How To: 4 Pricing Strategies
Now I want to talk about how exactly to price your services, and I have four pricing strategies that I want to go over these air, not the on ly pricing strategies there are, but these are the most prevalent when it comes to creative professionals, but first, let me start with this idea do you practice desperation pricing or profitable pricing? Right? Desperation pricing is basically pricing to get the job no matter what because you're desperate and it's usually not that profitable versus profitable pricing where you have the tools in place, you know exactly how much you need to make you know exactly what your profit margin is. You know exactly what the cushion is as justin was talking about it's important to have the information in place and a system in place so that you could do this quickly because if you can't do it quickly, then you're probably going to put it off or you're going to do it in a way that doesn't serve you well, all right? Or maybe even in a way that isn't logical, ri...
ght? Because for some reason, creative people seem to get kind of fuzzy when it comes to money and pricing, and so having these systems in place will prevent that from happening or maybe lesson it a little bit okay, so for pricing strategies, the first one is the most common one time based so pricing by the hour or pricing by the day or sometimes pricing by the word which could be a time and materials right but pricing which is based on the concrete aspect of what you do now I'm I'm not saying this is better than that, but what I do notice is that a lot of people just automatically price by the hour because it's the easiest all you have to do is multiplication right? And also because often that's what the client asks for the client may say what's your hourly rate and this is one of those political situations in my opinion where you don't have to accept the premise of the question you can say I'm sorry I don't charge by the hour I charge this other way and then you explain why so there are situations where it is not at all to your advantage to price hourly and one of the main situations is when you have a lot of experience and you work quickly and you do a really good job but it only takes you two hours should you on ly price two hours worth no right? So you have to come up with some other way of pricing that is fair that isn't you just adding on ours because you think it should be priced higher there's another strategy that you approach with that all right? So that's time based project based is an alternative to that and project based is also very clear and very popular. Uh, but it's a little bit trickier because you have to figure out what is involved in the project. There are many different factors. There is the amount of time there is the administrative active things you are doing there is the value to the client and you have to. And this comes with experience. Figure out what is this project worth to me? And this is related to the example I used before four. Where ah, website is worth twenty five hundred dollars that's a project fee. And so what all is included in that to make sure that I'm covering all of my expenses plus my profit and that that is worth it to me, right, that's, what you have to figure out for yourself. All right. The third pricing strategy is package based pricing, and we talked a little bit about this in session two and session one, actually, and there are a couple different ways of approaching. This one is standard projects that are based on a package. So we used the example of web site design and jill anderson talked about her packages. She has four different packages. One is designed when his design and development, when his development only and then there's the everything package right, and this is possible and easier for people who are offering the same essential type of project or services to the same type of people and again I want to emphasize that that's why focusing is so important because it allows you to package your prices on when you compacted your prices you save so much time in the conversation with the clients because everything is clear and all you need to do is say, well, you know, customize it sometimes for them all right? Maybe you don't need this and we'll take this away it even if the packages themselves can't be applied to everyone it's a really beautiful starting point for a conversation you have something already on the table now a variation on package based pricing is retainer so that similar because they get a suite of services or a package of services that is um paid for on an ongoing basis so that could be a monthly retainer it could be a quarterly retainer and it's a little trick here so I would not recommend doing this with people you've never worked with before because a lot of time there's some handholding and nagging and administrative time that you don't know how long it's going to take you to work with them how many revisions do they go through? There are so many aspects that are unknown so my recommendation is start with project pricing and then evolve it into retainer a retainer arrangement if there is a need and if that would serve people and often your clients will not offer it to you because they may not know that that would be better for everyone. But you can say, well, it looks like you have a need for more services, so I propose that we go to her retainer and then you propose exactly how to do it. And again, a retainer is essentially we're going to do all of this for this much money, or we're going to spend this much time for this much money on a regular basis and sometimes it's not exact right has to come out in the wash from one moment one month to the next. But if you have a strong relationship with your client and you have open communication, you can always say, all right, you know what? That's not working let's try this or we're a little over this month here's what's gonna happen or we're a little under this month, you can just talk about it with them and and that can work out well. And the main benefit of retainers is that you know how much money is coming in from one month to the next, and you're