John Rainsford

I was reading a blog post over on jameslarkin.ie regarding calculating your hourly rate if you’re a freelancing web designer. Even though I have the form of a business, I am more or less a freelancer, so these articles are always of interest to me.

Hourly rates are something that can be calculated in a fairly straightforward manner, an hourly rate is basically:
Your overheads per hour + Your wage per hour + Profit per hour = Hourly Rate

When I began working for myself, I calculated my hourly rate. The thing is though, I never really use it. I mostly deal with other small businesses who contact me to either redesign and rebuild their current website or create a new website for them. I have a rough idea of the time involved in both processes, but when I multiply those hours by my hourly rate, the cost per website is very low, too low. What gives?

Costing a job is a usually a pain, raising questions such as ‘am I costing too much’, ‘am I costing too little’, ‘am I being competitive’ etc. I think I have my costing worked out, so I’m going to share my method here. It’s the same method I have been using for the last two years, but it’s only since reading the aforementioned blog post that I was able to put a name to it- Pricing by Value.

I take absolutely no credit for this, a gentleman by the name of David Winch, a consultant in sales and marketing, has a DVD about the topic. I discovered Mr. Winch through the comments on the above blog post, who posted a comment explaining why you should be Pricing by Value rather than multiplying hours by an hourly rate. I haven’t seen the DVD, but after reading his comments, pennies dropped and I realised he was able to articulate the method of pricing that I have been using for years.

To better explain Pricing by Value, I’ll use an example:-

I go to the shop and I want to buy a new laser printer. The salesman says that there’s Printer A, which will do 10 prints a minute in black ink or there’s printer B which does 30 prints a minute in full colour.

He’ll then hit me with the prices for the two.

At no point will he say, “This costs more because it took longer to make and the parts are more expensive”. Neither of these are a factor in the price, they’re a factor in the manufacturers cost of production, which is then used to calculate price.

The manufacturer isn’t going to inform the customer how much time and resources goes into making the printer, they’ll just set a price for the printer, what they feel it’s worth for what it will do for you.

Now I know everyone will jump off their seats and proclaim “Hey, we’re providing a service, we’re not selling a product”. If you’re dealing directly with the customer (as opposed to doing contract work for another company), and you’re producing an entire website for them, then you are selling a product (that you have created) to your customer. This is why you should be pricing jobs in relation to what the website can do for your customer.

David Winch puts it very eloquently:-

You shouldn’t charge what the Client is willing to pay so much as you should charge what the Client sees is a moderate investment for the return, the value they will get from working with you. If you feel this modest investment is unprofitable for you, either decline to take on the work or, more likely, you haven’t helped the Client enough yet to see the full value of what they will get by working with you.

I can guarantee that a business in need of a website, will not approach a business or a freelancer and say “Hey, I need a website, what’s your hourly rate and how many hours will it take?”

Businesses and individuals approach me and tell me they want a website. They also tell me what they want this website to do (sell stuff, allow potential customers see product portfolio etc) and if they don’t, we sit and discuss the project until we both know what the purpose of the website is. Once I know what they want to do with the website, I then sit down and work out the cost based on what this website will accomplish for the customer.

Ok, so how do I cost?

Sure, we all know that finding out what the customer wants is the first step (and often the most difficult), but how do you determine how much to charge the customer?

Hourly Rates

You will need to decide upon your hourly rate, if only to make sure you aren’t losing money when costing. There are plenty of resources online, like the aforementioned blog post, if you do a search, you will find plenty of tutorials on how you can calculate an hourly rate. Like with everything else, your overheads will be different to mine, so it’s important that you calculate your own hourly rate, rather than using someone else’s.

Going Rates

Your next step is to do some research to establish the ‘going rate’ for similar work. This is a difficult process, but is really necessary to ensure you’re competitive and profitable.

Here’s a few suggestions to help your ‘research’:-

Ask other businesses-

I don’t think approaching other businesses with the opening line of “I’m trying to work out my pricing for my business, which also happens to be your competition” will work, nor will filling out their Request for Proposal (RFP) forms with phony project details (this will bring you nothing but hassle and bad karma). The only recommended way would be to look for published pricing details either on their website or advertisements. Not the most recommended option for obvious reasons.

Ask friends in other business-

This only works if you have friends in a similar business, but chances are, if you do have friends in a similar business, you’d have asked them already.

Ask potential clients-

I have two types of potential clients, people who have a website already and are looking for a redesign and those who are starting from the start.

