Day: August 16, 2024

Pricing projects can be one of the most challenging aspects of running a digital agency or working as a freelance web designer. It’s a topic that comes up frequently in discussions with fellow professionals in my Agency Academy.

Three Approaches to Pricing

Over my years in the industry, I’ve found that there are essentially three main approaches to pricing:

• Fixed price,
• Time and materials,
• And value-based pricing.

Each has its merits and drawbacks, and understanding these can help you make better decisions for your business. Let’s explore each of these in detail and then dive into what I believe is the most effective strategy.

Fixed Price

Fixed pricing is often favored by clients because it reduces their risk and allows for easier comparison between competing proposals. On the surface, it seems straightforward: you quote a price, the client agrees, and you deliver the project for that amount. However, this approach comes with significant drawbacks for agencies and freelancers:

• Estimating accurately is incredibly challenging.
  In the early stages of a project, we often don’t have enough information to provide a precise quote. Clients may not have a clear idea of their requirements, or there might be technical complexities that only become apparent once work begins. This lack of clarity can lead to underquoting, which eats into your profits, or overquoting, which might cost you the job.
• There’s no room for adaptation based on testing or insights gained during the project.
  Web design and development is an iterative process. As we build and test, we often discover better ways to implement features or uncover user needs that weren’t initially apparent. With a fixed price model, these improvements are often seen as “scope creep” and can lead to difficult conversations with clients about additional costs.
• The focus shifts from delivering the best possible product to sticking within the agreed-upon scope.
  This can result in missed opportunities for innovation and improvement, ultimately leading to a less satisfactory end product for the client.

While fixed pricing might seem straightforward, it’s not without its complications. The rigidity of this model can stifle creativity and adaptability, two crucial elements in successful web projects. So, let’s look at an alternative approach that offers more flexibility.

Time and Materials

Time and materials (T&M) pricing offers a fairer system where the client only pays for the hours actually worked. This approach has several advantages:

• Allows for greater adaptability as the project progresses. If new requirements emerge or if certain tasks take longer than expected, you can simply bill for the additional time. This flexibility can lead to better outcomes as you’re not constrained by an initial estimate.
• Encourages transparency and open communication. Clients can see exactly what they’re paying for, which can foster trust and understanding of the work involved.
• Reduces the risk of underquoting. You don’t have to worry about eating into your profits if a task takes longer than expected.

However, T&M pricing isn’t without its drawbacks:

• It carries a higher perceived risk for the client, as the final cost isn’t determined upfront. This can make budgeting difficult for clients and may cause anxiety about runaway costs.
• It requires careful tracking and regular communication about hours spent. Without this, clients may be surprised by the final bill, leading to disputes.
• Some clients may feel it incentivizes inefficiency, as taking longer on tasks results in higher bills.

T&M pricing can work well in many scenarios, especially for long-term or complex projects where requirements may evolve. However, it’s not always the perfect solution, particularly for clients with strict budgets or those who prefer more certainty. There’s one more pricing model that’s often discussed in the industry, which attempts to tie pricing directly to results.

Value-Based Pricing

Value-based pricing is often touted as the holy grail of pricing strategies. The idea is to base your price on the value your work will generate for the client rather than on the time it takes or a fixed estimate. While this sounds great in theory, it’s rarely a realistic approach in our industry. Here’s why:

• It’s only suitable for projects where you can tie your efforts directly to ROI (Return on Investment). For example, if you’re redesigning an e-commerce site, you might be able to link your work to increased sales. However, for many web projects, the value is more intangible or indirect.
• Accurately calculating ROI is often difficult or impossible in web design and development. Many factors contribute to a website’s success, and isolating the impact of design or development work can be challenging.
• It requires a deep understanding of the client’s business and industry. Without this, it’s hard to accurately assess the potential value of your work.
• Clients may be reluctant to share the financial information necessary to make value-based pricing work. They might see it as sensitive data or simply may not have accurate projections.
• It can lead to difficult conversations if the projected value isn’t realized. Was it due to your work or other factors beyond your control?

While these three approaches form the foundation of most pricing strategies, the reality of pricing projects is often more nuanced and complex. In fact, as I point out in my article “How To Work Out What To Charge Clients: The Honest Version”, pricing often involves a mix of educated guesswork, personal interest in the project, and an assessment of what the market will bear.

Given the challenges with each of these pricing models, you might be wondering if there’s a better way. In fact, there is, and it starts with a different approach to the initial client conversation.

Start by Discussing Appetite

Instead of jumping straight into deliverables or hourly rates, I’ve found it more effective to start by discussing what 37signals calls “appetite” in their book Shaping Up. Appetite is how much the product owner is willing to invest based on the expected return for their business. This concept shifts the conversation from “What will this cost?” to “What is this worth to you?”

