Freelance Pricing as Risk Management

This is part of a book (Free Money) about freelance pricing and money mindset I’m writing in public. Here are the prior installments (in order):

1. Why is freelance pricing hard?
2. Are you stuck in a freelance pricing dead-end?
3. Step 1 in Smart Freelance Pricing?
4. Step 2 in Smart Freelance Pricing?
5. Step 3 in Smart Freelance Pricing?
6. Step 4 in Smart Freelance Pricing?
7. Freelancing is the perfect con.

To see future installments as I publish them, get updates in my weekly newsletter, and check out the Twitter thread I’ll be updating along the way.

There is no one-size-fits-all pricing solution for freelancers

No matter how the supposed experts, myself included, blast charging hourly, pricing models aren’t “good” or “bad.”

The models are simply tools, better or worse at doing three jobs for you:

1. Managing risk.
2. Maximizing earning.
3. Strengthening positioning.

Most of us default to the last pricing tool we used. The better practice is to look at each new project from every angle. Let the project, client, and situation determine the best tool.

A dull paring knife does a fine job buttering bread. Yet, if you were to exert more force to cut through a watermelon, that same knife could cut you badly. You’d reach for a sharp carving knife instead.

This section explores the pros and cons of 7 common pricing models. By the end, you’ll know when to use each tool.

1. Hourly
2. Fixed Price, Fixed Scope (aka, Flat Fee)
3. Value Based
4. Subscriptions / Retainers (e.g., Monthly)
5. Equity for Services
6. Fixed Timeframe (e.g., Daily or Weekly)
7. Performance Based

1. Hourly

Charging hourly is the most common pricing model, so we’ll spend the most time to it. (The primary benefit of other models is that they’re not hourly. You get back the advantages hourly costs you.)

In other industries this model goes by the name of Time & Materials or Cost Plus. Lots of salty freelancers rail against it.

Without a doubt, hourly is the dull paring knife in your freelance kitchen. Yet, this model can cut down on frustration with a certain type of client.

Hourly does have some pros:

• Clients understand the hourly model. There’s no explaining to do.
• Charging hourly is an easy onramp for new freelancers. It feels familiar and comfortable, especially when you’re new to freelancing and don’t know how long projects will take.
• Hourly works when clients are flighty, disorganized, or indecisive. You may wonder how ten different projects can all be the unfocused founder’s “top priority,” but each time he changes his mind, he feeds your invoices. They grow big and strong. Thanks, guy!
• Hourly works with complicated clients. Some companies like the one I mentioned above will subject you to broken process. You have a front row seat as decisions are made, then reversed, then reverse-reversed. Hourly transfers the risk to the client. They pay more every time they change the scope, change their minds, or insist the logo still isn’t big enough. It really needs to pop.[Insert eye roll.]
• Hourly works for projects that are unpredictable by nature. Think project management or software development. No matter how long you’ve been building software, websites and apps carry a certain cargo of uncertainty. Two months in, the client comes to you and says, “We forgot to tell you that our customers need to be able to buy gift cards and book appointments.” Or you may you discover that using a certain API will be much more difficult than anticipated. Quoting a fixed price for each 5-minute tweak, 43-minute refinement, and 21-hour API wrestling match is tedious and time-consuming. As long as you communicate about the burn rate, charging hourly cuts down on frustration on both sides.
• You get paid for all the time you put in. As long as you track your time closely and invoice every two weeks, clients will pay you for every minute you invest in their projects. Regular invoices also serve as a signal to clients: “This project is getting expensive. Stop second guessing and adding things. Wrap it up, por favor.”

For every situation where charging hourly has protected me, I can think of three where it hurt.

Charging hourly has clear cons:

• Hourly caps your earning potential. Whether you charge $5 or $500 an hour, you’re trading time for money. You can only sell so many hours before you run out of “inventory.” You can only leverage your productivity and squeeze in so many billable hours before you burn yourself out. The trouble is, you often can’t see that burnout border until you’ve crossed it.
• Hourly penalizes skill and efficiency. The faster you work, the less you earn. (Compare hourly to the fixed price, fixed scope model. It rewards you for streamlined processes and delivering a positive outcome in less time. The faster you work, the more you earn.)
• Hourly doesn’t account for all the ways freelancers create value. Yes, we produce words, pixels, lines of code. We also have valuable experience. We learn through trial-and-error the nuances of copywriting, identity design, or software engineering. As best practices shift, true expertise adapts. What price tag can a client put on good taste or judgment? On wise leadership or out-of-the-box strategy? On the one brilliant idea that became the linchpin of the whole marketing campaign? Some copywriters and software engineers can solve a problem in 10 minutes that their peers can’t solve in 10 hours. The same goes for every type of freelancer. Hourly makes it harder to profit from your X factor.
• Hourly turns you into a commodity. Time is never what a freelance client buys. They want their problems to disappear. They want outcomes. That doesn’t stop them from comparing the freelancer who charges $200 an hour to the one who charges $75 an hour. Even if you deliver three times or ten times as much value, you still face an uphill negotiation. It’s easier to quantify the value of the outcome, anchor a fixed fee against that, and get out of the hourly game altogether.

