Estimated reading time: 7 mins
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 !