not in that feaster famine syndrome, which is really tricky for a lot of people. Really good point, they say, for their clients they are it make they can impress on them that they are available immediately for urgent issues they are on a retainer you can be on call and that's one of the benefits of having a retainer and you know it's funny because sometimes people say to me, well, I'm kind of on call anyway and they don't know it, but that doesn't matter. You can say this is one of the benefits of paying on retainer. Justin, could you give a good example of a retainer like a client that you're working with a successful retainer? Sure, I'm thinking of uh in fact I showed them earlier are ex creative lab they offer retainers to associations who need the same services every month or every quarter for their events and they say for it's going it's going tto take us x number of hours again it could be based on hours or it could be a scope of services and a payment plan. Sometimes the retainer is a payment plan for a scope of services. So for the next year we're going to do this this this and this and it's going to take a year and we're going to charge you this much per month to do it I don't know if it would be appropriate for your business, but it's definitely worth thinking about him anyone in the room used retainers, do you? Raina? I have ah have a really great client. Um, that I've been with for seven years that I'm on a retainer with and it really it makes such a difference to basically we have an arrangement where they guaranteed me sixty hours a month that they pay me for, but if I end up going over, I charging hourly rate on top of that and so I have my base is all covered every month. I know I'm getting this check and I don't have the fluctuation, which is just so helpful and I think my goal for this year going forward is to get a tte least another couple of retainer clients like that and then there's just a lot less you can have less clients and more work with the ones that you do work are there challenges in that type of situation for you? It's worked out really well for me. Yeah. And do you agree, then that the open communication is really important in the strong relationship or yeah, great. Jane, do you have any retainer arrangement? Yeah, I find retainers to be really effective. I mean, they could predictability in your business and which is great and you're not, you know, it's really good, yeah, I have a few that's well I mean, I just thought of one thing that sort of particular to that situation because I guarantee them so much of my time every month I have an arrangement that if I'm out of town for three days or more, I have to supply somebody to take over for me so that that's a consideration when I think it's fair enough because they still pay me at the end of the month, so if I want to go out on vacation or something, I I train somebody and have them take over for me doing that time and pay them out of my pop in, but then I get paid by, so I'm channeling one of the questions that are probably coming up in response to that, which is, aren't you afraid that the person you bring in to replace you is going to take the client away from you know, why not? Because they're friends of mine and they're busy enough with their own working good all right retainer based on when you're actually using what is the frequency? Do you make it an annual or monthly? Or do you have to? Just? Well, I would say start with monthly and I would even start with a trial period of two or three months because again it takes time to get into a groove and see what is goingto work for each situation right so I think it's really important and then eventually it could be annual if it's strong and if it it works well for everybody okay? All right I just wanted to show you ah screenshot this is from jill lynn design dot com of her packages and you could go on her website and see them a little bit more closely but essentially she has four packages and I love the way she has best value as a little icon on the one that is the best value and the most popular is another one right? So this is a way of really um kind of directing people to see what you want them to see and perhaps buy what you want them to buy right? Tell them it's the most popular that's a little psychological psychology of pricing trick because people like to follow what's popular and it works so and you can see that there are differences between the packages and you can click on the details and see what exactly is involved in each one so that's a perfect example and just a little plug if you don't mind for the package pricing bundle which includes this and an analysis of this and two other pack designers with their packages and that's in the marketing dash mentor dot com online store oh look that's what I have the cover of here's the package pricing bundle I'm anticipating myself all right the fourth pricing strategy is value based pricing, so we touched on this a little bit in session two, and this tends to be the most complex or the most challenging for people to to understand and to do. And I wantto emphasize that it's not right for everyone it's not right for every creative and it's not right for every client. But the idea here is that if you can ask and find out what the value is or the potential value is to your client of the thing that you're doing, no matter what it is, then your price could be based on that. So I'll give you an example, and then maybe zane, you could talk a little bit more also about how you do value based pricing, but I was doing a ah marketing project for a client, and I knew that she stood toe earn one hundred thousand dollars as a result of the marketing effort that we were doing together, and I proposed to her that my feet not be based on my time, but it be based on a percentage of what she was going to earn, potentially from that right, so it could be ten percent, it could be one percent. You negotiate that percentage, but the idea is, what are you trying to do with this? And let the phoebe based on that and we're not talking about a royalty here we're not talking about a commission were saying here's what the potential