What Should You Charge? 4 Methods to Avoid

John Tabita

Selling a product is so much easier. You have a fixed cost at which you buy (called wholesale), so you figure out how much profit you’d like, and mark it up according. There’s even the MSRP (Manufacturer’s Suggested Retail Price) to make your life easier. But everyone who decides to sell their services will agonize over this question: “How much should I charge?”

There are many ways to answer that question. Let’s look at four to avoid.

Formula-Based Pricing

Many of us used a formula to answer that question:

  1. How much do I want to make a year?
  2. How many hours a week do I want to work?

So if it’s your dream to make $60,000 a year, working only 20 hours a week (including a two-week vacation), you do this:

$60,000 / 50 weeks / 20 hours = $60/hour

Next, determine the time it takes you to create a “basic” website (for me, that was a 5-10 page custom-designed static site, no programming). If that takes 35 hours, your pricing would start at $2,100. Or you could simply charge by the hour and the client pays what he pays.

Sounds great, except for one problem. Clients don’t care about your formulas.

Pricing your product is actually simple, as long as you consider it from the buyer’s point of view. How much it costs you to make something is irrelevant. They don’t care …

Seth Godin

Your formula has no bearing on what a client is or isn’t willing to pay. How would you justify $60 an hour if the client thinks that’s too expensive? Telling him you’re worth that because you want to make $60k a year working 20 hours a week isn’t going to convince him to hire you. Neither is telling the client “how long” it will take.

Esteem-Based Pricing

The second method to avoid is basing your price structure on what you “deserve” to make. I’ve read books that claim we’re not charging what we’re worth because of low self-esteem. If we improve our self-esteem, we’ll charge what we’re worth, what we deserve—and our clients will gladly pay it. Pardon me if I’m not quite convinced.

Your clients don’t care if you think you “deserve” $60 an hour because you have a computer science degree, 15 years of programming experience, hundreds of hours of formal web training, $10,000 worth of hardware and software, and a $50,000 student loan to repay, or because some self-help guru told you that you do. Clients buy for their own reasons, not yours.

Comparison-Based Pricing

Comparison-based pricing is when you set your prices based on what you think is too expensive. It usually happens after you arrive at some semblance of a price, but then you start thinking, “I don’t know, $1,000 is a lot of money; maybe I should charge $900 …” You might think $1,000 is a lot of money, but what are you comparing that to? Your car payment? Your rent? Your monthly income? I once suffered from this malady, but the first time a client paid three times above what I considered “a lot of money,” I was cured.

Competitive-Based Pricing

Researching the competition is generally considered valuable when starting a business. But I found that to be a tall order in the web industry. First of all, who’s your competition? ABC Interactive Agency, or the teenager with a cracked copy of Dreamweaver? Sure, you can scour the web or post a newbie “How much should I charge?” question on SitePoint’s forum, but most of us keep that pretty close to the vest. And the prices I have found are all over the map. Even fellow web designers can’t agree. Although I did look at others’ prices when I first started out, it wasn’t a determining factor when setting my own.

So what should you base your pricing on? The answer lies in why people buy. Even established companies don’t always know why their customers are their customers. Remember, people buy for their reasons, not yours. If you don’t know what those reasons are, you’ll have a difficult time determining what to charge.

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  • http://www.twitter.com/chgraphics Dorothy

    Wow John, you’re on a roll today! Where have you been—or better still, how come I’m just now finding your articles to read?

    You’ve touched on some really important “what not to do” points—I’ve tried ‘em all… In the end, I just decided on a set price (based on what I’m comfortable with) for my services. I’m happier that way.

    …now off I go to follow you on Twitter! Keep up the good work :)

    • http://smallbusinessmarketingsucks.com/ John Tabita

      I’m here every week, Dorothy, for about a year now. I’m glad you enjoyed the article. I publish a new one at the beginning of each week (Sun evening EST or Mon AM if you’re someplace in Australia). Hope to see you back.

      Thanks for following me on Twitter.

  • http://richardrazo.com Richard Razo

    I like the message of this post: making us think like our customers and market our services in such a way to hopefully close more deals. However, you mentioned potential clients don’t care about how long it will take when dealing with prices, but this is the only point I am having trouble believing. I charge per hour or per project. To avoid low-ballers with unrealistic budgets I’m thinking of having web design packages base prices based on time worked into my future redesigned website. I figure, please correct me if I’m wrong, that giving sample packages stating the scope of the project like estimated/allotted hours for $xyz.oo would be a good thing. I would also mention I do custom work and the sample packages are good for those on a strict budget needing an out-the-door price. Opinion?

