Hourly Rates, Piecemeal Pricing or Packaged Projects?
Services are often priced using either an hourly rate or a project price. For new entrepreneurs or those new to being service providers I’ll explain the differences between these two pricing models.
Hourly rates are often the most logical way to start, because your income can be based on planned hours. How many hours can I sell per month and what compensation should I get for these hours in order to be able to feed myself?
This model is easiest for sharing your rate to customers and agreeing to the number of hours for a project. The biggest problem with this model is convincing a customer that the suggested amount of time is necessary. Customers will want to know how long a project will take. Remember, customers use your services because they aren’t able to do it themselves or don’ have the time to do it. Therefore, it is easier for the customer if they don’t need to estimate how long it will take to perform a service.
Another problem with hourly rates is understanding how much a client should pay for incidental expenses included in the final invoice. For example, if the bill is €50 and the tax rate is €20, you receive only about 22 euros after taxes. You can test your rates with UKKO.fi’s salary calculator. €50 an hour can sound expensive, but it is almost the minimum price it pays to charge for sporadic assignments. Therefore it is often smarter to charge separately for the individual elements of a project especially if you sell services to consumers.
When Hourly Rates Are The Most Reasonable Option?
Hourly rates may be sensible, for example, when subcontractors are billing a client for working on the client’s own premise. When the customer buys yours service, offer your expertise at their disposal for a specific period of time. This model works best when the job is very standardized, and you can expect the same amount of work each hour. In the IT industry or commerce, this is a fairly common way to work.
It is usually easier for a customer to buy your services a piece at a time. The customer knows the price at which they receive the completed service. A customer may want a new website, so they may only want you to design it, they don’t want you to maintain it. So you could separate those two services out. You know your industry so you’ll know what’s possible to separate out as a service and how to price it accordingly.
While many traditional hourly rate services can be turned into the piecemeal projects, such as cleaning assignments, renovation etc. It requires careful planning and estimating to invoice piecemeal services.
Packaged projects, aka agreed pricing, requires more expertise and skill on the part of the person doing the work. One must be able to estimate as accurately as possible how long it takes to perform the work. In addition, you need to be prepared for surprises. Sometimes projects take longer than expected. And sometimes, projects are finished sooner than you thought. This evens out the more you perform a particular task, so always track how long it takes so you can give a better estimate in the future. If particular tasks constantly take longer to carry out than you planned, you need to reevaluate your estimate.
For example it is easier to buy a photographer’s services if there’s an agreed price. A wedding photographer needs to shoot, process and print the photos, but the bride and groom don’t need to worry about every aspect, they just want someone to document their special day. So the photographer must first figure out how much time they’re going to need and make an offer based on that.
Agreed Pricing is More Profitable
As I mentioned earlier, it is easier for the customer to buy a service at a fixed price. Agreed pricing is often more profitable for you too. This is because it is psychologically easier for a customer to purchase a €500 service than five hours at €100 each. An hourly rate of hundred euros immediately raises thoughts that a friend or family member might be able to accomplish the same project for only a couple bucks an hour.
A €500 photography package that includes everything from planning to shooting and printing, may include tens of hours of work but it allows customers to justify the price to themselves. Formulated this way it can feel like scam, but it isn’t. The price is the same, the service is the same, and the customer is satisfied and likely to buying your services again.
I have worked as an online marketing consultant for several companies. My hourly rate has varied between €100-200. Customers who paid the hourly rate compared my rates to lawyers’ fees and some considered it too expensive for my services. But the same customers have bought the exact same services for an agreed price.
The human brain works in strange ways, take this into consideration when planning your pricing.