Let me reiterate my earlier point. Hourly is not “bad.” It is a tool with obvious limitations.

These questions can help you decide if it is the right tool for your next project:

• Is this project with a past client who wants to reengage? If so, has the client asked for lots of changes and revisions? Has scope creep been a problem? Hourly might not be a bad idea.
• Does this person or company have inefficient or broken processes? Lots of extra time, difficulty, or irritation may make hourly the safer bet. Or you may need to choose sanity over money and pass on the project.
• Does the prospect seem disorganized, scattered, or indecisive? Do they struggle to articulate needs or set priorities? Chances are, this will continue to be a problem, and it’s not your job to facilitate marathon discovery sessions for free. Sell a paid discovery session or a time block of 10 or 20 hours. Pass the risk to them or pass altogether.
• Have you already had one or more discovery meetings yet seem to be no closer to defining what the project even is? See above.
• Does the prospect struggle to answer practical questions about the scope or go off on tangents? This is called wasting your time. See above.
• Is the prospect hard to get ahold of or slow to respond to emails? This will continue. See above.
• Does the client have significant or problematic gaps in knowledge about the nature of the project, realistic timelines, best practices, or good workflow? Extra education and hand-holding eats up time and good humor. See above.
• Has the client said or done anything that predicts extensive personality management? You will have conversations with prospects who seem incapable of concrete plans or clear instructions. “I’m the visionary type. I have a lot of amazing ideas. I just need someone to implement them.” Unless you enjoy confusion and frustration, see above.

You may decide hourly is the right tool for the project (and client). It minimizes your risk, and you need the work. Fine. Be practical. Just don’t forget that you can and should switch to a better tool as soon as you can.

4 Tips for De-risking Hourly

• Use a minimum engagement. Some clients will ask for a small project or handful of easy tasks. You can use a “minimum engagement” to avoid sending piddly, half-hour invoices. I have handled this in two ways: 1) lowest project price I’m willing to accept, or 2) time block of 10 or 20 hours. You track your time and knock out whatever the client needs. Any time they don’t use rolls forward as a credit toward future projects.
• Track your time. Every minute you spend on a client project is one you should track. Remembering to start the timer and add notes becomes tedious fast. Your diligence pays now (getting paid for all the time you invest) and later (using past projects to quote a flat fee for future ones).
• Invoice every two weeks. You don’t want to spring a hefty bill on clients at the very end of the project. Even if you were just doing what they asked, the higher-than-expected price can end an otherwise successful project on a sour note. By invoicing twice a month, you get paid more often. This helps with cash flow and helps both parties keep tabs on a project’s cost. Fewer surprises means happier clients.
• Charge a rush rate. A client comes to you with a really tight deadline. Do you tie on your superhero cape and start right away? Or do you say, “Sorry, I have prior commitments and can’t make this my top priority”? Assuming the deadline affords enough time to do work you’re proud of, don’t be afraid to charge more for faster delivery. FedEx does. At Disney theme parks you can pay more to skip long lines. Airlines charge extra for priority boarding. A rush rate enables you to serve clients in a tight situation without sending the wrong message: “Come to me with your emergencies. Go straight to the front of the line. I’ll drop everything.”

Positive Example of Hourly: Complicated Company

One longstanding client of mine was a multi-national medical device company. I worked with a marketing director who oversaw several small business units. I communicated up front that I would be charging by the hour and rounding up to the nearest 15-minute increment. She was fine with that, and even invited me to bill for large blocks of hours in advance.

Boy was I glad I did! Timezone differences, cultural and language barriers, vague pecking orders, and baffling decision-making protocols added inefficiency at every step.

Simple copywriting and design projects took on a comical complexity. One discount and rebate guide for sales reps went through at least fifteen iterations! Another time, I was asked to revert back to the confusing, typo-ridden version of an email promotion I had edited. The reason? The original version had already been approved.

I remember thinking, “How is this company still in business?”

Thanks to charging hourly, I was able to stay gracious and accommodating. Every round of edits put more money in my pocket.

2. Fixed Price, Fixed Scope (aka, Flat Fee)

Once you’re confident that you can give accurate fixed-price quotes, do that instead. Charging a flat fee helps you to loosen or break the relationship between time and money.

This model rewards your own skill and streamlined processes. The faster you work, the more you make. When you end up finish the project in 6 hours instead of 12, your effective hourly rate (EHR) will make you giddy.