    • http://smallbusinessmarketingsucks.com/ John Tabita

      There’s nothing inherently wrong with your approach, but the bottom line is this: if your customer isn’t convinced he’s going to receive more back in return than the money your asking him to pay, there’s no value. Without real or perceived value, no discussion of “how long it will take” is going to convince him otherwise. If you front-load the conversation with value and a demonstration of return on investment, how long it will take you becomes moot. Does that make sense?

  • http://singletreeproduction.com Evan

    Thanks for the tips. I’ve gone through all four of these ideas and still don’t have a solid price I’m comfortable with. These are good pitfalls to avoid, but what it a good principle for pricing. There is a science to pricing. Successful companies have figured this out, but many of us haven’t. Are there some few, basic principles that are taught in business schools or lessons of wisdom that business champions have shared in the past? I haven’t yet reached the mark where customers are upset because they think I charge to much. Often they’re surprised and think I charge too little. Then there’s a possibility of not being taken seriously. Or so I’m told. So I remain at the position that I make a product the customer wants, one that I’m satisfied with and charge a rate that I think is reasonable (reasonable to me).

    • http://smallbusinessmarketingsucks.com/ John Tabita

      If there’s a principle for pricing, then continue raising your prices until you start getting resistance. Pricing is a lot like exercising: once you can run 1 mile, you can try to run 1.5 miles. The first time I quoted a price, I was terrified. I had no idea if I was too high or too low. When the client said “okay” with no resistance, that made it easier to quote that same price to the next client with confidence.

  • http://www.mickg.co.nz MickG

    Great article John. One other point for others to consider when pricing/ charging.
    ALWAYS provide at least 3 options for your clients to consider in your proposals.

    #1. The Aspirational (Gold) level price, that covers off on the full scope + a little more, so as to get your client closer (and quicker) to their goal.

    #2. The Middle-of-the-road (Silver) price, that covers off on all the basics (but nothing more)

    #3. The Hourly-Rate pricing. This is your hourly rate. Make sure that in this option you mention that it is subject to your availability.

    What this does is:

    Give your client 3 options to select from (everyone likes having a choice)
    PLUS … gives you 3 times the chance to get a positive confirmation on the proposal (just do the math)

    I’ve found that 4 out of 5 clients normally go for option #1. Mainly because they dont want to sell themselves short :)

    • http://sreenath.net/blog/ Sreenath H B

      I like this idea. Should try it next time.

    • http://smallbusinessmarketingsucks.com/ John Tabita

      Package pricing is a tried-and-true approach. The industry I’m in currently utilizes this approach. However, what we do is present option 1 first, and support it with a return on investment analysis, and only present the smaller package(s) when the client is too risk-adverse or it’s simply not in his budget.

      • http://www.mikehealy.com.au Mike Healy

        Do clients ever think that by coming back with a lower spec, cheaper option you were just trying to squeeze money initially (testing the waters to see if they’d pay)?

  • http://www.webmosis.net CMS Dude

    I’ve found that a combination of a formula-based pricing works, but only when you combine it with my own system I like to call the “Is the McDonald’s drive-through guy making a higher hourly wage?” method.

    You see, most clients generally don’t care about your formula, or what you feel you should make per hour, etc. Until you put it to them in terms they can understand. And I’ll give you an example:

    You: “In order to make the change you’re suggesting, I would have to re-write your entire application, map out every single one of your excel sheets to database tables, and edit at least 100 of your images.”

    Client: “I don’t why that should take you very long. Can’t you get this done for a couple hundred bucks?”

    You: “If I do this for you for $200, then I will be making about $2 per hour. And at that point, filling out an application to McDonald’s would start to look like a wise career move … compared to working at the rate you’re requesting.”

    And honestly, this method seems to work more often than not. People don’t care about your formula until you can put it in to terms they can understand. I’ve worked for some very wealthy people in my day. If I were going by the $60K formula outlined in this blog post, I would consider it more than reasonable to simply ask the client “Do you remember the last time you made $60K in a year?” You can’t expect a customer to care about any of your formulas, until you can put it in terms they can understand and relate to.

    • http://smallbusinessmarketingsucks.com/ John Tabita

      “I’ve found that a combination of a formula-based pricing works, but only when you combine it with my own system I like to call the “Is the McDonald’s drive-through guy making a higher hourly wage?” method.”

      Formulas are great for figuring out how much you need to make. But as a selling tool, I found it less than effective. I would suggest turning the conversation away from re-writing applications, database tables, and image editing and into “what exactly are you trying to accomplish by making these changes?”

