Inquiring minds want to know: Should I charge by the hour or by the project?
There are, generally, two business models that service-based businesses work from. The first is based on an hourly rate. A business quotes a client a rate of, say, $75 an hour, and the client is then able to request the number of hours in their budget. The second is based on a package or project rate. In this business model, a client and business work together to detail everything that needs to be done, and the business quotes a rate for the entire project.
New businesses, particularly freelancers, are forever debating what type of business model is best, but there are pros and cons to each. Read on, and read to the end to learn what we think the best option is.
Pros and Cons of the Hourly Rate
An hourly rate has some major benefits and situations in which it’s most useful:
- It’s a small amount of work, such as website updates or editing a single page of content.
- It’s a new project type and you’re not certain how much time it will take.
- You’ll get paid for the exact number of hours you work on the project.
- This helps you get paid more accurately–instead of allowing yourself to imagine a project will only take three weeks, though it will really take four, you’ll be paid for the exact time it does take.
- The requirements and goals of the project are somewhat unclear. If you quote a project rate, in this case, you could easily end up doing more work than you anticipated.
But, an hourly rate does have cons:
- You’re trading time for money. You should be trading value for money.
- It’s also worth noting that as you become faster and more skilled, you’ll be doing the same amount of work in less time. If the average time to complete a job, industry-wide, is three hours, but it only takes you two, you actually lose money charging by the hour.
- I’d argue this makes it somewhat more difficult to change your rates, as the client will very blatantly receive charges per hour–so when you decide to double your prices, the change will really stand out.
- This isn’t exactly a con, but you must accurately track your time to stay above-board when reporting to clients.
Pros and Cons of a Project-Based Rate
The main pros are:
- The client is given a total cost up front. There are no hourly or hidden fees to surprise them later. They are then able to budget for 50% down and the rest in payments (or however you’ve agreed to set up the payment plan).
- The client is focused on the perceived value they’ll receive, not the amount of your time they receive.
- This also helps keep freelancers and other business owners focused on providing strong value.
- It’s easy to raise rates because clients are not focused on what they pay you per hour.
- If you’re particularly fast or particularly slow, it doesn’t matter–as long as you complete the work by the deadline.
- Project rates require discipline to keep both parties happy–which means setting up a clear contract. The contract should clearly state what your business will provide, by what date, what revisions are allowed, etc. Otherwise, you could end up with a real mess–a client asking for 20 revisions or additions and a contract that doesn’t put a limit on those changes. In that case, you could wind up losing a significant amount of time.
- If you’re not careful, you could end up undercharging yourself when the amount of work you initial thought was involved was a lot more when you actually go into it.
What about Packages?
There is another business model that plenty of companies use, likely in addition to hourly or project rates: packages, though they’re more often called retainers. These are typically charged by businesses that provide some sort of ongoing service. For example, CloudZen Designs provides website maintenance. For a set fee each month, clients receive maintenance that will be completed regularly. If we find a problem that will take significantly more time than their retainer fee covers, we bill by the hour.
Packages are useful in grouping services that clients will likely need on an ongoing basis. It’s sort of a combination of hourly and project billing, as the package is often determined based on the number of hours you think that ongoing work will take, but it is billed as a single monthly fee.
Value and what CloudZen Designs thinks about the different business models
CloudZen Designs is focused on providing value. We want to help businesses achieve their goals and look good doing it. While we use project rates for very specific cases (such as SEO and maintenance packages), we always quote large projects with a project rate. We aim to be transparent in pricing, and we want every client to come to the end of the project feeling they received even more value than they’d hoped for. And that’s probably what you want to do, or you wouldn’t be in business. Keep that in mind, and remember–nothing is permanent. If you try one business model and it doesn’t work for you, try another, or combine the two in a way that fits your particular business and industry.
For more reading, check out this post on Bidsketch. It’s a great read that digs deeper into the psychology of client decision-making.