Let’s start with Flat Fee’s pros:

• Flat Fee reassures clients. Some clients don’t like the hourly model because of the uncertainty it represents: No matter what the estimate says, how much is the project really going to cost? A flat fee is less ambiguous and risky. The price is the price.
• Flat Fee rewards expertise. Clients don’t care how the sausage is made. Whether a $5,000 project takes you three hours or twenty is inconsequential. They get what they paid for. As you dial in your processes and deliver better outcomes in less time, your EHR goes up.
• Flat Fee weakens the relationship between time and money. You’ll often hear freelance pros declare, with vigor, “Stop trading time for money!” Well, there’s no such thing as fully passive income. You’ll always trade time for money, but you can make strategic decisions to lower your time input and raise the income output. Pushing for that asymmetric relationship will make your business more enjoyable and sustainable. If twenty hours of billable work per week can cover your immediate needs and long-term financial goals, you can do whatever you want with the rest of your time. Did someone say four-day weekends?
• Flat Fee compensates us for the full spectrum of ways we create value. We produce words, pixels, lines of code, yes, but what price tag do you put on good judgment or good taste? What about wise leadership or novel marketing strategies? What about bringing personality and fun to every project?
• Flat Fee strengthens your positioning. Clients know freelancers aren’t identical widgets, but the Hourly model encourages easy (and often unfair) comparisons based purely on price. A flat fee shifts the focus from price to value. What will the client get and what is that worth? With that expanded focus will come opportunities to show your expertise, quality, and process—who you are and how you do what you do. The client gets so much more than your time and hard skills.

With the upside comes risk. Here are Flat Fee’s cons:

• Inaccurate time estimates can burn you. If you haven’t done a similar project in the past or didn’t track your time closely, your best guess at the time required is just that: a guess. Once the project gets going, you may learn your guess was a little off. Or you may find yourself on a different continent. You still have to finish the project. Ten hours becomes twenty, and now your EHR is lower than if you’d charged hourly. Woof.
• Projects usually evolve. It’s unusual when the final project mirrors the original scope. You have experienced this inevitable drift. Another stakeholder enters the fray. New information comes to light. Goal posts move. You’ve also felt the tension of trying to keep your EHR high (by minimizing time you invest) while delivering a positive outcome. When do you let the buffer in your price absorb minor scope creep? When do you draw the line and have a frank conversation with the client? If major scope creep shows its beady-eyed face, you can’t be squeamish. You must be prepared for this kind of healthy confrontation. Not doing extra work for free doesn’t make you stingy but a professional with healthy boundaries.

Positive Example of Flat Fee: Copywriting for a Video Script.

After a filmmaker friend landed a new project, he looped me in to write a three- to five-minute Kickstarter video script. Because I’d written scripts, I knew about how long I’d need to finish the project.

I didn’t know much about the client’s personality or personality, so I added plenty of cushion to my quote, $2,000. The client said yes, and the project went smoothly.

All told, I spent three hours on drafts, edits, and meetings. The client never would have agreed to pay me $667 an hour, yet that’s what I made.

Sell outcomes, not hours.

3. Value Based

The best clients won’t care how much time you put into the project. They won’t care if your EHR is $40, $400, or $4,000. What matters is the felt, smile-sparking absence of their problems.

That absence, or the opportunity represented by it, can have significant value. A non-profit may capture $100,000 more in donations when they rethink their strategy and update the stories, photos, videos, copywriting, and UI/UX on their website. A similar project may generate an extra $1,000,000, or ten times more, for an e-commerce company. The project’s value goes up or down based on the industry or context.

Some freelancers (and more consultants) develop a sixth sense for this sliding scale and anchor the project’s price against potential ROI

Let’s start with the pros of the Value Based model:

• Value Based pays you for your X factor, not your time. A copywriter goes on a five-minute walk and comes back with a genius turn of phrase. In one hour a talented software engineer uncovers the root problem, one her peers couldn’t make heads or tails of in ten. You can and should be paid handsomely for solving painful, expensive problems, and if you’re able to do that in a fraction of the time, all the better for you.
• Value Based pays for your many aptitudes, not just your skills. In my How to Sell Strategy program, I make this observation: Writers sell writing, then use their many aptitudes to deliver it. Consultants sell their many aptitudes, then use writing to deliver them. The two groups share many of the same aptitudes, but the latter makes a lot more cheddar. Chances are, your hands work requires significant head work. When freelancers think and charge more like consultants, we win, and our clients do too. The head work has more value for many of them.
• Value Based can dramatically reduce the hours you work. The trouble with hourly is that you’re trying to sell most of your available time inventory while squeezing marketing into the cracks. Once you get the hang of Value Based pricing and sell a few projects, you don’t need to hustle nearly as hard to hit your income target. You’ll still need to market your offers, but as long as you help clients achieve the desired outcomes, you can whittle down your work hours and get more white space in your calendar.

