What to charge as a freelancer: does value-based pricing live up to the hype?

Illuminati photo by Thought Catalog.

Pricing your services as a freelancer is hard. Even after years of experience, it‘s common to second-guess whether you‘re charging the right amount. Am I leaving money on the table? Does my price reflect the value I‘m delivering? Could I structure my pricing differently to earn more while working less?

Most freelancers default to charging by the hour. It‘s a tried-and-true method that‘s easy for both freelancer and client to understand. But recently, a new pricing paradigm has emerged that promises to help freelancers break free from the limitations of trading time for money: value-based pricing.

Instead of charging for hours worked, value-based pricing ties the cost of the project to the value it generates for the client‘s business. Earn $20K for a project that will net the client $100K in new revenue. No more worrying about how long the work takes you. Get paid based on outcomes, not input. Sounds amazing, right?

In theory, yes. In practice…it‘s complicated. After studying the pros and cons of different pricing methods and trying to implement value-based pricing in my own freelance business, I‘ve reached an unsatisfying conclusion: full value-based pricing is extremely difficult to implement for most projects. A better approach is to incorporate value-based principles into your hourly rate while still maintaining the transparency and simplicity of charging by the hour.

The Case For and Against Hourly Pricing

Let‘s start with the basics. What‘s good about the standard hourly rate pricing model?

• It‘s simple and transparent. The client knows exactly what they‘re paying for: units of your time. No complex calculations or abstract concepts to explain.
• It‘s easy to budget. If the client has a set amount to spend, they can easily calculate how many hours that buys them.
• It feels fair. The client only pays for the time you actually spend on their project. No more, no less.

Simplicity and transparency are big points in favor of hourly billing. But there are also some major drawbacks:

• It commoditizes your expertise. Clients compare your hourly rate to other freelancers without considering the speed and quality of your work. It‘s a race to the bottom.
• It caps your earning potential. Since you only get paid when you‘re actively working, you can never earn more than what your hourly rate and available work hours allow.
• It penalizes efficiency. If you work quickly, you get paid less. You‘re discouraged from becoming faster and better at your craft.
• The client doesn‘t know the final cost. An hourly rate is not a complete project price. This can lead to unpleasant surprises and friction when the final bill exceeds the estimate.

Hourly billing may be the most common method, but it has some clear shortcomings. Charging by the project is one alternative, but it comes with risks of its own.

Project-Based Pricing as an Alternative

Project-based (or fixed-fee) pricing involves quoting the client a flat price for a defined set of deliverables. Rather than paying you for hours worked, they pay a set amount for the whole project, regardless of how long it takes you.

This model offers benefits for both parties:

• The client knows exactly how much they‘ll pay. No surprises.
• You‘re incentivized to work efficiently. Finishing faster means a higher effective hourly rate.

However, project-based pricing only works if you can very precisely define the project scope up front. It requires airtight contracts and explicit agreement on what‘s included. If the requirements change along the way (and they almost always do), you‘ll have to renegotiate the price at each step. For complex, ongoing projects, this quickly becomes a nightmare for everyone involved.

Project-based pricing also still allows for direct price comparison between freelancers. You may be faster or better than the competition, but if the client is judging solely on total cost, you‘ll lose to the lowest bidder every time. Your expertise is still treated as a commodity.

Charging by the hour or by the project both have benefits and drawbacks. What if there was a third option – one that captured the upside of both models while mitigating the risks? That‘s where value-based pricing comes in…at least in theory.

How Value-Based Pricing Works

Value-based pricing is fundamentally different from time-based methods like hourly or project-based pricing. Instead of selling units of your time, you‘re selling a result. An outcome. The price you charge is directly tied to the value that outcome generates for your client‘s business.

Here‘s a simplified example:

Let‘s say you‘re a web designer and a client wants you to redesign their e-commerce site. Their goal is to increase sales. You determine that your redesign will likely lead to a 1% increase in their conversion rate. If their current sales are $1M per year, a 1% increase equals $10K in new revenue. You charge 20% of that amount as your fee: $2K. The price is based completely on the result you produce, not the hours you spend.

Simple, right? Not quite.

The value-based pricing process is rife with challenges for both freelancer and client. Calculating the price requires access to sensitive business data the client may be unwilling to share. The value must be estimated up front and you get paid regardless of whether the project achieves its goals. You don‘t work on commission, so the client takes on risk by paying you for potential value, not actual results.

Even if the client is willing to share the data needed to calculate a price, there‘s the issue of turning subjective goals into dollar amounts. Improving brand perception or increasing customer satisfaction are valuable results but not easily quantified.

Finally, each value-based price must be customized for the individual project and client. A website generating $10K in value for a small business is very different from the same site producing $1M for an enterprise. You can‘t take a one-size-fits-all approach or you‘ll leave money on the table.