      Here’s an example. I met with the new owner of a company we had designed a site for. The first thing he did was spin his monitor around and start pointing out things he wanted changed on the site. I stopped him mid-stream and asked him what he was trying to accomplish. The end result of that question was a tour of his shop and a conversation about how he wanted to get top search ranking to sell nationally. If I hadn’t gone that route, I would have ended up with a few hours work, tops, and a conversation about “how long it will take me” to justify my price. Instead I walked out with a contract for several thousand dollars.

      Sure, clients may understand your formulas and accept your explanation, and even pay your price. However, you may be missing opportunities and leaving money on the table.

  • http://sreenath.net/blog Sreenath H B

    Great article. Its got a bit of comedy mixed into some serious talk.

    But I believe its a mix of both – What you need to make and What the competition is charging. But this is applicable if you know 80% of what you are gonna do and its just about doing it.

    In case there is a major component of uncertainty in the job (and most web development/design projects fall in this category), then a bit of Estimate Based Pricing will come into play – where you conclude how much extra effort you need to get the job done.

    That’s my thoughts on the topic.

    • http://smallbusinessmarketingsucks.com/ John Tabita

      I agree; you need to determine how much extra effort you need to get the job done. I came to the point that I knew exactly how long it would take me to create what I considered a basic, bare-bones site. This is important to do; otherwise, as CMS Dude pointed out, you may find yourself working for less than McDonald’s wage. It’s just that “how long it will take me” was never a part of the sales conversation. I always believed that my job was to produce a result, not get paid for a certain number of hours worked.

  • http://www.pricingprophets.com Greg

    What you are really talking about is value-based pricing. This is where you determine the value you are providing to your clients. 100% agree with John that clients do not care about what it costs you to perform the service – just the value they are receiving out of it. And yes, 70%-80% of organisations (large and small) do not get this and fumble around with their pricing. Pricing is the next big thing in business management and is the easiest way to increase your profit. Have a look at our web site http://www.pricingprophets.com – the world’s only crowd-sourcing site devoted to offering pricing advice.

    • http://smallbusinessmarketingsucks.com/ John Tabita

      Actually, I am talking about value, but not necessarily about value-based pricing. The article was intended as a lead-in to next week’s article, in which I will touch on value-based pricing.

      • http://www.pricingprophets.com Greg

        Excellent – I look forward to your discussion about value-based pricing ;)

  • http://smallbusinessmarketingsucks.com/ John Tabita

    @Mike Healy

    “Do clients ever think that by coming back with a lower spec, cheaper option you were just trying to squeeze money initially (testing the waters to see if they’d pay)?”

    No, because that’s not what I’m doing. I present the best option designed to get him the best result, based on what he’s told me he wants. If that’s more than he’s willing to pay, I make it clear that I have to scale back the scope to meet his budget.

  • http://www.ofazomi.org Ofazomi

    There is a calculation table that includes employees, time spent sending packages and all the rest of overhead including taxes here: http://www.ofazomi.org/resources/how-to/freelance/.

    Download the “handy guide”. Pages 16-19 have what you are after. Some info in the guide is specific to Sacramento, California, USA but most content, like this freelancing calculation table, is generic.

  • http://www.pittsburghwebdesigncompany.com/ Greg

    We offer ala-carte services with our Web Design packages spelled out very plainly in our quotes and contracts. We have people indicate / check off the services they want and then sign-off on them with specific language indicating additional services (logo creation, stock imagery, etc) are billed at X dollars per hour based on 15 minute increments.

    However, we notice that some business owners can’t get past reading 140 characters any longer and just assume they get everything for one price. Sticker shock hits when they get their monthly bill and wonder why X amount has been charged. Our contracts are written at maybe a 9th grade level…is that too much to ask someone to read?

    • http://smallbusinessmarketingsucks.com/ John Tabita

      I never expected my clients to actually read the contract. Instead, I would go over every point of it before they’d sign, even the cancellation and “what will happen if we sue one another” clauses. I found it to be very effective at managing expectations and avoiding surprises. All my clients seemed to appreciate it, as well.

  • http://www.astronautdesigns.com/ Tim Holt

    How long is a piece of string……………………..

    Every client wants to know “how much?”. if I were the client, I know I would. The biggest problem I find with answering this question is that the client often doesn’t know exactly what they want; largely because they don’t understand the technology and/or they don’t develop a clear idea of what they want until they start to see their project take shape. What they consider a ‘simple’ feature for their proposed website could in fact be vastly complex and therefore expensive. When you combine this with the fact that the feature was requested after the project has begun, it can make for an unhappy client if they are told it will blow their budget.

