Pricing as a freelancer is not a simple function of price and time. There are psychological elements that you should start paying attention to, if you are new to the freelancing game.

 

The similarities between bricing as a freelancer and poker

If you ever decide to get serious about playing poker, you will soon realize that you need to acquire a basic knowledge of its strategy. Many understand the mechanics of the game and its rules. Some of us have gone as far as trying to learn about the probabilities of the game.

Yet, many players sit down at a poker table without having spared a thought for the human side of the game. We, freelancers, similarly tend to think of the price we charge for our services as a function of time, a proportional calculation.

We forget that our client’s meat computer does not function like a pocket calculator, unless you, the freelancer, instruct it to do so. 

 

Some basic definitions for price setting: cost, price, and value

 In the words of Warren Buffet: “Price is what you pay, value is what you get”

Before bestowing our negotiation wisdom upon you, here are 3 terms we need to get straight:

Cost is the amount incurred in producing and maintaining a product. It includes things like raw materials, labor, salaries, rent, interest, taxes, etc. As a freelancer, the costs of providing your service are your problem and does not usually concern the client.

Price is the amount the buyer pays the seller in exchange for a particular product or service. Price is determined by both the seller and the buyer and it depends on supply, demand and exclusivity.

Value is the perceived usefulness of your product or service to your customer. It is not measured in monetary terms. Most importantly, unlike cost and price, value remains unchanged.

Now that we got that out of the way, let’s address some of our natural biases as first-time negotiators.

 

Negotiation biases of low-earning freelancers

The negotiation process starts way before you engage in any price discussion with the client. In fact, you first negotiate with yourself, until you manage to persuade yourself to lower your prices and expectations. Here are some of your arguments:

 

“In the past I’ve been paid x amount for a similar project, so I should probably charge a similar amount.”

“If I make too high of an offer, the client is likely to walk away, so I should keep it reasonable.”

“Other people charge this much, so it is unlikely that the client will go for the more expensive option.”

“I don’t want my client to get a shock when they see my proposal. The price should be within their expectations.” 

 

You then walk into a negotiation meeting having convinced yourself that your client’s only criterion is price. Your new aim is mediocre compensation. And that’s exactly what you get.

What’s next? Over time, you feel cheated and start despising your clients. You feel that they are unable to appreciate your work and you blame them for your demotivation and dissatisfaction. Every new freelancer has fallen into this pitfall at the beginning of their journey. Yet, you were the one who shied away from asking for a higher price.

You must keep this in mind: in every business transaction, both parties are completely within their right to negotiate to their advantage. It is a simple fact of our economy. As a freelancer you are also within your right to drive your prices up.

“But what if the client says no?” “They are on a tight budget.” “Or they simply don’t think your service is worth that much.” You can walk away. Not every deal has to be closed and you don’t have to take on every client. Give yourself permission to be picky.

Having said that, you should develop a sense of awareness of your own capabilities. Be humble but work towards perfecting your skills and providing a better service, rather than continue to charge low prices out of fear for negotiations.

One last thing. You should try to see the process of negotiation a bit like a game. You win some, you lose some, but if you have the right mentality, you win in the long term.

Here are 3 ways to look at pricing. 

 

The 3 pricing methods to earn more as a freelancer

1. Selling inputs and hours

As a new freelancer, you likely bill by the hour. Therefore, you are selling inputs: time and materials. As your hourly rate increases, the more valuable your work is perceived to be.

The problem is that charging by the hour signals to your client is that time is the most important metric for success. By this logic, a logo that took 200 hours to design is more valuable than one that took 10 hours.

In addition, it incentivizes you as the freelancer to work on a slower pace. In fact, when you become more efficient and start working smarter, by investing in training and equipment, you will actually earn less.

You’ve also now programmed your client to look at time spent on a project as a sole marker of quality. Therefore, if you spend less time on a project than initially anticipated, your service is seen as good value. If the contrary is the case however, you are perceived as inefficient and overcharging.

The pro to this type of billing, however, is that expectations are lower overall, as time spent overshadows quality of the result somewhat. Your client bares the risk of hourly contracts, as projects can extend indefinitely. And again, every new freelancer starts like this, as it allows you to make some mistakes and improve along the way.

The big con is that long term, it undervalues your work and does not incentivize to invest in efficiency within your business.

 

2. Selling outputs and outcomes

Once you’ve been around the block a couple of times, you will come across clients that are uncomfortable assuming responsibility for your inefficiency. They may want higher control over their costs.

This is when you start selling outputs. You will take responsibility for the result, along for the risk associated with estimating the time it takes to complete said project or task. To account for this transference of risk, you will start charging more, somewhere in the range of 30% to 80% as a margin of error.

Congratulations! You are now selling outputs. Hence if you go about achieving a result faster, smarter, and more efficiently you will be rewarded with higher profit. This is when your growth as a freelancer or small agency can skyrocket. You have a natural incentive to invest in better processes, better project management, equipment, skill improvement, and so on.

This is an exciting place to be if you learn to deal with the risk factor over time. The con of this pricing strategy is that if you underestimate the amount of time or resources to complete a project, you can lose money. This problem is remedied over time, however, as you gain more experience.

 

3. Selling value

Here’s where it gets complicated. Value pricing is driven for your clients emotional and psychological wants.

Therefore, to successfully negotiate from a value perspective, you need to have a deep understanding of your client’s circumstances. You no longer provide a service but rather a solution to a pressing problem, which would make a substantial difference in your client’s life. And I’m not talking strictly in a business sense.

It is very hard to put a price tag on things like peace of mind, feelings of accomplishment or reassurance that you made the right choice.

This goes beyond great project management capabilities, efficiency, and a good result. It requires you to have a conversation with your client and assess their business from a broad perspective, rather than focusing on a specific problem they have ascribed to you. Your goal is to give your client psychological relief. To solve a problem, that they may not have thought is solvable.

This is the most complicated of the pricing models. It comes with great reward but also limits you to the types of clients with bigger budgets. It also carries a lot of risk for you, the freelancer, as this strategy necessitates that you make big promises. And you need to live up to them.

 

Last thoughts

It is important to remember that your pricing strategy should serve your long-term business goals. It also signals to your client the quality of your service as the more risk you take on yourself, the more you will be perceived as valuable.

After all, peace of mind is one of our innate drivers. 

 

If you have made it this far through the blog…

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