Here are the cons:

• The value of certain projects is difficult to quantify. If you’re a sales trainer, you can, with little effort, estimate the ROI of working with you. How many leads does the company get each month? What is the average deal value? What’s the average close rate? Small improvements may signify $5 million in revenue for a new B2B client. For you to charge 10%, or $500,000, over a 12-month period would be reasonable. Freelance creatives (e.g., writers, designers, etc.) can have a harder time quantifying the value of ghostwriting op-ed articles for executives or a visual identity for a new direct-to-consumer brand. It can be done, but it’s hard. The knowing comes through doing, and you have to risk losing a project or two as you get the hang of it.
• Big price tags shed light on head trash. You may have heard the little proverb, “New levels, new devils.” When we’re worried about overreaching and failing, we keep bad company, including imposter syndrome, overthinking, second guessing, perfectionism, procrastination—the nefarious mental companions we spend time with when we’re worried about failing. The more you charge, the more is on the line, the more pressing the need for mindset work.
• Some clients don’t “get” value based pricing. If they’ve worked with freelancers who charge hourly or a flat fee close that’s comparable, then they may be confused by your quote. Upset even. One of my prospect’s had this to say in an email: “The main hold up will be the price tag. Just to be transparent, it seems inflated, when the artwork and heavy lifting will come from us.” I responded with a question: “What are you comparing my price to? Based on my past experience and research, my price for strategy, story development, and copywriting falls somewhere in the middle of the spectrum.” I then shared five prices from competitors’ websites to back up what I had just said. Half of winning at this game is keeping your cool, figuring out how to stand your ground, and being prepared to walk away. The best negotiators don’t need the deal.

Value-Based Pricing? This Means War.

Discussions about value-based pricing stir up strong feelings, er, opinions.

When freelancers duke it out over what they believe is most reasonable or most “fair” to clients, we’re really fighting for a specific paradigm.

One such discussion unfolded in the comments after I published what I thought was a funny, related LinkedIn post: “That moment after a freelance client gives you an instant yes and you know you left money on the table.”

Freelance Writer A argued that charging more because you can means “getting away with it.” Eventually, he says, clients will “realize you’re overcharging and move to someone with more realistic rates.”

Freelance Writer B questioned the sense in that: “So if you knew Client A would likely go on to make $100K from your time together and Client B $5K, you would still charge them the same?”

Under the surface, I see a clash between two paradigms:

Paradigm #1 — The price depends on perceived value and potential ROI.

• How much time you put into a project is irrelevant.
• Freelance / consulting projects don’t have set prices. What people will pay changes with perceived value.
• Perceived value determines the value of your work. (Furthermore, perceived value goes up with perceived expertise.)
• Client A may make $100K from one case study you wrote, and Client B, only $5k. Because Client A has higher upside, you have delivered more value. It’s fine to have a sliding scale based on the value you create. Charge Client A more.

Paradigm #2 — The price depends on time and market dynamics.

• You charge based on the amount of time you put in.
• What other freelancers / consultants charge (market dynamics) also affects what you can charge.
• Client A may have higher upside with your work than Client B. That doesn’t mean you provided more value.
• You shouldn’t charge more just because you can. Even if you can get away with it, clients may feel like you overcharged and leave.

I’m here to bash anyone, and I won’t try to convince you that one paradigm is better than the other.

However, I will share a conversation that moved me from Paradigm #2 to Paradigm #1.

“You won’t be taken seriously in larger markets.”

In May 2009, a veteran freelance copywriter and agency owner named Andrew Gordon was glancing through my portfolio.

Precious baby freelancer I was, I had printed it out!

He asked me what I charged. I told him $40 an hour. He asked if he could give me some advice. I said yes.

He told me to raise my rates effectively immediately. Otherwise, I wouldn’t be taken seriously in larger markets like Washington, D.C., and Atlanta. Potential clients wouldn’t look at my “reasonable,” or comparatively low, rates and think, “Great! More work for less money.” No, they’d take my rates as a signal of my inexperience, lack of confidence, or low skill level.

There I was thinking that anyone accustomed to paying $85 or more per hour could hire me and get twice as much work. What a bargain!

Andrew made me realize that, if I were too cheap, the clients I really wanted wouldn’t even consider me. Pricing is branding. Pricing is positioning. You won’t command Rolex respect at Timex prices.

My paradigm never recovered from that conversation, and I share it with people convinced that Paradigm #2 is somehow more upstanding or more fair to clients.

We must think beyond time, market dynamics, and even return on investment and think about positioning. When clients have a lot riding on a project, they don’t want to entrust it to a freelancer’s whose pricing suggests a lack of experience, talent, or confidence. In those cases, higher prices represent lower risk to them.

We often need higher prices to attract and win clients who care deeply about high-quality work and highly satisfying outcomes.

When is a client or market receptive to value-based pricing?

Once your paradigm and pricing shift to focus on value, you’ll still have conversations with potential clients unfamiliar with this model.

A value-based price will make their eyes pop out of their heads. Some may take offense. One prospect told me he thought the two prices I gave him for a pitch deck were “inflated.” I was 99% sure he had never hired for that type of project. He didn’t really know what it “should” cost. And he was thinking about it as an expense, not an investment.

Don’t let a prospect’s emotional reaction to your prices discourage or deter you. The more price-conscious ones are disappointed that you’re out of reach, price-wise.

Value-based pricing is a sifting tool. It reveals which clients have the right value- and outcome-focused mindset, and which ones don’t. Some clients won’t be a good fit for value-based pricing. You can explain why you take this approach, but don’t expect to change their minds.

