Setting prices for freelance gigs is not an easy task. I am sure you know what I mean. It’s a dichotomy – you want to earn as much profit as you can, whilst at the same time offering an attractive price that your customer believes offers them value. Somewhere in the middle is the right price… ain’t it?

‘Price’ is a complex combination of real costs, emotional costs, perceived benefits (not always real ones), and expected profit. Unfortunately for us there is no accounting method for determining price based on all of the above factors. It’s also unfortunate for buyers too, so we’re all subjected to the same complex situation.
Existing pricing methods do not cover all the components. Cost-plus pricing could not be used because it deals with accounting cost plus expected profits. Value based pricing is based on the perceived benefits. Performance based pricing deals with outcomes only.

Price can be very subjective – especially around services pricing . For example, the prices for two software developers on a single development project can be very different, but the outcomes could well be the same. The client makes a subjective assessment on what factors they would use to judge rates of the individual programmers. The individuals may find it difficult to justify their rate back to the client.

A traditional approach is to determine your costs (often by intelligent guesswork), negotiate profit hard (without necessarily disclosing your costs) and schmooze the rest over an expensive dinner. It’s a tactic used by both customer and provider. It’s a game of wit and charm, and how great that meal tasted or how fine the wine is. The process is time consuming, costly, and lacks transparency. It assumes that rewards of finery create leverage for negotiation based on the pretext of a ‘good relationship’.

It also assumes that the social, political and economic agendas of both sides are irrelevant!

Schmoozing is not the way to set a price. It’s a risky method and it’s easy to be swept up in the moment. Avoid it!

Many ‘factors’ affect your costs, your profit margin and the good-will you apply in order to set a price. You won’t be sensitive to the same factors to each customer, not will those factors have the same weighting/impact. I can explain this best by giving you some examples:

• Will you set the same price for two customers when one of those customers costs you a lot more to service due to their poor management discipline?
• Would you set the same price for a gig that helped a business who clubbed seals for profit as you would a different gig for a charity that helped people, like your grandmother, pay their heating bills during the winter to survive?
• Or what if you’re a democrat pitching for a gig with your state’s democratic headquarters? What will you do then?

Here’s what you’ll do. You’re going to want to price yourself differently based on a number of factors you determine. But how do you do it?

The answer is that you will learn how to adjust prices against a number of factors through experience, or through the wisdom of a financial expert. If a financial expert isn’t on hand, then you’ll certainly have to learn such adjustments by trial-and-error. Quite often, the true cost of doing business isn’t known until the business is done, and then reviewed. Wait though – do you review how much profit you make (that’s if you did in fact make profit) after every gig? I guess not – because you’re chasing the next gig! So the learning process of setting price against numerous factors can be haphazard and far from even a rough science.

This is confirmed bu Mechele Pellebon at FreelanceVanity.com who described this quandry as one of the biggest issues for freelancer:

It takes even the most profitable freelancers a few months or even years to get into the rhythm of setting their prices properly.

But learn you must… or you will price yourself out of the market, or reduce (or even totally lose) your profit.

Learning is made easier, for example, if you work for a small number of clients. Over time, you learn about their behaviors, such as their management rigor, how they make decisions (and stick to them) or their social/political philosophies. Eventually, you strike on an acceptable configuration of price adjustments that match your factors, and you then only need to adjust one or two as your relationship develops or the importance of each factor changes.

If you’re setting a price for a brand-new customer, what then? You have to give it your best guess and suffer any financial losses, or damage to your integrity, whilst you learn about them, that’s what!

Under-pricing yourself is a costly mistake. Chris Garrett claimed that this was his number-one gaffe !

Many freelancers find this a gloomy prospect. I know I do.

So does Mr X (that’s not his real name… obviously, but Mr X chooses to remain anonymous). Mr X is a freelancer in Palm Springs who helps companies renegotiate commercial property leases. Therefore, he works with many customers as there are long delays between repeat custom. During the last 5 years Mr X discovered, much to his peril, that several customers required much more effort than others. Bound by a contract, Mr X experienced cashflow problems whilst customers delayed decision-making and requested further negotiation, before he received payment. Forced to finance his business through loans, Mr X has suffered terrible losses (over $55,000).

