Whether you’re a small boutique or growing agency, establishing a pricing model can be difficult to determine. Most companies will use two to three different methods. But before we dive into the pros and cons of each pricing model, it’s important to know what your shop rate is.
What is shop rate? Use this simple equation: (expenses + profit) ÷ hours = shop rate
For example: Company A ($20,000 in expenses + $4,000 in profit) ÷ 160 hours = $150/hour shop rate
Knowing your shop rate will help you determine how much a project should cost. It will also help your business thrive, not just survive. Although there isn’t a right way to price your services, consider the ideal way to price your services. With your shop rate number in mind, keep reading to discover which pricing model is the best fit for your business.
The Pros and Cons of Each Pricing Model
Hourly Pricing
One of the simplest models, it is ideal for freelancers, or anyone who isn’t working directly with a client. It does require thorough documentation of the time you’ve worked on a project and the expenses you’ve incurred. Consistent communication with your client is also important to retain trust. However, unless you choose to remain a freelancer, the hourly pricing model isn’t an ideal long-term solution. The only way to become more profitable would be to raise your rates, which will eventually cap out.
Pros:
-Simple cost calculations
Cons:
-Requires thorough documentation
-Not a profitable solution long-term
Project-Based Pricing
Another simple model, project-based pricing or “flat-fee” pricing is often used in tandem with the hourly pricing model. For example: a client asks you how much it will cost to build them a website. You quote them $5,000, and that’s what you’ll charge them regardless of time or cost involved.
Unfortunately, you may underestimate the time required, have clients with excessive project changes, or you may run in to unexpected problems. This can lead to a loss in profit or an uncomfortable request for an increase in budget.
However, it can be profitable! For example, if you routinely do similar work for new clients, you can cut costs and increase your profits, knowing it’s something you can complete quickly with few issues.
Pros:
-Simple, flat-fee
-Easily profitable with repeat project types
Cons:
-You may underestimate time required
-Picky clients can cut into profits
Retainer Pricing
Retainers are a pre-billed fee. They can be time-based or value-based.
Time-Based: A client purchases 100 hours of work per month at $100/hour = $10,000/month
- Rolling time-based retainers: clients can roll over any unused hours to the following month (not recommended)
- Use-it-or-lose-it time-based retainers: any unused time is lost, and the balance resets a month later
Value-Based: The client tells you what deliverables they need and pay $10,000/month, regardless of how many hours it takes to complete. As you build your skills and reduce the amount of time it takes to produce deliverables, you’re essentially paid more for efficiency.
Pros:
-Money upfront
-Paid to scale your skills
Cons:
-There is a maximum amount a client is willing to pay
-Rolling retainers can result in meaningless busy work
Package Pricing
Just starting your business? This might be the best option for you. Package pricing means you list your prices publicly. Here are some examples:
- Brand Package: One price for a logo, website, and business cards
- Consulting Workshop/Day Rate: For public or private audiences
- Analysis: Provide an analysis of an existing project with a conclusive report
- Photoshoots: A specific number of photos or time allowance
Package Pricing can also be listed as a range.
- Ex: Custom websites range from $5,000 to $10,000
- Ex: Projects start at $5,000
Pros:
-Your needs (price) are met first
-Filters out clients that can’t meet your minimum
Cons:
-Services viewed as a commodity
-Can’t directly address clients’ pain points
Performance-Based Pricing
Confident in the performance of your services? Is it measurable? Performance-based pricing is exactly as it sounds – your fee is based on how your work performs. This is a great option for experts in fields that have clear and measurable analytics and metrics. Examples:
- Web Design
- App Design
- SEO
- Ad Agencies
Pros:
-Hard to underprice your services
Cons:
-Metric expectations must be met
-Need a bulletproof contract and clear terms
Equity Pricing
Is cash flow not a problem? Have a steady flow of clients? The equity pricing model gives you a stake in a business in exchange for your work, with a reduced cash payment or totally in lieu of a cash payment. This is a great option for smaller side projects. Keep in mind that it’s important to know how successful the company offering you ownership is before accepting equity.
Pros:
-Passive income
Cons:
-Not a great option if you need money now
Which Pricing Model is Best for Your Business?
Pricing can be tricky, especially as you’re just starting a business. Keeping your shop rate in mind, we hope you’ve been able to pick two or three pricing models that will help your business hit the ground running. Having a pricing model that fits the needs of your business, and a solid pricing strategy, will result in more profitability.