Here’s how I responded to the one guy who used that word “inflated” but neglected to explain who or what he was comparing me to.

Clients who are a good fit for Value Based Pricing meet these criteria:

• They have a well-defined business model. They could fill in Strategyzer’s Business Model Canvas with relative ease. They know their customer segments, core offerings / value propositions, revenue streams, marketing channels, and cost structure. They see relationships between inputs and outputs. More effort invested in a leveraged opportunity, such as better email marketing, will likely produce a good result. People who understand their business model and its many relationships also see the upside in hiring a specialist to pull a specific lever.
• They have painful, expensive problems. Some problems aren’t painful enough to solve. For example, an engineering firm may have a shockingly bad website and a managing partner who’s fantastic at sales. Some projects don’t have significant value to clients in certain markets or industries. A 2-person micro-agency selling $5,000 websites won’t place high enough value on a case study to pay $2,975. A consulting firm selling $100,000 engagements might. If one case study nets them one sale, their ROI would be 3,000%. The problem, need, or opportunity you sell into has to be painful enough to provoke desire for change and painful enough to make doing nothing more expensive than hiring you.
• They have acute awareness of their problems or opportunities. I just mentioned shockingly bad websites. Some companies do need a beautiful, modern, responsive site. They’re blind to the opportunity cost even if you generate a report and show them their bounce rate. I once did a one-off consultation with a medical practice whose website was garbage. It certainly wasn’t HIPAA compliant. They weren’t ready to invest in a new site, though the minimum fine for willful violation is $50,000. Thankfully, some prospects see the threats, feel the urgency, and mix their spending with long-term thinking.
• They pay attention to their numbers. You’ll find it much easier to sell an e-commerce optimization consulting to a founder who already keeps tabs on key metrics, such as traffic sources, conversions, and average order value. If you can help your clients quantify the value of raising or lowering certain numbers, then the math can do the selling for you. Selling value-based project to people who don’t know and track their “three magic numbers” (h/t Brad Feld) is much, much harder.
• They can focus more on value than price. I chose the word “able” purposefully because some people seem hellbent on saving money even when that goes against their self-interest. If I offered to give you $10,000 for $2,000, you’d be stupid to say no. Yet, some clients will still try to find someone who will do “it” for $500 or $1,000. (Of course, “it” is never constant.) Some clients always choose the cheapest option. It’s like a business tic. They can’t help but ask for a discount. They’ll drive 20 minutes across town to save $0.50 per gallon of gas. You’re looking for outcome-focused clients who see the difference between expenses and investments.
• They’re tired of shoddy work. I’m not trying to knock anyone, especially beginners. We all have to start somewhere. But some projects do succeed or fail based on a freelancer’s incisive thinking, attention to detail, deep expertise, and character. Sales copy, brand development, and software products come to mind. If you’ve ever tried to build a brand or app with amateurs, you know just how costly amateurs can be. For every dollar you saved, you spend two fixing their mistakes and messes. In the startup world the time lost can be even more devastating. Some clients get burned, say enough is enough, and fork over a pro’s hefty fees. It’s hard to put a price on relief and peace of mind.

Positive Example of Value Based: Business Plans for CEOs

One of my early coaching clients was a business consultant named Robert Cross. Robert’s consulting clients hired him to help them fix expensive problems. The trouble was, he’d prove himself so capable that they kept delegating more and more to him.

The predictable cashflow was nice, but too much low-level implementation work was start to wear Robert down.

Consulting with C-level leaders was how Robert made his highest and best contribution. He knew that many CEOs of startups and small businesses were too busy and reactive. They lacked a clear, scalable business model.

Robert and I developed new positioning, messaging, and structure for two offers for those CEOs. Here was Robert’s bold promise: “I help CEOs escape tactical hell and gain real traction in 90 days.”

Robert had been charging $125 an hour. He wanted to pivot to value based pricing. We used a more aggressive “internal” rate of $500 an hour to calculate a fixed price for both offers.

Within five weeks, Robert had sold his $10,000 offer to six new clients.

4. Subscription

Over the years I’ve sold a variety of subscriptions, which also go by the name of “retainer.” “Retainer” is a carryover from the legal world where a company pays an attorney to be available, in case the company needs counsel or suddenly finds itself in hot legal water.

Enough of my clients weren’t familiar with the term, so I started using a more common one: subscriptions. Everyone knows what those are.

For our purposes here, subscriptions are a subset of Flat Fee and Value-Based. The most common subscription is a monthly one consisting of a fixed set of deliverables at a fixed cost. The main benefit is selling a nearly identical project however many months in a row without having to renegotiate the contract each time.

I’ve also sold subscriptions of a hybrid variety focused on strategy and leadership. For example, as a fractional CMO, I agree to help move certain branding and marketing projects forward and make myself available for high-level strategy and decision-making.

