By Ellen Rohr
Legend has it that Pablo Picasso was sketching in the park when a bold woman approached him.
Even Picasso struggled with the same pricing issues that you face as an IP. He understood that it's the skill, the expertise, the end result that the customer pays for, not the time it takes. But customers may need a bit of education to really understand that.
What are you worth? How much do you charge for the wonderful work that you do? How do you communicate your value to your clients? Do you quote an hourly rate, and then present a tally of hours and expenses at the end of a project? That's typical of many IPs, who find this the simplest way to charge their clients. Or do you quote an up-front, flat rate for a project? This eliminates the sphincter-tightening moment at the end of the job when you present your bill. You run the risk, however, of seriously undercharging if the project turns out to be more complicated than you thought it would be.
Monola Robison, a management consultant in Atlanta, Ga., has developed a set of guidelines to determine which approach is most appropriate for a project. "With pricing strategies, the determining factor is how well the outcome of the project can be defined," she says. "The less ambiguous the project, the easier it is to charge by the job. If the scope is broad and ill-defined, then a per-day rate is more appropriate."
Time is on Your Side
Charging by the hour, also known as time-and-materials billing, appeals to many IPs because it's so straightforward. You take your hourly rate, figure out how many hours you've worked, multiply the two, factor in any expenses, and send the bill off to your client. Couldn't be simpler, right?
Charging by the hour is often a good option for short-term projects with specific goals. "If a client wants to pick my brain about a very specific project, like my opinion about a marketing piece, I will arrange a one- or two-hour phone meeting and charge by the hour," Robison says.
Time-and-materials billing can also be appropriate when you're presented with a poorly defined project -- say, a new client calls and says, "Help! Come fix my company! Everything's a disaster!" While a project like this should probably send you screaming in the other direction, accepting it and charging a flat fee would be a big mistake. You simply don't know enough about the project's scope. What if you grossly underestimate the time you'll spend implementing your proposal? You'll end up being grossly underpaid, too. Hourly billing is the only way to go in this situation.
But time and materials billing can result in misunderstandings with your clients. A client might ask, "Why did it take you so long? I had no idea it was going to be so much." Or maybe he'll protest, "I know another consultant who charges $50 per hour less than you do. I'll go with her next time."
Your customers aren't trying to be difficult. They don't know better! Clients ask, "How much per hour?" assuming you and your competitors are all the same and that rates are the only way to differentiate between contractors. But all IPs aren't created equal -- there's a big difference between a management consultant with two years of experience and one with twenty years.
To answer questions about pricing, you need good sales and communications skills to demonstrate the value of your solutions and explain why you're worth your hourly rate. You also need to be prepared to justify the time you spent on the project, which means accounting for every hour you billed the client.
The Project's The Thing
Of course, charging by the hour isn't the only option -- and often, it's not the right one. When you're faced with a long-term project with clearly defined goals, charging by the project is the way to go. Gail Gudell, an independent accountant, uses this approach. "I act as Chief Financial Officer at three of my clients' companies. They are relatively small organizations, and there is no need for any of them to have a full-time CFO. I developed a specific checklist of duties, forms, and reports that I'm going to provide on a weekly, monthly, quarterly, and yearly basis. And I am paid on a contract basis for performing these CFO functions." And this means steady income and stability for Gudell, two things that are hard to find as an IP.
Alternatively, charging by the project works well when you're providing one specific service or product to your client. Take, for example, an illustrator who's been asked to draw a picture for a company's brochure. Charging by the hour doesn't make much sense here -- whether it takes him two hours or ten to complete the illustration, it will still have the same value to the company. Why should he be penalized for finishing the project quickly? He should determine what the illustration's value is and charge his client that amount.
A Client's Perspective
Clients often prefer to pay on a per-project basis. They like knowing just how much your services will cost before they sign on the dotted line. They're scared of giving you free rein -- and then getting a nasty surprise down the line.
Al Levi, owner of Oil Services, Inc., a heating company in New York, hires a lot of IPs to help him with various aspects of his business. He likes to pay them on a per-project basis and tells a story to explain why.
"I was traveling with my family in Houston, Texas -- cattle country," he recalls.
"We stopped for dinner at a steakhouse. The waitress recommended the off-the-menu special: Porterhouse steak. She eloquently described its generous portion size and melt-in-your-mouth taste. I ordered it. And the steak was perfect -- absolutely delicious! But when the bill arrived, I discovered the price of the steak: $32.00. And the salad, bread -- everything else -- was extra.
"Now, the steak was great, and $32 may be a fair price for such a nice cut of beef. But the other steaks on the menu ranged from $16 to $23. The price surprised me, and I don't like to be surprised when it comes to purchases. Let me know ahead of time, and I can say, 'Yes' or 'No, thanks.'
"That's how I feel about consulting services, too. I want to know what services will be delivered and how much it will cost before I sign on."
Determining Your Project Rate
Despite the benefits of per-project pricing, some IPs are reluctant to use it because they simply don't know how to decide upon a price. Well, here's a hint: every project-based fee is based on your hourly rate. But instead of figuring out how much time a project took you after the project has been completed, you estimate how many hours it will take you before it's even begun. To come up with a good estimate, follow these guidelines.
Assess the project. What's the problem? What is the full scope of the project? How can you measure results? How will you know when the project is finished?
Then, decide how many hours the project will take. Be realistic. No project ever goes off without a hitch. Add some hours to account for unforeseen problems. Some people even advise IPs to double their first estimate. Multiply the total number of hours by your per-hour rate. What resources will you need? Add these expenses up. Then, before you present the total price to your client, ask yourself, "Should I discount this price because it involves so many hours of solid work? Am I saving time I would otherwise spend marketing and selling another job?"
Adjust your total price according to your answers. Then, sell yourself on the price. Do you see the value in relation to the price? Can you describe the benefits of your service so that it seems like a bargain?
Present your proposal to your client. Don't offer a breakdown of time and materials. Reassure your client that you will hold to the price until the desired, measurable results are achieved, no matter what it takes. If you are efficient at what you do, and you bring the job in ahead of schedule, then you and the client both win.
So should you charge by the hour or by the project? There's no one-size-fits-all answer. They're both legitimate strategies that work well in different situations. When you're presented with a new project, consider them both, figure out which is the better option, and present your decision to the client. Then it's time to get down to business and start wowing them with your work!
October 27, 2000
Primary Editor: Eric Gershon
Illustrator: Steve Smallwood
Production: Fletcher Moore
We'd love to hear your comments about this article!
Ellen Rohr, author of How Much Should I Charge?, lives in Rogersville, Mo. If you like, we'd be happy to put you in touch with her, or with any of the other IPs named in this article.