The first type will have already paid a web professional (most of the time) to create their previous incarnations so I’d ask them what they paid for the previous website. Be careful though, ask them casually without seeming forceful (i.e. “out of curiosity, would you mind if I asked how much you paid for your previous website?”)

The second type usually have no idea of budgets etc., so they usually get multiple cost estimates. If you are their first call, then they’re no good to you for this exercise, otherwise you should try convince them to tell you how much they’ve been quoted from other businesses. Your explanation could simply be that you want to provide a competitive estimate for a similar spec for the customer.

Using potential clients to ascertain the going rate is a good way of getting information for costing purposes, just make sure you get the details (project spec) of what the other costing is for.

When gathering costs, they should always be from a similar business to yours, for example-

The size of the business should be the same (ie if you’re a freelancer, try get the standard prices for other freelancers, likewise small businesses, likewise big businesses).

Try get a business you think would have similar overheads. A business in a big city has larger overheads, which inflate costs. If you work in a small town, you should be passing on the savings in overheads to your customer (you don’t have to, but being more competitive is an advantage for your business, not just your customers).

The product of your work should be the same- If you’re doing web standards-compliant work, which is very accessible, you should be looking at businesses who produce similar websites. If you’re using Joomla or Wordpress as your CMS, you can’t really charge the same as a business that builds a custom CMS or uses an enterprise-level CMS.

Remember! This information is for reference only, this is your business, the ultimate decision on cost is up to you, for good or for bad.

Timing is everything

You should have a really good idea of the length of time it takes you to do a project. Personally I like to divide a website into different parts, and cost each part separately. This cost is derived from three different factors, time it takes to complete this part, hourly rate and what I feel this part is worth. Different parts are divided into two different categories, the parts that are absolutely mandatory to a project and the parts that are additional to fulfil a specification.

Examples of some mandatory parts:-

• Initial consultation
• Design
• Initial implementation of our CMS (we don’t really do non-CMS websites).
• Post-launch work (setting up Google Analytics, Favicons etc)

Examples of some parts that I add on as needed:-

• Photo Gallery
• Date-ordered events Listing
• News/Blog pages

Keeping track of the time implementing each part is a task onto itself, sometimes estimation plays a significant part. It helps if you actually have work in that you can time each section. When I started to work out my pricing, I kept a list of all the different parts of a project beside my computer and filled the time in as I went along. I further subdivided each part into the individual tasks involved in implementing a part. This is useful at the planning stage as well and also if you’re using a Getting Things Done (GTD) approach.

It takes approximately four hours to implement my photo gallery code and style it to suit the site, but what I charge my clients is not four hours multiplied by my hourly rate, instead I charge what I think having a photo gallery on a website is worth.

So I work through the different parts of a website, and keep a record of the costs of different parts, for pricing purposes. There is always the issue of bespoke work, but once you’ve worked on standard parts (news articles, photo galleries etc.) it’s fairly easy to estimate the time to do bespoke work.

I’ve used examples of mixed work, i.e. design and development, because that’s what I do, but it also applies to any project where you are giving the customer a finished product (website), as opposed to a part (HTML/CSS templates).

At this point you should have a spreadsheet assembled with all the factors in place, to allow you easily assemble a cost for your potential customers. I won’t go into it here, but if it’s any help, I may detail how I use a spreadsheet to work out costs efficiently in a future post. Let me know in the comments.

Charging more than your time?

So now you know how long a project will take, you have an idea of the ‘going rate’ so you’re confident enough to cost any projects that come in, but if you’ve even somewhat efficient and you’ve been keeping up with what the Jones’ have been charging, you’ll notice that: Time to complete the project * Your hourly rate < Researched-Project-Cost

How do you justify the extra chunk of cost in a project?

Put simply, the hourly rate pays your wage and your overheads and the extra other bit keeps you in business. That’s your cashflow/rainy-day-money. This is paid for the clients best interest. Andy Clarke said it very nicely in his post, aptly titled Worth:

Your value is in more than just the hours, days or weeks that you spend working on your current job, or the next. Your value to your clients is that you’ll be there for them, to help them when they need it, in the future.

At the end of the day, you are getting paid a decent wage, your overheads are being covered and your business has some cash flow. Your client is receiving a quality product at a reasonable price.

Costing is a continuous process, there are so many factors that are constantly changing, you have to stay on top, and keep your costs updated. Regardless of whether you’re a freelancer, small business or large business, you are still running a business. Successful business people do not have any qualms over increasing their pricing- whether it’s an increased demand for your services or lack of competition, the purpose of a business is to turn a profit, a profit is there to allow you to stay in business (which is beneficial to you and your clients) and expand your business and services (which is also beneficial to you and your clients).