Here are the Pros of Subscriptions:

• Subscriptions help you regulate cash flow. Predictable monthly infusions of cash help you stabilize your business finances. Once you stack up enough of subscriptions, you no longer feel the feast-or-famine extremes that freelancers bemoan.
• Subscriptions hit the pressure release valve on sales. Make no mistake, you’ll always be marketing and selling. However, a crew of subscriptions move you toward our monthly sales target without so much pressure on finding and landing enough one-off projects. You’ll experience less whiplash from mode shifts between sales and delivery, sales and delivery, in your day too. Eventually, you can be more selective and turn away projects that you’re not excited about.
• Subscriptions start you down the productized path. When you carve off part of an open-ended service and deliver it monthly, you start productizing your services. You can get better and better at delivering the same project or set of deliverables, and as you define and document your processes — “What’s up, SOPs?!” — you’ll find it easier to delegate certain tasks or projects without a dip in quality.

Here are the Cons of Subscription:

• Subscriptions can vanish. No matter how airtight, rock-solid, bulletproof your service agreement is, some clients will still ignore the terms. They’ll cancel their subscription unexpectedly, without cause. Your agreement may “protect” you in that situation. It may stipulate that the client must pay part or all of outstanding subscription fees. Yet, if the client goes dark on simply refuses to pay their balance, you must decide whether the juice is worth the squeeze. Are you going to drag them to court? Probably not. You’ll cut your losses. If several clients cancel in quick succession, you may see income you were counting on vanish (and a sales pipeline that has barely a trickle moving through it).
• Subscriptions can make us complacent. Many freelancers are so accustomed to winning the next project that we don’t provide the best level of service to our most loyal clients. (Never you, of course. I’m talking about other freelancers.) The trick is not falling asleep on the job. Be as enthusiastic and industrious about keeping their business as you were about winning it. Pro tip: Rigorous process helps you deliver excellent outcomes and client experience month after month.
• Subscriptions can be boring. The knife cuts both ways. The very work that is well-defined and predictable can quickly lose its shine. The money’s great, but where are the fresh creative challenges? When it comes time to ramp up for yet another month of X, Y, and Z, you find your gumption is noticeably non-gumptious. (By the way, this is a great time to create better SOPs, hire, and delegate.)

Positive Example of Subscriptions: Strategy as a Service

Back in 2018, I started selling deep brand development engagements. Once we finished the work on the brand foundation and strategy, most clients were still new to brand management.

New questions and needs would crop up:

• How do brand values affect who they hire?
• How does brand purpose influence what products or services they care
• How should they think about brand architecture before they launch those new products or services?

I had the idea of bundling a strategy subscription with the initial branding work. We define what the brand is, and then we do two strategy sessions per month. I become the de facto brand manager and give the clients the ongoing support they need.

That subscription—$1,750 per month for six months—double the value of most engagements and positions to get more repeat business and better case studies too.

Pro Tip: Clarify what happens with underutilized subscriptions.

Explicitly state what will happen when clients don’t “use” their allotment of your time or capacity each month. Does it disappear or does it roll forward as a “credit” to the next month?

A slow accumulation of these credits can put you in a production pickle if a client later ask to “redeem” them all during a month when you’re already spread thin.

A “use it or lose it” policy is best for you, though some clients won’t like it.

5. Equity for Services

On occasion a client may ask you to “work on the come,” meaning work now and get paid later.

This ask is especially common from startup founders who need top-tier creative talent they can’t always afford. “We’re on a startup budget” is a nice way of saying “We can’t afford your expertise and quality. We don’t want to insult you by underpaying you. Would you consider helping us out anyway now in exchange for some upside?”

To entice you to lend a head and hand, a prospect may offer a percentage of equity (that is, ownership) in exchange for free work or discounted rates.

Out of all the pricing models we’ve covered, Equity for Services has the most risk and the most upside. (Remember, whoever takes the risk gets the upside.)

This model is usually a bad idea for a simple reason: Most startups fail.

Look up the statistics. The likelihood of your investment of talent and time becoming worth nothing is much, much higher than the positive example from Darrell I share below.

Treat any Equity for Services deals as exactly what they are, a gamble. Don’t make the bet if you can’t afford to come up empty-handed.

Getting paid nothing up front isn’t tenable for most of us, and that’s why I recommend asking for a combination of cash fees, equity, and a profit share too, if you can swing it. For example, let’s say the EHR you’re going for is $150 USD an hour. The startup can realistically pay half that. You use $75 an hour to calculate your project fees, but they agree to pay back the difference, plus a premium. Instead of $150, you make $250 an hour in a mix of cash and equity.

When the honeymoon phase is over, you still want to have a deal that made short- and long-term sense. (And hopefully, you’ll still like the people you’re in bed with).

Under no circumstances should you do free work in exchange for compliments and promises. People don’t respect things they get for free, and founders can forget the exact details of what they said they’d give you later. Get everything in writing.

Stern warnings aside, here are the pros of Equity for Services:

• Equity can be worth more than cash. If you pick the right startup and do the right deal with them, equity later can be worth ten times, a hundred times, more than cash now.
• Equity and cash fees can go together. There’s no reason you can’t get some cash in the short-term and ask for equity too. Might as well ask for both, and see what happens.
• Opportunities create opportunities. Once you get in with the right set of startup founders and develop a reputation for doing high-quality work and being open to equity, word will get out.

