Freelance Pricing: Hourly Rate vs. Fixed Fee?

Ilise Benun on your online marketing planOne of the most active discussions on the CFC LinkedIn Group lately is on the pros and cons of pricing hourly vs. using a fixed fee.

(BTW this was one of the main topics of conversation in my Business Bootcamp for Interactive Design Projects at the HOW Interactive Design Conference, which starts today. I’m sure it’s not too late to sign up on site!)

Here are the Pros and Cons of each, as proposed by the designer who posted the question.

Hourly rate PROS:

- Deposit (good for late paying clients)
- Cost of the actual time you work
- Less client hesitation on decision taking or changes

Cons:
- If a bigger client comes I can’t change my rate for them, because my clients usually know each other, so I end up underpricing.
- New clients seem to accept proposals more easily with a fixed fee. They don’t have to go through the process of trusting my honesty about how many hours I work and charge.

Fixed fee PROS:
- You can add any extra amount if you consider that your work for any specific client has more value.

Cons:
- Instead of a deposit there is the advance payment (50%) but there are times when clients disappear or cancel once its all finished.
- If you calculate the time of your work wrong, your screwed.

What would you add? What do you agree and disagree with? And, most importantly, how do you actually charge? Does it depend on the client?

6 thoughts on “Freelance Pricing: Hourly Rate vs. Fixed Fee?

  1. Laurel Black

    I think there’s no question that pricing by the project beats hourly pricing in nearly all circumstances. Here’s my take:

    Hourly rate PROS:
    - Deposit (good for late paying clients):
    >Who says you can’t get a deposit for fixed fee work? This is just plain wrong.

    - Cost of the actual time you work
    >This completely misses the point: you are selling value, not chunks of time.

    - Less client hesitation on decision taking or changes
    >This is a red herring. Charging by the hour makes it much easier for clients to question your fee. “You’re charging for 2 hours to do that? It should have only taken you 15 minutes! All you did was make a few clicks.”

    Cons: These are all true. I would add that charging by the hour puts you in the position of an order-taker, not a professional services provider. You will be questioned more and you will receive less respect. Charging by the hour can categorize you as an hourly wage employee in the mind of some clients. Plus it’s not your clients’ business what you charge an hour. Your hourly rate is for purposes of estimating your fee, which is your prerogative.

    Fixed fee PROS:
    - You can add any extra amount if you consider that your work for any specific client has more value.
    >That’s the main reason your should charge by fixed fee. You are providing a service that will have value beyond what it takes of your time to create it, if you’re doing your job. That is worth a lot more than merely charging for your time.

    But you can’t, however, just “add any extra amount.” Fees need to be reasonable and in line with what the market will bear. That is especially true in our current economy. We have to walk a fine line between defending the value of our work and remaining competitive. I think there is a lot more scope for finessing this when you charge by fixed fee.

    Cons:
    - Instead of a deposit there is the advance payment (50%) but there are times when clients disappear or cancel once it’s all finished.
    >Clients can flake on you regardless of your fee structure. All the more reason to get a deposit or an advance or whatever you want to call it – they are the same thing: a chunk of the fee at the onset of the project. And a well-written contract is a must for any project that isn’t totally simple.

    - If you calculate the time of your work wrong, you’re screwed.
    > That’s the result of poor estimating, not whether you charge by the hour or by fixed fee. How many of us have set our fees too low when we were learning how to estimate? I have found that clients appreciate fixed fees because they know what their cost will be (unless they ask for a change in scope), which makes planning and budgeting easier for them. Clients usually aren’t okay with paying whatever hours the designer ends up spending, with no cap.

    I think the only appropriate services to charge for by the hour are operational things like routine maintenance or production work. I also mention an hourly in the section of my contract about change orders. Creative services have value beyond the time it takes to deliver them. If we think our work has value, we need to express that in how we set our prices.

  2. Tom Nagel

    I agree 100% with Laurel. A few additional thoughts on why I prefer fixed fees:

    - My time is limited, and therefore I am always seeking to become more efficient at what I do. Hourly rates don’t account for added value or improvements in methodology, for example if you use a code library or design template files to cut down on the amount of time it takes to complete each project.

    - The best way to avoid conflict with clients is to avoid surprises, and one surprise that clients hate is an invoice that’s higher than what they expected.

    - Hourly rates encourage uninformed cost comparisons. If I charge 25% more per hour but I’m 50% faster than another designer, the client sees only the 25% cost difference.

  3. Seth @ Cashboard

    Great discussion, and one that always seems to have an equal amount of people on either side.

    When I was freelancing I started hourly at first, but found that fixed price worked better as I got later into my career. My last projects were fixed price + a maintenance contract based on hourly rates.

    In any event – you should be estimating your hours and keeping track of your time to adjust your pricing accordingly. Even if you don’t expose your hourly estimates to clients you should keep them for your own benefit.

    FYI: (shameless plug) this is the exact reason I created Cashboard. Check it out if you need a tool that will help you be more productive and produce better estimates.

  4. Alex

    Here’s a voice in favor of the hourly rate AND a total estimate, which has worked well for me for 14 years. I calculate how many hours a job will take, multiply it times the hourly rate (which does vary by client) and spell it all out in my proposals, along w. what those hours buy. My clients appreciate seeing how a job breaks down and it helps them understand how a project that seems simple to them can actually take a fair amount of time, plus time is a universal unit of measurement everybody gets. Many of them also frequently require lots of revisions, which I equally frequently remind them could increase the final bill. I don’t think charging by the hour categorizes me as an “order taker” or other low-rent worker… that’s how lawyers do it.

  5. Kimberly Hawkins

    Fixed is just easy + pro. (fyi to Alex: most people don’t like lawyers ;-)
    I charge a flat fee with 3 round of changes and then a flat rate per change regardless if it’s a retouch that takes an hour or a type change that takes .5 sec. (I’d prefer to just have project finished).
    I worked at an agency that was more concerned about hourly chair sitting than work produced (I quit) – I want my clients to love + feel loved :-)

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