    My recent approach to solving this problem is to pitch a ‘prototype version’ of the project to the client. I offer to create an interactive wireframe at an hourly rate which allows the client to properly develop their brief at a relatively low cost. Then I will cost out the project and give them an accurate answer to their initial question. If they don’t like the quote, they can take the wireframes to other developers to shop for a lower price.

    It’s still early days but so far I’ve landed one solid client by taking this approach.

    • http://smallbusinessmarketingsucks.com/ John Tabita

      We took the same approach when developing a project plan. We’d scope out the project and quote a price. The client would pay for the project plan if he went to another developer. None ever did.

      • http://www.webcloud.ie Tadhg

        When you say “None ever did”, do you mean none paid for the project plan or none went with another developer

  • http://greatestcollectibles.com Gisela Chan

    Great article. One thing I personally look for in a developer is how long will it take them to do a project. I usually get three quotes from three different developers. How long will it take them to do what I would like and how much would they charge.

    I usually go with the one who seems to give me the best answer. If A. says he will charge $500 for a project and take a week. B. charges $550 but will take two days. C. Will charge $450 but take two weeks I would usually go with option B.

    Also, i ask for links to other sites they have worked on.

    Finally, I always pay a portion of the work done before hand and the remainder once the project is done and working correctly.

  • Mark

    Hmm, I think formula-based pricing makes perfect sense for most people.

    Assuming you are good at what you do and willing to work hard then it’s very reasonable to assess what the business running costs are and set a pricing strategy that allows you to work and get paid enough to live and work as you want to.

    If you aren’t offering a valuable service, no strategy will work and your business will fail.

  • http://www.drlinux.no/konsulent.php Arne K. Haaje

    Very good article, and some great comments as well!

    I have a question regarding price per hour vs. fixed price for a project. Do you simply give the fixed price as a figure of estimated hours times your hourly price, or do you give a small discount or add a “uncertainity” buffer?

    • http://smallbusinessmarketingsucks.com/ John Tabita

      If you’re going to use formula-based pricing, then you would multiply your estimated hours by your hourly rate. I added an “uncertainly buffer” by including absolutely everything I spent time on, like the initial consultation, writing up a contract, registering the domain name, and searching for stock images. Even if it only took 15 minutes, I added it to my time calculations.

      When I had partners, we used the time-based formula to calculate what we’d each get paid per project, then we’d mark that up, like a fixed cost. That way, the company made a profit on our work. The money we earned was our personal income, and the remainder went into the company account.

      The only “discount” I ever offered was 5% off if the client would pay 100% up-front.

      Hope that answers your question.

  • http://www.dorseyharrington.com Dorsey

    A trick that works consistently for me is to figure out how many days it will take to complete a project, multiply that by $600 (my going daily rate), and then give the client a due-date far enough in the future that it seems like I’m making far less than I am. For example, a five-day project would cost $3,000. If I tell the client that I’ll have it for them in three weeks, they quickly get out their calculators (and they all do this) and figure that I’m making $1,000/week, or $25/hour. That’s the same as their friend’s son or daughter fresh out of school, but the perception is that they’re getting my 25+ years experience at a bargain price. That removes some of the sticker shock for them. Behind-the-scenes, I’ve completed three projects during that rolling three-week period and earned $9,000. If it turns out that I’ve underestimated the effort, the price doesn’t change (bad for me), but I can still make my delivery date (good for the client and future business).

    Another thing I’ve learned to avoid completely are people with champagne tastes and beer budgets. There is nothing to be gained from them, and they never tell their friends all about you, so you’ll never “make it up in volume”. Larger customers (mostly corporations or well-funded startups) are more interested in a quality result than how much it cost. Or, as Willie Sutton said when asked why he robbed banks: “’cause that’s where the money is”.

  • Tim

    Great info – yet disappointing. You said what not to do and left the reader with a lot of ‘not’ options.

    You do need to have a formula worked out that includes how much you need/want to make, retirement, added profits for marketing, etc, which is divided by how many billable hours you have for the year. Then track projects to at least get a baseline and figure out the minimum reasonable amount you need to make.
    If you don’t then you have no idea how much you/your business needs in order to at least keep you content.

    With that said, you should not be telling them how much a site costs based on hourly rates and time. Those mean nothing to a potential client.

    I’m guessing you’re heading towards pricing that’s based on value… I hope so at least. If so, then I look forward to your next article!

    • http://smallbusinessmarketingsucks.com/ John Tabita

      You are guessing correctly.

  • http://crowdogs.com Peter Schreiner

    John, an entertaining read. You left us with no quick and easy solution to the eternal problem of: what to charge; but then, I don’t think there is one. Although I did come here hoping to find it.

    Thanks!