Here are the cons:

• Most startups fail. The business will probably flounder before your equity is worth anything. I don’t mean to be the bearer of bad tidings, but look it up. Go in with your eyes wide open, and recognize that equity for services is a bet with much worse odds than a coin toss.
• You count on the founders to eventually get you paid. Owning a small slice of a startup sounds cool, yet it’s difficult to build a business that’s profitable. It’s even more difficult to build a business with enough value and momentum to attract outside interest. Your equity won’t be worth anything (except a tax liability) until you either receive profit distributions (which you must negotiate as a part of your agreement) or until an investor or another entrepreneur buys part or all of the company and triggers a liquidity event. How much do you trust these founders’ leadership and capabilities? Do you understand how the business will actually generate revenue and profit? Do you see and believe in the bigger opportunity? What’s going on in the broader competitive landscape? I did the startup thing from 2013 to 2017 and discovered firsthand just how hard this is. Our startup reached the end of its lifecycle (meaning, it failed).
• Equity isn’t free. Equity, in essence, makes you an owner. You may not have voting or governance rights, and any number of people with different rights or a different class of shares may stand in front of you in line when a “liquidity event” happens. But as soon as you accept equity and the ink dries, you have business partners, with all the headaches pertaining thereto. Beyond the relational and emotional dynamics, you have to think about the tax liability. Based on what happens with the company’s valuation and spending over time, you may have to pay taxes even if you don’t sell your shares and don’t realize any gains. Yay!

Positive Example of Equity for Services

My friend Darrell Vesterfelt wanted to be an angel investor. Though he didn’t have cash to invest, he could offer his time, skills, and network.

The latter two he had spent years developing. They had obvious value to a SaaS company like ConvertKit. In exchange for equity, Darrell agreed to a lower salary in a Head of Growth role.

Several years later, when ConvertKit’s founder Nathan Barry sold a small percentage of the company at a valuation of $200 million.

Darrell jumped at the opportunity to sell his shares, and he used the proceeds to invest in other companies. He’s now in a position to look for similar opportunities.

I’m happy for Darrell, but remember, his story is highly unusual.

6. Fixed Timeframe

This model is another hybrid of Flat Fee and Value Based. I’ve used Fixed Timeframe to sell a variety of workshops and 1-Day Brand Sprints.

Requiring a client to buy a “unit” (either a day or week, with a premium paid on top of any private, internal hourly rate) makes a lot of sense in certain scenarios. The nature of software development can require complete focus and thus totally monopolize a software architect or developer’s attention. Daily or weekly billing also makes a lot of sense for consultants who will travel and work on-site with their clients. (Note: Many consultants also charge a per diem or discounted day rate for travel days.)

This model has been trending in recent years. Various freelancers, including Sarah Masci and Jordan Gill, have popularized it. They’ve helped hundreds of freelancers reshape their businesses around a day rate, or “VIP day.”

Here are the pros of Fixed Timeframe:

• Cashflow is predictable. It’s easy to break down your sales targets into the exact number of projects you need to close, and reverse-engineer your sales and marketing activities from there.
• Workflow is predictable. It’s easy to reserve certain days and spots in your calendar for a 3-hour workshop here and a VIP day there. Scheduling tends to be straightforward, and scope creep rarely becomes an issue.
• Outcomes are predictable. You must have a deep understanding of a specific project in order to build the right process and deliver it in a day. The process of defining steps, tasks, and even pre-work for clients brings the added benefit of less uncertainty, ambiguity, and risk. Because six to eight hours isn’t much time, you’re less likely to overpromise, and more likely to underpromise and overdeliver.

Here are the cons of Fixed Timeframe:

• You need strong positioning, trust, and sales tools—ideally all three. To charge a premium for Fixed Timeframe, clients need to feel understood and see proof you can deliver. Or, they need to lean on the trust you’ve earned during past projects. Or, they need to see visuals, read what you’ve written about the process, and receive enough education so that their excitement overpowers their reservations. If you don’t have the positioning, trust, and / or sales tools, then Fixed Timeframe will be an uphill scramble for a while.
• You must lead and occasionally say no. Clients want to get their money’s worth, and some will try to squeeze in more outcomes, more needs. Every new item you say yes to leaves you less margin to knock out the two or three most important priorities. This is a situation where you must step up and say no to protect a positive outcome. Saying no and temporarily disappointing a client makes some freelancers uncomfortable.
• You will underestimate the time required. Any number of factors can cause a project’s scope to grow. Installing and configuring that website plug-in may take two hours when you only allotted one. Slicing photos for a new web page may send you on a wild goose chase for the original high-res version. You know the drill. You may promise fewer outcomes with a Fixed Timeframe project, but you still have to keep your word. You’ll still need to finish what you started even if extra time is required.

