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Why You Need to Shift to Value-Based Pricing for Your Freelance Business

All set to start to grow your freelance business? One of the first things to think about is how you can make the most money in a fair way without working any more hours. While there are different pricing strategies, such as time-based pricing and monthly retainer, value-based pricing stands out as the fairest way to get compensated.

Here is a closer look at the different pricing strategies and why value-based pricing is the recommended model.

Time-based pricing

In this freelance business pricing model, you agree with your client on an hourly rate based on the time it takes for you to complete the project.

However, time-based pricing makes it hard for you to earn a higher profit. Your service is in danger of becoming a 'commodity' while you run the risk of losing out to your competitors who may charge less than you. While this model is suitable for beginners, experienced professionals will stand to make less simply because they can complete a project in lesser time as compared to beginners.

Monthly retainer

Retainer contracts are formal written agreements that the freelancer and their client enter into. In the monthly retainer model, the client agrees to pay a fixed fee every month for retaining your services. A retainer fee can also be an annual fee or a single advance payment.

Project-based (Fixed fee) pricing

Project pricing involves charging a flat rate for defined deliverables. While this model is ideal for productized services, it becomes challenging when there are complex projects with scope creep ups.

Value-based pricing

Value-based pricing involves charging the client for the value your project brings to the client instead of the time it takes for you to complete it. While it is similar to fixed-fee project pricing, the difference lies in how you determine and justify that fee.

Value-based pricing helps establish you as a professional and an expert while helping you earn what you are worth.

A value-based price is generally 15 to 25 percent of your client's annual revenue post completion of the project. What this means is that if your client realizes a profit of $100,000 after your project is completed within the next year, it is reasonable to charge $15,000-25,000 for the project.

For instance, as a freelance graphic designer, you charge an hourly rate of $120. You are hired by Nike to redesign their logo. You estimate that you need 140 hours to complete the project, with the total charges coming up to $16,800. While this seems like good pay, for a business that makes an annual revenue of $44 Billion, the amount is too low.

Instead of charging an hourly rate in this case, opting for a value-based price makes sense. This is because the project is not only a high-risk one for Nike (they have to get it right), but is of high value.

Value-based pricing benefits clients too, as they will know the project price upfront and do not have to base their purchasing decision on the hourly estimates. Investing in the right freelance consultant will help your client minimize risk, save time and deliver the most value to their stakeholders.

Challenges of value-based pricing

The success of value-based pricing depends on securing complete buy-in from your client. As it is about charging a percentage of the estimated value your client realizes, it will work only if you can gather the information you need to calculate the value. Apart from these, there are some other criteria for value-based pricing to work.

You need to know what metrics of success the business measures and the financial impact of not achieving these metrics. Your client needs to share their financial goals and KPIs of the project with you. For example, if you are revamping the e-commerce site, conversions can go up by 2 percent. Your client has to share with you how much they will earn as a result of the conversions.

The project needs to have quantifiable outcomes. For instance, if the outcome of the project is emotional, such as increasing customer satisfaction or revamping brand identity to reflect the lifestyle of Millennials, determining the monetary value can be difficult.

It can be difficult to ace the value-based pricing strategy. At Nomawo, we offer end-to-end resources, including lifetime access to tutorials, networking, and peer support that set you up for success.