high-end rates for the types of projects you plan to deliver.
If you’re a logo designer, for example, search for “how much does a logo cost?” and you’ll quickly get a feel for the different price ranges on offer. Aim to charge at least the average going rate for your kind of project, even if you’re just starting out. It’s important not to undersell or oversell yourself; begin in the average range and then you can decide how flexible to be in any negotiations you have with your clients.
Ask your client about their budget
If you’re really struggling to get a feel for how much to charge for a project, you could try opening up a conversation with your client about their budget. With that knowledge, you may then be able to plan or adjust the project to ensure that you meet your client’s needs within their budget. Don’t worry if your client isn’t comfortable disclosing this information; your market research should still help you to figure out a ballpark project price.
Break-even points and savings buffers
Once you have a good rough estimate of how much to charge for your projects, it’s important to drill down into the financial details to ensure that you keep your cashflow healthy. Start by identifying your business’s break-even point: the minimum amount you need to earn every day in order to cover all your costs, without net loss or gain. You should also calculate a savings buffer to ensure that you’re prepared for any changes that might affect your income. Check out our Chief Accountant’s guidance on calculating a business's break-even point and savings buffer.
Remember that you’ll need to set aside money for your tax bills. If you’re unsure how to do this, try using HMRC’s tax budget calculator. If you’re a FreeAgent customer, you can take advantage of our handy Tax Timeline feature.
Hourly vs fixed-rate pricing
The dilemma of deciding whether to charge an hourly or fixed rate is familiar to many small business owners and freelancers. So what are the pros and cons of each pricing strategy?
Hourly pricing: pros and cons
Charging an hourly rate can be an effective tactic if you simply don’t know how long a project will take. You’ll need to track your time and bill your client for each hour that you work in order to protect yourself from the risk of inadvertently racking up non-billable time.
If you charge an hourly rate, you can only charge for the hours that you work. If you end up working fewer hours than anticipated, you might get paid less than you would have if you’d charged a fixed rate.
For example, if you create an illustration in an hour at an hourly rate, you’ll only be paid for that hour. However, if you agree to a fixed rate per illustration, you will get that full rate regardless of how long the work takes you.
Fixed-rate pricing: pros and cons
Charging a fixed rate for a project gives you the greatest degree of flexibility. You won’t need to get into the nitty-gritty of time tracking and you can manage your schedule however you like. In addition, you won’t find yourself being paid less if you manage to wrap the project up quickly.
The downside of a fixed rate is that if the project drags on a little longer than expected, you could end up doing additional unplanned work for no extra charge.
If your business primarily sells goods
It’s vital to keep your costs firmly in mind if your business primarily sells goods, rather than services. If you don’t estimate all of your costs accurately, you may end up reducing your earnings and damaging that all-important profit margin. If your business sells knitted socks, for example, you should take into account the cost of the wool, needles, patterns and packaging before deciding on a price.
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