is and I have a stake in it because I'm going to make it as good as it can be so zane tell us a little bit about your value based pricing be as specific as you can based pricing I use is typically for e commerce projects so usually I start off with the goals of what the client how much the client is looking to generate in a monthly based on a monthly basis and based on that I try to price the project given an estimate on based on the percentage of how how much revenue that they're going to generate and quote them on that for me like the realization of value based pricing came after reading e book by the founder of fresh books he ordered really cool able called breaking the time barrier which he talks about how he was able to use value based pricing for us consulting business that he used to actually fund fresh books so I highly recommend ah a lot of the audience to watch that and I read that and you know he talks more about how you you came upon the realization as well yes absolutely that is a great book his name is mike mcdermott he's the ceo of fresh books and uh he has a very clear approach to it based on his own experience excellent. All right, now, before we wrap up this lesson we have one more uh issue to address as I promised, which is this question of which is better hourly pricing versus project pricing because this is the debate a lot of people are in I imagined there might be a debate in the chat room going on about this too. Project pricing is clearer for everyone because if you quote hourly people don't seem to realize that there's no context for it if I say my hourly rate is one hundred dollars an hour or fifty dollars an hour and someone else says their hourly rate is two hundred fifty dollars an hour, it sounds like they're more expensive than me but we haven't said how much time we're talking about and so when people compare your hourly rate to another person's hourly rate, they assume it's going to take the same amount of time and it may not they're also not telling you how much time it's going to take usually that's not part of the quote. So my suggestion is that you do project pricing because that basically means here's how much it's going to cost you and this is what you're going to pay it allows everybody to budget you get to budget, you know, what's coming in they get to budget, they know what they're going to spend, it is much cleaner for everyone also as I mentioned before, one of the reasons to avoid hourly pricing is because the better you get the quicker you get the less you make that is absolutely not right right it's the opposite of what should be happening unless you just keep raising your hourly rate and certain point some was going to say that's too expensive even though you're not telling them it's only going to take me an hour right? So there's just a lot of miscommunication there's a lot of confusion around hourly pricing it's there are exceptions I will give you the exceptions because I'm trying to make a very strong point without being too absolute about it there are exceptions sometimes there are clients who will only pay by the hour the government is sometimes like that corporations are sometimes like that on a retainer sometimes that is the only they will work with you on a retainer and sometimes they want you to lower your hourly rate because they're guaranteeing you a certain amount of time which can be negotiated but again I go back to the political situation where if someone just automatically says what's your hourly rate does not mean you have to charge them hourly just because that's the question they asked you right you do not have to accept the premise of the question and what you need to say is I'm sorry that's not how I charge I don't quote my hourly rate here's how I charge and that requires some strength but it really wears is not saying I'm not going toe charge you it's just here's how I work here's my policy all right before we get to the what would you do if let's see if there are any questions in the room or in the chat room about this because I know it can be I see some I see some people with questions burgeoning I'm curious about like a mixed model where let's say I'm creating educational product and there's just some costs upfront costs and you need to be covered have you seen that before we're value based you have any advice for a man? Absolutely no and it can be tricky and as I said, I'm trying not to do black or white but for example I have one client I was talking about this with him yesterday morning before I came here. Actually we were looking at a proposal and part of it is a web sites for a website. So part of it is here's the design fee and then for the development it's going to be based on an hourly rate and here's how many hours we estimate and then of course you have to give the hourly rate so you have to be careful and sometimes especially when it comes to revisions if you're quoting revisions at an hourly rate you khun quote a much higher hourly rate than what everything else might be based on right so yes you could do a hybrid you can mix it up and I'm not saying don't ever tell your client your hourly rate is just that that's not your value you wantto change that mind set any other questions yes sort of follows up from what raynor with asking earlier on a more justin is just touching on because some people are confused about what is billable and what isn't on dh you know if you're learning a skill to complete a project is that going to be available time that's totally up to you right? I mean who pays for your learning curve that's the question um I have clients who split it right because they may not be learning it if it weren't for that client but it's probably not fair because it's going to take them more timeto learn it so they split the fee basically and you don't have to tell the client that right but that's an ethical way to consider it for yourself costars asked about this but are confused about how you are quoting for a giant corporation as opposed to if you're working with a very small business or indeed a self employed person he prefers all his pricing to be valued value based but we appreciate sort