When starting out as a freelancer or contractor there are many questions that need answering: what are going to do? what are you going to be called? where are you going to be based? Today I want to look at the most important of all:
How are you going to charge?
Notice I didn’t say “What are you going to charge?” Pricing models would have been a great topic for Freelancing 101 at University. I know when I was starting out in my accounting firm I asked around and looked at other accounting firm websites. But there’s more than one way to bill for services. The three types we’ll look at today are:
- Hourly Billing
- Service Pricing
- Value Pricing
One is not necessarily better than the other but there are certainly customer cases where one is suitable over another. Hourly billing doesn’t need much introduction - you bill a certain amount by the hour worked - a common rule of thumb when going from employment to self employment is to take your salary and divide by 1000 to get your targeted hourly rate. Service pricing (sometimes called “menu pricing”) is priced by the service performed, which lets face it is mostly copied from the competition.
To get to Value Pricing we need to understand as service providers that there’s a value gap in what your customer receives in value compared to what you charge for your services. Value pricing attempts to narrow this gap by extending the sales cycle to find out what the customer really needs and wants from an engagement. You can then look to determine the value of those needs and wants to the customer and propose a price and service package accordingly.
If you don’t believe theres ever a gap, and that you’re always worth $60 or $100 an hour to a client then Value Pricing might not be able to help you.
If you’re already in business it’s also useful to see how you can increase your prices. The power of increasing your price on your bottom line makes an enormous difference. usually increasing your pricing by 10% can often have an exponential impact on your profit.
Higher pricing also gives you more freedom to do things of interest, spend time in in professional development and work on other projects.
So how do you value price?
The first step in value pricing is not to price by the hour or by the service. That should actually be rule #1, #2 and #3. Each customer will have a different experience with you so may get a different price. Rather than steps to follow we split the new customer process into Discovery, Proposing and Onboarding.
- Discovery - a chance to feel out what the client really needs and wants. Meet up for coffee and talk through the work and whats’s driving the work.
- Proposing - present the client with a written proposal for services showing how their needs will be met, and the cost of this value received
- Onboarding - the work has only just begun - make sure to devote time to bringing the customer into your business successfully.
The value of a Deposit
Getting paid while you work rather than after can make a big difference to your cashflow. Two ways we’ve found to improve your “cash conversion cycle” is to make collecting deposits a part of how you propose for work and also to bill for each month in advance.
Charging a deposit is normal in many business situations and yours should be no different. A deposit means you can pay for all the expenses of performing the work and not have to wait a month or two for payment.
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