home about contact internet marketing book twitter business book archives subscribe

Charging by the Hour

Photography: Leo Reynolds

No two businesses are ever completely alike but all entrepreneurs have at least one thing in common: they all have to decide on the amount to charge their customers. That’s never easy. Pitch too high and you’ll struggle to pick up customers. Pitch too low and while you’ll pick up lots of business, you’ll struggle to make it pay.

Even before you decide on the amount you want to charge though, you first have to decide how you want to charge. Do you want the client to pay according to the project or do you want to set a fee that depends on the amount of time it takes you to complete the work?

Both approaches have advantages and disadvantages. Charge by the project and the client can see exactly how much the work will cost. There’s no chance of any nasty surprises when you present the bill and you don’t have to worry about an argument with someone who’s convinced that it’s possible to build a website from scratch in half an hour and can’t understand why you’ve charged for three days’ labor.

The time pressure too will be lessened. Dawdle while you work and you’re only wasting your time. That’s bad enough but it’s your choice and you’ll end up paying for it. Take lots of breaks while you’re charging by the hour and either you have to keep turning off a stopwatch or you’ll end up bumping the price until it’s no longer competitive. That could cost you your reputation, something much more valuable than the price of a coffee break.

How Long is Too Long?
The biggest danger of charging by the project though is that you can underestimate the amount of time it will take to complete the work. Sometimes you can get it very wrong indeed. Programmers asked to write scripts, for example, can provide quotes on the basis that the work would take two days only to find it takes four. That would be two whole days without income and no way of recovering. Once the price has been agreed, you can’t return to your client and say that the work is taking longer than you expected and that you’d like to charge more.

So charging by the project makes everything clear for the client but not for you; charging by the hour returns the risk to the client but weakens the attractiveness of your offer.

In practice though, for successful businesses there’s often little difference between charging by the hour and charging by the project. That’s because in both instances, the company has a good idea of how long the work is going to take. If a business owner knows that a job will take half a day, for example, and he wants to earn $150 dollars in that time then he can either charge $37.50 an hour or he can ask for $150 for the project. When the time estimate is clear, the result should be the same.

The best time to display your prices as an hourly rate then is when you don’t know how long a project will take. SetYourRate.com, for example, is a UK-based freelancers’ service that mostly offers coaching and teaching. All the prices here are quoted by the hour. In part that’s because a lesson lasts a set amount of time but even graphic designers and handymen are quoting their prices by the hour here because they have no idea what sort of projects they’re going to be receiving.

Give the Client a Clue
Making the hourly rates clear when the work is unclear means that the buyer has to rely on his or her own estimate of the size of the project. The negotiations then are not about your fee but about the time it will take for you to complete the work — a much easier field for you to negotiate on.

So choosing whether to charge by the hour or by the project should be fairly straightforward: when you know how long the project will take, charge by the project so that the client will know how much he can expect to pay. When you don’t know what sort of projects you’ll be receiving or how long they’ll take, provide an indication of the price by giving an hourly quote.

Setting that rate though is a whole other question.

Looking at what competitors charge is a good place to begin. Again, freelancers’ sites with different types of jobs like SetYourRate.com or Elance.com can be good places to do research but make sure that you remember that prices can differ greatly from location to location — as can costs.

And while you’re looking at these sites — especially those that offer coaching services — pay attention too to the range of different jobs on offer. You might well find that people there are offering a service that you hadn’t considered. You might not want to look after small pets but if you know how to complete tax returns, that could be something you sell by the hour too.

One Comment

  1. graft Says:

    "If a business owner knows that a job will take half a day, for example, and he wants to earn $150 dollars in that time then he can either charge $37.50 an hour or he can ask for $150 for the project."

    That's such a weird strategy, especially since the remainder of the article after that comment discusses deciding a fair market rate. If a lot of your clients know each other, don't you think that one of them might get upset to find that they were charged twice as much as another? Might they think that they're difficult to deal with, or think that you're scamming them or making up hours? And doesn't this complicate your accounting?

    Pick a rate and keep it the same across the board, with two exceptions... First, reward longtime clients by being conservative with rate increases (i.e. offer them a lower rate for an additional six months after you've raised your rate, and don't hesitate to tell them that you're doing it). Second, provide nonprofits/artists/etc with a discounted rate. They are usually great clients that are flexible, gracious, and allow you to exercise more creative freedom (especially if they know that they're getting a discount).

    Also, you can avoid the dangers of overestimation and underestimation by providing a flexible estimate. For example, if you can typically do a website in 20 hours, but this site might take a little longer, tell the client that the estimate is 20-30 hours. So if you're charging $75/hour, the estimate is a range between $1500-2250. Instead of getting worried about quality due to an estimate that's too low, or worrying about their budget due to an estimate that's too high, they will initially zero in on the median cost of $1875. They will see the low estimate as a possible way to get good work without spending a lot of money, and they'll see the high estimate as "reassuringly expensive" (i.e. you can command decent project fees because you know what you're doing).

Leave a Comment