of big corporations going approach it completely differently to an individual right and that's why it is specific to each situation it is based on a conversation and you might be able to persuade if you're dressed up persuade um a corporation to pay based on value if you can make the argument right because it may be it may be a lower feet maybe a higher fee you don't know ah the other point I want to make about hourly pricing one of the exceptions is that when there are clients who you know are going to be problematic and do many, many revisions or where there's a committee and just lots of time will be taken that you haven't accounted for in your project feet then you might want to charge parts of it hourly maybe that at that point you do the revisions hourly but keep that in mind that when there are a lot of unknowns that may be a good reason to do a part of it hourly okay, so here is the what would you do if question what if you've quoted a project fee for project but the client insists that you quoted hourly so this is about what would you say? What would you do if you have already quoted in your proposal a project fee and the client comes back and says no, no, we must have an hourly it's not a trick question justin, what would you do? I guess just guess you know, look at that that number and kind of guest mate, how many hours going taken and divided divide that up? That's one way. Yeah, maybe you could, um do that and then also limit them amount of hours that are included in that, right? So that if there is scope, creep or anything else, they realize they're going to have to pay more? Absolutely, yeah, I would probably have ah, certain base and then also for additional services charge them on hourly basis is supposed that they need extra hours, then I can put that in the proposal as well. And again, you know, based on how much you want this project, what else is on your plate? You might say I'm sorry, I just don't work that way and you've got all these other fish in the sea. You've got all these little prospects in your pipeline who are willing to pay on a project basis so that you could be profitable. Do we have comments in the cutout? Right? We do have quite a few three eighteen media is saying I'd stress my process. I'd explain why I don't quite why I explained, I don't quote out allie and why, debra saying yes, I would ask why. But flocks appeal says I would but the thing to do here is to contemplate what they're really trying to figure out that's interesting to people saying you know you need to ask up from what the approval process is and that way you can you can adjust absolutely all good ideas no right answer here sometimes tricky so really needs attention and thought all right so wrapping up this lesson for four pricing strategies in the workbook if it's not clear yet there is a short article outlining each of these pricing strategy so you can understand what they are and the question is on let's just do this quickly with the in studio audience which strategy is the best for you of those four maybe based on what you've done so far or maybe based on aspirational e where you're going in the future of the four strategies time based project based package based or value based which one do you think is the best for you? Justin um honestly I see multiple ones working for me you know, like having the package based around consulting people like over skype helping people with content and then I somehow see ah hybrid model of the value based in project bases somehow like a fee up front with some sort of uh I guess just uh percentage like based on on sales so it's always good to have skin in the game too yeah it helps me now definitely a mix for me too, depending on what the project this I am mostly bill by the projects so far. Most projects right now, it's project based I do want to move more towards the value based nowhere it applies and where it works on dh, then only use our leaf with things like maintenance on and hourly based retainers. Excellent date for me. I think the focus now will be more having a value based base price and then having a retainer package this way I can create predictability on a monthly basis and only served like small number of clients and do a really good job for them. So based on the value, the base price and then monthly retainer through the package pricing excellent, excellent. It seems that most people like project pricing crown view amy they're all saying christian w but flux appeal on them. I'm on london is saying they have ah project practice or a package price they pay depends on what the client actually needs on what the actual scope, right? And as I said in session one one of the most important skills and talents and qualities to make this kind of life work is flexibility, and this is one of the ways you need to be flexible in order to know where going and what you're going to achieve and your largest on that is so they did do hourly but they converted to project creating packages excellent I'll just bring a small example has a word of warning and I went very creative with one client last year who had budget problems I really trusted them I really wanted to work with him so I sort of spaced out all the pricing over the year with their estimated launch time for this website and estimated sales at a certain point would pay the full amount in the meantime there were so many hours included for in the retainer basing the monthly retainer and everything that went over would also be paid at the end of the year and it just got so confusing it was it was kind of a nightmare I don't think I'll ever do that excellent thank you for that word of warning good okay right so keep it simple I think that is the point is keep it simple and also I will talk about this a little bit more later but the idea of tying the payments to the milestones in the project is tricky because if the project gets delayed then your cash flow is affected so I have some solutions for that which we'll talk about later but just be careful instead the alternative is tying the payments to the calendar on a monthly basis it's almost like a retainer of sorts but it's based on a project scope