Basing your prices solely on value requires significant buy-in from the client. They must see you as a partner invested in their success. If they treat your services as a commodity, value-based pricing will be a non-starter.

Challenges of Implementing Value-Based Pricing

While value-based pricing is conceptually very appealing, the tactical challenges of making it work in practice are daunting. The central issue: you are completely reliant on the client to provide the information you need to calculate a price. Without access to their KPIs, revenue figures, and other sensitive data, you‘re just guessing at what the project is worth.

Extracting that data from a client is no small task. It requires a significant leap of faith for them to open their books to you. If they don‘t already see you as a strategic partner, getting to that level of trust will be an uphill battle.

Even once you have the data, you still need to define success metrics and confirm the client agrees with your assessment of the value. If increasing conversions by 1% will drive $10K in new sales based on your analysis but the client thinks you‘re overestimating, your price will seem exorbitant to them.

And you must go through this entire process for each new project. When the perceived value varies from client to client – or even from project to project for the same client – you can‘t re-use pricing models. Your ability to scale is limited.

The final major hurdle is risk. With value-based pricing, you get paid the same amount regardless of whether the project meets its defined goals. Since the price assumes a certain ROI, clients may feel cheated if that ROI doesn‘t materialize, even if you delivered everything you promised.

None of this is to say value-based pricing is impossible or not worth pursuing. When it works, it‘s the most lucrative and rewarding pricing model. But it‘s an advanced strategy that requires significant preparatory work. It simply won‘t be feasible for many freelancers and clients.

So where does that leave us? With a hybrid approach that captures the key benefits of value-based pricing without alienating clients.

A Hybrid Approach to Value-Based Pricing

Pure value-based pricing may not be realistic in many scenarios, but you don‘t have to abandon the concept entirely. You can incorporate principles of value-based pricing into an hourly model through value anchoring and value-based retainers.

Value Anchoring

Value anchoring involves adjusting your hourly rate based on the perceived value of the project to the client. Instead of charging the same rate to everyone, you take into account factors like company size, project budget, and strategic importance of the work. Clients with bigger budgets and more important projects pay a premium.

While not a true value-based price, since it‘s still fundamentally tied to an hourly rate, value anchoring allows you to capture more of the value you create without radically departing from convention. Clients still pay for your time, but what that time costs depends on their unique circumstances.

Value-Based Retainers

Another approach is to move to a retainer arrangement where the client pays you a flat weekly or monthly fee in exchange for a certain number of hours and/or defined deliverables. This is still hourly pricing, but by framing the retainer around the responsibilities and results the client cares about, the focus shifts from your time to the value you provide.

Productized consulting offerings commonly use this model. For a set monthly fee, the client gets access to your expertise to help them accomplish a well-defined set of goals. Rather than paying for individual hours worked, they‘re paying for the value of a senior advisor helping them solve important problems.

The number of hours worked each month can flex up or down depending on the client‘s needs, but the fee remains the same. If they need more hours one month, you work more. If they need less, you have extra time to spend on other projects. But the fee – tied to the value and outcomes they expect you to deliver each month – stays consistent.

A value-anchored hourly rate or value-framed retainer allows you to implement value-based principles within the familiar scaffolding of selling time. It‘s an easier sell for clients who are used to this model and wary of dramatic change.

Once you have some successful value-based projects under your belt, you can gradually increase the value-focus of your pricing. But anchoring and retainers are a more realistic starting point for freelancers looking to capture more value without overhauling their entire business model.

Conclusion

Value-based pricing is not a panacea. While promising in theory, it introduces significant complexity and risk that most clients (and many freelancers) will have trouble stomaching. The upfront investment required to determine the true value of your work and get client buy-in is considerable and difficult to scale.

But that doesn‘t mean you should abandon the pursuit of value-based pricing entirely. You can take a graduated approach, slowly introducing value-based concepts into your existing hourly or project pricing. Value anchoring your rates and moving to a value-framed retainer model allows you to capture more of the value you create without forcing an abrupt change that will confuse and alienate clients.

As you build trust and establish a reputation as an indispensable partner in your clients‘ success, you can begin to have the deeper conversations required for true value-based pricing. But don‘t feel like you have to make the leap all at once. An incremental approach is more likely to succeed in the long run.

Start by having open and honest conversations with your clients about their goals, challenges, and definition of success. Show that you‘re invested in outcomes, not just billable hours. Prove your worth by helping them move key business metrics. Then when the time comes to have a value-based pricing discussion, you‘ll have hard data and client trust on your side.

Value-based pricing is a worthy goal, but the path there is winding and full of obstacles. Don‘t feel bad if you can‘t jump straight to the end. Take it one step at a time and enjoy the journey. Your bank account (and your clients) will thank you.