What Mr X desires is a structured method to set prices against risk factors. He doesn’t have the option of learning about the idiosyncrasies of each customer to set the price accordingly.

In general, freelancers need a complete and structured method which accounts for any number of factors resulting in a way of setting competitive and profitable prices.

The thing is, traditional processes around negotiating pricing lacks a finite framework (i.e. step A, step B, and then step C and Hey Presto! You have a price!). Telephone calls can be exchanged and contracts can be vetted, however while these may show that buyer and seller have established a rate – they do not lead the parties down an equitable path to establishing that rate. Having a point-by-point framework for price negotiation could create equity in the process and deliver a win-win outcome to both parties – or what might feel like one anyway (see my thoughts on ‘win-win’ negotiation here ). The best outcome is that you’re not screwed over, by your customer or by your own efforts.

When I heard Mr X’s story, I searched for such tools… I found only one: FactorHub .

FactorHub claims to provide tools and techniques for determining what price you should charge based on a series of factors that you determine. This tool can be applied consistently over any business request that might affect your costs and subsequently your pricing.

When you use FactorHub, you tell it what factors are important, and how important, and it tells you your ideal price to charge. When I ran through several evaluations I could see the effect of different factors on the price I was recommended. These numbers weren’t plucked out of the air though. This is where the power of FactorHub comes in…

The best thing about FactorHub is that it consolidates the experiences of a whole community of freelancers to weight the effect of factors to produce a recommended price. This means that as a user of FactorHub, you’re enjoying the benefit of experience from a plethora of your freelancing peers.

This is the way it works. Freelancers using FactorHub can choose to share their actual pricing adjustments with the community who use a common ‘template’ of factors – these adjustments are aggregated and levelled to produce a ‘standard’ recommended adjustment which can be used by any other freelancer using that template. By using the standard, you’re adjusting your price towards the industry norm – the norm being all other gigs where those factors have relevance.

FactorHub is a powerful tool for ensuring that all the relevant factors are accounted for and have an influence on how we set price, so it solves the problem! (I must tell Mr X…)

I can’t find any competitors to FactorHub on the market, so there is nothing to compare it to (well, except to the pain of learning how to factor manually, that is). This makes it a unique proposition. Well done to the guys at FactorHub!

Cut out that painful and expensive process of setting prices using Trial-and-Error. Leverage the experiences of your peer-group - FactorHub .

Keep your eyes peeled – next time I will be looking more at factoring and FactorHub as I learn more about how it works, and hopefully I will land an interview with one of the guys there too! To find out when I publish this article, subscribe to my RSS Feed !

©2012 SimonStapleton.com. All Rights Reserved.

The best answer you will hear, when negotiating, is No (find out why)

No sets a boundary. And once you know why your clients says No to your proposal, you have a foundation to work off. Cutting price is not always the best approach.

In this article, I will give you a serious edge when negotiating by sharing a few psychological techniques. These techniques rely on typical human behaviors. Use them to avoid a sterile approach to negotiating and give yourself an upper hand.

The fact is that most people like to win, and win for a clear and obvious reason. Negotiators don’t always strive for the outcome they have been given as an objective – a deeper psychological imperative is to come out on top on a number of levels, and the moral high ground is one of them, as is a position of superiority. It’s not just about winning the best deal, it’s about winning the personality game. If you want to come out as the best personality, then forget this next section as your emotions will get the better of you. To win in a negotiation, you have to put emotions aside.

The Un-comfort Zone

Why does the outbreak of tears turn a row into a reconciliation? What effect does pity have on an outcome? The answer is that they create an uncomfortable situation. Human beings like their comfort zones. And they do whatever it takes to avoid stepping out of it. This is a fact of human behavior that you can use to your advantage.

It’s like this: in any negotiation, who will most likely win – the guy in the sharp-suit and perfect hair, manicured nails, with a 100-page presentation and $800 pen, or the guy who bumbles, stumbles on words, with fingernails like a garden laborer and appears fragile?

If you guessed the first guy, then think again. The second guy will win most negotiations.

Why? It’s about the comfort zone. The first guy feels comfortable. The outward display of rigor and splendor says ‘I am comfortable, and I am safe’. He will probably be thinking that the other guy is not comfortable, and feel even safer in this belief. He probably thinks that he will win the negotiation because he looks more successful, he demonstrates the fruit of success in the sharp-suit and pen, and his well prepared presentation. He will feel in total control. He lacks belief that his opponent can put up a good fight, and any action on their part is random at best.