Positive Example: Consulting with Digital Agencies

Various consultants use a day rate as a minimum engagement for clients who need a little help in a lot of areas. In an interview with Chris Do, David C. Baker shares his experience charging Chris’s friend $10,000 for a single day and three follow-up phone calls.

Chris’s friend, Fabian Geyrhalter, described his engagement with David as transformative. It was a turning point in his career as a brand strategist and entrepreneur, and the value he got underscores a remark Chris made: “Expensive is relative.”

Chris went on to provide helpful reframing for the right value based, fixed timeframe offer: Find the clients who can’t afford to not work with you, and sell them an outcome they really want in a fixed (accelerated?) timeframe.

Note: As of 2020, David C. Baker had increased his day rate to $18,000.

7. Performance

With this model, you get paid more when the project you’re working on generates more sales.

Performance pricing can work in specific situations. Examples include the setup and management of ad campaigns, product launches (say, on Kickstarter), conversion copywriting for products and sales pages, and consulting related to SEO, lead generation, e-commerce optimization, and online funnels.

This pricing model carries both risk and reward. To be clear, I have never used the Performance, and I don’t see that changing.

Here are the pros of the Performance model:

• The right clients and projects can make you a lot of money. Copywriter and marketing consultant Clayton Makepeace said he made up to $3 million in royalties each year. He was an outlier, but but he was extremely selective. His intake questionnaire was unusually thorough and specific — with questions about how long the company had been in business, annual revenues, a product description, how long the company had been promoting the product, total sales to date, target market, demographic and psychographic profile, and so on.
• This model removes friction from the sales process. The appeal of Performance pricing to clients is easy to see. They pay less or nothing up front and instead pay you out of the profits you generate for them. You take most of the risk on yourself, and in a way, you pay for yourself using their company as a sales mechanism. What’s not to like? Your confidence will be winsome, and you’ll find it easier to close clients.

Here are the cons of the Performance model:

• Attribution can be difficult. How much you make is tied to the sales or value created, and measuring your work’s true impact can be very difficult. What if the client claims sales went up for other reasons ?What if the client doesn’t have analytics buttoned up? What if they don’t track the key numbers as closely as you’d like? To be successful with performance pricing, you and your client need to get crystal clear on how they will be measuring performance, how they will or won’t attribute sales to your work, and how they will calculate your compensation. A less than scrupulous client may promise you a percentage of gross sales and later claim he said a percentage of net profit. Those details can be worth $10,000s, so include them in your signed service agreements.
• Your upside may depend on other people’s performance. It’s one thing to stake your earning on your own skill and expertise. But what if you stand to lose large sums because the company’s sales reps can’t close the deals your new sales funnel produced for them? What if the ad manager’s incompetence incinerates the ad budget without driving significant traffic to the sales page you wrote? Performance projects aren’t a one-woman sport. To maximize upside, you need a whole team of A players.
• You have to be really, really good. Your confidence in what your client is selling and your own ability to generate sales must very high. Does your domain expertise make you highly desirable to this client? Do you have case studies that prove you can deliver results? Do you have a reputation? If you can answer yes to those questions, you can hedge your downsides by asking for cash fees and a percentage of sales.

Positive Example: Consulting with Digital Agencies

In an interview with Jason Swenk, founder Tom Breeze, explained how his Youtube ad agency, Viewability, uses performance pricing.

Inbound leads come pre-sold on the idea of not paying up front. The agency knows their formula for a good-fit client, and they thoroughly qualify new prospects before starting the initial 4–6 week test that Viewability pays for. By the third month, most campaigns are profitable for the client, and Breeze said 80% of Viewability’s clients end up being a win for the agency.

Performance pricing costs more for some clients, but they get the results they want and are happy.

Conclusion

There is no one-size-fits-all approach to pricing. Let the project pick the model. When you’re choosing a pricing model and estimating a project’s price, you’re really running a calculation of time and risk.

• Will the original scope stay more or less the same?
• Will the client need a lot of hand holding?
• Will he change his mind a dozen times?
• Will she go dark in the middle of the project?
• Will he be a lazy communicator who forces you to decipher confusing emails and garbled text messages?

A complex project is like a bag with a dozen small leaks. The bigger the scope, the more deliverables the project has, the longer the timeline, the higher the potential for time lost.

A $10,000 project can be less profitable than a $1,000 project. The $10,000 project took 80 hours to deliver. The $1,000 project took 4 hours to deliver.

Which effective hourly rate is better, $125 or $250?

What matters more than the type of pricing is a paradigm shift. Smart freelancers start selling outcomes instead of hours. They’re conscious of which party is taking on more risk in the project. They may start a new client on one type of pricing and later switch to another.

The right pricing model is the one that minimizes risk, maximizes your EHR, and strengthens your positioning—with that client and project. If you can safely take on the risk, thanks to a clear scope, accurate time estimates, and proven process, then your EHR will be higher.

Each project that you sell at or near your Dream Rate gets you that much closer to your target income and the freelance lifestyle you want.

In the next section, I’ll share the most valuable lessons about pricing I’ve learned in 13 years of freelancing.