This approach is beneficial for several reasons:

• Focuses on the budget rather than trying to nail down every deliverable upfront. This allows for more flexibility in how that budget is allocated as the project progresses.
• Allows you to tailor your proposal to what the client can actually afford. There’s no point in proposing a $100,000 solution if the client only has $20,000 to spend.
• Helps set realistic expectations from the start. If a client’s appetite doesn’t align with what’s required to meet their goals, you can have that conversation early before investing time in detailed proposals.
• Shifts the conversation from price comparison to value delivery. Instead of competing solely on price, you’re discussing how to maximize the value of the client’s investment.
• Mirrors how real estate agents work — they ask for your budget to determine what kind of properties to show you. This analogy can help clients understand why discussing budgets early is crucial.

To introduce this concept to clients, I often use the real estate analogy. I explain that even if you describe your ideal house (e.g., 3 bedrooms, specific location), a real estate agent still cannot give you a price because it depends on many other factors, including the state of repair and nearby facilities that may impact value. Similarly, in web design and development, many factors beyond the basic requirements affect the final cost and value of a project.

Once you’ve established the client’s appetite, you’re in a much better position to structure your pricing. But how exactly should you do that? Let me share a strategy that’s worked well for me and many others in my Agency Academy.

Improve Your Estimates With Sub-Projects

Here’s an approach I’ve found highly effective:

1. Take approximately 10% of the total budget for a discovery phase. This can be a separate contract with a fixed price. During this phase, you dig deep into the client’s needs, goals, and constraints. You might conduct user research, analyze competitors, and start mapping out the project’s architecture.
2. Use the discovery phase to define what needs to be prototyped, allowing you to produce a fixed price for the prototyping sub-project. This phase might involve creating wireframes, mockups, or even a basic working prototype of key features.
3. Test and evolve the prototype, using it as a functional specification for the build. This detailed specification allows you to quote the build accurately. By this point, you have a much clearer picture of what needs to be built, reducing the risk of unexpected complications.

This approach combines elements of fixed pricing (for each sub-project) with the flexibility to adapt between phases. It allows you to provide more accurate estimates while still maintaining the ability to pivot based on what you learn along the way.

Advantages of the Sub-Project Approach

This method offers several key benefits:

• Clients appreciate the sense of control over the budget. They can decide after each phase whether to continue, giving them clear exit points if needed.
• It reduces the perceived risk for clients, as they could theoretically change suppliers between sub-projects. This makes you a less risky option compared to agencies asking for a commitment to the entire project upfront.
• Each sub-project is easier to price accurately. As you progress, you gain more information, allowing for increasingly precise estimates.
• It allows for adaptability between sub-projects, eliminating the problem of scope creep. If new requirements emerge during one phase, they can be incorporated into the planning and pricing of the next phase.
• It encourages ongoing communication and collaboration with the client. Regular check-ins and approvals are built into the process.
• It aligns with agile methodologies, allowing for iterative development and continuous improvement.

This sub-project approach not only helps with more accurate pricing but also addresses one of the most common challenges in project management: scope creep. By breaking the project into phases, you create natural points for reassessment and adjustment. For a more detailed look at how this approach can help manage scope creep, check out my article “How To Price Projects And Manage Scope Creep.”

This approach sounds great in theory, but you might be wondering how clients typically react to it. Let’s address some common objections and how to handle them.

Dealing with Client Objections

You may encounter resistance to this approach, especially in formal bid processes where clients are used to receiving comprehensive fixed-price quotes. Here’s how to handle common objections:

“We need a fixed price for the entire project.”

Provide an overall estimate based on their initial scope, but emphasize that this is a rough figure. Use your sub-project process as a selling point, explaining how it actually provides more accurate pricing and better results. Highlight how inaccurate other agency quotes are likely to be and warn about potential scope discussions later.

“This seems more complicated than other proposals we've received.”

Acknowledge that it may seem more complex initially, but explain how this approach actually simplifies the process in the long run. Emphasize that it reduces risk and increases the likelihood of a successful outcome.

“We don't have time for all these phases.”

Explain that while it may seem like more steps, this approach often leads to faster overall delivery because it reduces rework and ensures everyone is aligned at each stage.

“How do we compare your proposal to others if you’re not giving us a fixed price?”

Emphasize that the quality and implementation of what agencies quote for can vary wildly. Your approach ensures they get exactly what they need, not just what they think they want at the outset. Encourage them to consider the long-term value and reduced risk, not just the initial price tag.

“We’re not comfortable discussing our budget upfront.”

Use the real estate analogy to explain why discussing the budget upfront is crucial. Just as a real estate agent needs to know your budget to show you appropriate properties, you need to understand their investment appetite to propose suitable solutions.

By adopting this approach to pricing, you can create a more collaborative relationship with your clients, reduce the risk for both parties, and ultimately deliver better results.

Remember,

Pricing isn’t just about numbers — it’s about setting the foundation for a successful project and a positive client relationship.

By being transparent about your process and focusing on delivering value within the client’s budget, you’ll set yourself apart in a crowded market.