But the other guy… well do you remember the TV detective Columbo? He was a master of appearing inferior, and controllable to his adversaries. His dirty coat and beaten up car portrayed an image that encouraged criminals to feel no threat. He would appear to bumble around, turn away, and on his way out ask the killer question as if it was an after-thought. The criminal is totally unprepared for it.

What happens is that the second guy above, and Columbo, both step into the un-comfort zone.

The un-comfort zone enables negotiators to lure their opponents into a false sense of security, and then use it. Let your more ‘comfortable’ opponent in a negotiation feel safe and secure in their belief that they have the upper hand.

OK, for those people that really do enjoy the morale high ground, this might seem a totally manipulative tactic, but I say this: in a negotiation, a win:win is a false prophecy.

Let me explain why. You’re a business-person. You have bills to pay, a living to enjoy and a future to invest in. So out of any deal, you need to make sure you get what you require to make it worthwhile and valuable to you. Anything less, you should walk away from it. It doesn’t matter if your client ‘wins’. All you should care about is a ‘win’ for you – that it meets your financial objectives and fits your personal values.

But if your definition of ‘win’ includes the psychological prizes of feeling superior and having the upper hand, then you’re trying to step into your comfort zone. This isn’t a win, it’s a hollow emotional victory. Winning this is like my son finding his lost ‘taggie-blankie’ that he won’t go to bed without.

But it’s highly likely that your client will be wanting their blankie too…. so let them have it whilst making sure you get the result *you* want. The cost of appearing goofy is nothing compared to your desired commercial outcome.

Don’t confuse my point about the pointless win:win. There is always the ‘virtuous spiral’ that comes with providing great service to a client who gives you valuable repeat business. It’s not about screwing people and damaging the chance of this outcome. It is about giving your clients the outcome they desire, and if a superiority complex is part of that outcome then hand it to them. Give them that (their taggie-blankie) and take the rest!

Negotiate with a clean slate

Another psychological tactic is to take everything said at face value and not build up expectations. This is perhaps better explained by an example I remember from two years back.

A friend was negotiating a price for a large piece of work with a high profile client. At the outset, the client said that the potential duration of the project would be 24 months, and would like my friends best price. So he set the price at a daily rate of $800 for that project, a discount of $300 off his usual daily rate. But what then happened is the client said that they would give him a 3-month contract at that rate! He hadn’t priced for a 3-month deal, he set the price for a 24-month deal. So he then was in a hell of a situation to negotiate the price upwards, which of course he couldn’t.

What happened was he had built up an expectation of a 2-year project and had priced on that expectation. He saw the dollar signs of a guaranteed 24-months work with no gaps and became over-excited. His positivity got the better of him. He fell into a classic trap. With hindsight, he should have negotiated the price against a contract rather than pure potential.

The flip-side to this is negativity. Some clients like to screw you on price (probably because they feel that they have achieved some emotional upper-hand, see the un-comfort zone). They start with a price that you can’t make profit off. So what do you do? Rookie negotiators create an expectation that unless they can come close to that price, they will lose the deal. So what they do is to find the lowest price that they can turn a tiny profit (or break even). The skilled freelance negotiator doesn’t fall for this. They don’t make such assumptions, and build such expectations. They return with a price that works for them and waits for a Yes, or No, and negotiates the factors (price, time, quantity, quality) from there.

The trick, in both situations, is to listen your inner-voice and check that you’re not making assumptions. In a negotiation, unless it’s explicitly stated, don’t factor it.

Summary

Negotiation can be a game of conniving and trickery. If you believe that your client wants to achieve a win:win then you’re opening up the serious possibility that you will be the loser. Don’t assume the worst though, in fact don’t assume anything. When negotiating, begin with knowing what you need to make the deal work and don’t compromise. Go for *your* win. Forget whether your clients wins or loses – that’s their concern. Equally, they will think the same of you.

Stay tuned for more freelancer negotiation tips. I’ll soon be discussing ‘factoring’ in more detail. Subscribe to my RSS feed to discover when I do!

©2012 SimonStapleton.com. All Rights Reserved.