Free Yourself From the Hourly Trap with Productized ServicesBy Michelle Nickolaisen
Have you heard about “productized” service packages and been told you should be doing them? Not sure where to start–or why, indeed, you should even consider it? Or maybe, you don’t even know what the word means and you’re currently giving your monitor a somewhat quizzical look.
A “productized” service is a set of services that a customer buys as a package instead of paying you an hourly rate to perform the services separately.
For example, you might sell a “website design and e-commerce store addition” package for $5,000 instead of billing hourly at $75 an hour until the project is done.
The pros and cons of productized services
The number one reason to work this way is that it decouples your profit from the amount of time involved. Hourly rates work well for some freelancers, but they do have downsides:
- If you naturally work fast, an hourly rate puts you at a disadvantage–you have to charge what looks like disproportionately high rates to a client, even though their price will work out to the same or less than if they’d gone with someone who charged a lower hourly rate but worked slower.
- Similarly, as you get more experienced, you usually work faster. Of course, with more experience you can also justify a higher hourly rate. But a package price removes your hourly rate from the equation entirely.
With a “productized” service package, you’re still trading time for money, but you don’t have to justify an hourly rate to your potential client. Instead, you can focus on showing them the results and benefits they get from working with you.
There are a few additional benefits:
- No sticker shock for the client. A less-than-ideal but probably familiar scenario: as the project progresses, you spend more time working than either of you planned. That means more money out of the client’s pocket, and they get stressed about how out-of-scope the project is getting and how much money they’re spending. (And stressed-out clients are not good clients.) If you’re working off of a flat-fee, they know how much money they’re spending going in, which takes stress and uncertainty off their shoulders.
- No proposal process. If you’re tired of doing the back-and-forth proposal dance of “Can you take this out and leave this in?”, productized service packages are the way to go. They save both you and your client time and effort.
- It’s easier for clients to say “yes.” If you have your service packages and prices listed on your website, they can just look at your service offerings and know exactly what they’re getting into. Any client that gets in touch is already going to be pre-qualified; They know your rates, and they are less likely to be tire-kickers or hagglers.
There are certainly some pitfalls with productized services. The main disadvantage to packaging your services is that it’s easy to wind up undercharging, overbooked and stressed out. When this happens, it means you haven’t accurately estimated how much time it will take you to deliver the services you’re promising. To avoid this trap, it’s important to learn to create better time estimates.
How to create your first productized service
The best way to develop your initial service packages is to think about your most commonly performed services and your most frequently asked questions. Do you get asked “Hey, can you do X for me?” over and over again?
For a designer, this might be logo or business card design. For a developer, this could be setting up an e-commerce store and integrating it with an existing website. If you haven’t been freelancing for very long, you might struggle with this; you can get some ideas by scoping out what others in your industry are doing (this should go without saying, but don’t ever steal anyone else’s’ sales copy–impolite, to say the least!).
You’ll probably notice three to five popular services, things like “I’ll install WordPress and add 3-5 customizations to a preexisting theme.” There will also be some niche offerings like the e-commerce service mentioned above. In between looking at the work you have done, the work other service providers are doing, and the work you really enjoy doing, you should be able to come up with at least one productized service idea.
Pricing psychology: A primer
Now that you’ve created your first productized service, you need to figure out how to price it. Here’s a few tips to make sure you aren’t shooting yourself in the foot with your pricing:
- Don’t overwhelm people with too many options or prices. If you have three different services and three tiers for each service, that’s nine options for the customer to choose from. A famous study showed that customers who were given six options bought 10 times as frequently as customers who were given 24 options. The customers who were confronted with more choices often got overwhelmed and left without buying.
- That said, tiered options are good in moderation. Given the option between three prices (low, middle, high), people tend to pick the medium option, with some people choosing the higher option. Most people don’t want to feel “cheap” but also want to be assured they’re spending responsibly, and the medium option tends to satisfy both of those urges. By creating three tiers, you can encourage people to choose the middle, higher dollar value option rather than just going with the lowest price.
- When you focus on benefits, not features, you can often justify a higher price. Focusing on features makes your service look like a commodity, and in a commodity market, the lowest price usually wins.
And I’ve mentioned it once already, but it bears repeating: When you’re creating your prices, don’t forget to check and double-check your time estimates.
“Buy now” vs. invoicing
When it comes to productized services, people generally go one of two routes: the “buy now” option or invoicing.
The “buy it now” approach has a couple of advantages:
- It eliminates the typical back-and-forth email exchanges before buying. A customer can simply come to your website, browse your services and pay you without you having to quote and negotiate via email.
- It also decreases the chances of the customer waffling and changing their mind after you’ve already spent time discussing the project with them.
But there are also some downsides:
- It isn’t ideal for complex projects–there are many variables that can affect pricing in a larger project, and you might start work on the project only to realize that you missed a complicating factor.
- You also have to be diligent about updating your “buy it now” service information with real-time availability so that clients know what your turnaround time is. If they buy thinking you can complete their project in the next two weeks but it turns out that you’re booked up for the next six weeks, you’re going to have some unhappy clients on your hands.
If you go the buy it now route, you can use any of these tools to sell your productized services with a buy now button.
There are also pros and cons to using an invoicing approach:
- There is more friction in the process–email back and forth, the time between them requesting an invoice and actually receiving it, etc. Trouble can arise at these friction points. For example, during initial email negotiations, the client might start to waffle on which package they actually need, or they might decide not to work with you after all.
- On the plus side, it’s easier to get started. If you have a basic service package with a la carte add-ons or customization options, invoicing may be simpler than trying to set up a shopping cart and buy it now option that accounts for that.
- This process gives you a chance to communicate timeframe expectations with your client, so that they know when you’re available and what your turnaround time will be.
Which should you choose?
For smaller service packages or a la carte offerings that require less onboarding and that you know you’ll be available to complete for the foreseeable future, a buy it now option is a good choice.
For more involved services that might require customization, you’re probably better off just putting up a contact form on your site and sending an invoice for each project.
The recap (and your homework)
Productized services are great for you if:
- You want to get out of an hourly pricing model, whether it’s because you work unusually fast or because you want to stop spending so much time and effort on the proposal process.
- You’d like to avoid scope-creep and sticker shock with your future clients.
- You know (actually know, not just guess) how much time it takes you to deliver your services and you can price them accurately.
If you want to get started using packaged services in your freelancing business, here’s what to do next:
- Go over your most commonly performed services and decide which one you want to productize first.
- Create a price for the package, using sound pricing psychology and pricing tiers if appropriate.
- Choose whether you want to handle payments with a “buy it now” option invoicing, and set up your payment processes accordingly.
- Pat yourself on the back for a job well done!