Pricing 101: When to use fixed rates and hourly rates
Last updated on
October 14, 2020
When it comes to pricing your work, it’s hard to escape the camp mentality of “hourly rates vs. fixed rates.” But in reality, fair and sustainable contract-based business depends on a mixture of both approaches. Your pricing model should always be situation-specific, so you choose the best approach for your own creative and financial operation. And since clients have preferences, you also need to be ready to quote for both. We’ve broken down how to choose the most profitable rate for your work – including examples of when to use flat rates and hourly fees.
Charging hourly rates
Pros and cons
Hourly rates ensure that you actually get paid for all the time you spend working. As the most popular pricing choice, they’re conventional and easy to secure (since prices tend to look rather low). Clients feel comfortable using them and understand them as an established method for considering contracts. As a rolling pricing method, any unexpected changes or additional work can be easily billed for without re-quoting anything. It gives clients flexibility to change the scope of projects, which often benefits the quality of the final product.
However, their flexible nature can worry budget-conscious clients, since it’s not clear how much the project will cost upon entering a contract. For contractors, they can also seek to punish efficiency, as your earning potential decreases the quicker you work. By framing your work against time, you also serve to cap your earnings, since you can only work the amount of hours available in a day.
When to use hourly rates
Use hourly rates for unfamiliar, non-standard or unstructured projects which haven’t been fully scoped.
Hourly rates are ideal for unfamiliar projects you haven’t previously worked on and working with new clients, since they provide a level of protection. You can’t be certain of the total work involved or the level of communication and involvement the client desires if you’ve never worked with them, and you don’t want to fix a fee when you can’t be sure the project will actually be profitable. Always opt for hourly rates when working on non-standard, unstructured projects which haven’t been fully scoped by the client or require a lot of subjective back and forth.
Hourly rates are the go-to choice for those new to freelancing, especially if you haven’t got a solid portfolio of work to justify a rather opaque fixed project fee. They’re a relatable, transparent measurement. Hourly rates also give you the opportunity to learn how long different tasks and projects take, which you can later use to decide profitable fixed fees for the same work. You can still use them once you’ve established a solid client relationship – it’s easier to use hourly rates for long-term maintenance and ongoing simple requests, than create a new quote afresh.
Charging fixed rates
Pros and cons
Fixed rates are wonderfully simple – you don’t have to keep detailed records of everything you do just to get paid, and you know from the start how much you will get paid for a piece of work. Budget-conscious clients like them for the exact same reason, as a price confirmed up front is much easier to manage. Unlike hourly rates, they also reward efficiency, since you are paid for the creation of a product in of itself, rather than the time it takes to produce it.
But you need to estimate to an insane level of accuracy to ensure you strike a profitable deal that is also reasonable to your client. There’s much less flexibility to adjust to changes in project direction than with hourly rates, and unforeseen rounds of revision can hugely eat into your profits. It puts freelancers in a locked, defensive position, fending off unexpected client requests that could actually improve the end product. You should only quote fixed rates when you can be sure you have enough information to ensure a profitable return. The resulting high prices can scare clients as a result, making negotiations for big projects quite difficult and uncomfortable.
When to use flat rates
Opt for fixed rates when you are completely certain of what a project will entail.
Use flat rates for standard jobs whose duration and profile you are almost completely certain of from previous experience. Make sure you’ve factored every aspect of the project into your quote, including the time you’ll need for meetings, communicating with clients, travelling and tweaking work. If it has a well-defined scope with a fixed start and end point, like launching a website, use fixed rates. Small projects tend to lend themselves to this more easily than big ones.
Since fixed rates seem more opaque and arbitrary to clients, they’re often easier to use when you’re in an established, trusting professional relationship. A good track record from previous work provides the reassurance clients need in the absence of an hourly record justifying your price tag. However, if you’re a seasoned freelancer with a strong portfolio you are in a better position to use fixed rates for new clients. Some clients actually prefer using fixed rates with new contractors, since it sets expectations and removes the risk of you busting their budget.
The easiest and most accurate way to do this is by using an automatic time tracker. These capture all the time you spend in work apps and websites as you work, producing a flawless record of all project time.
If you're working with fixed rates, you'll also want to track how you're spending your project budget. Aside from seeing what tasks eat up the majority of your time, this helps you stick to your retainers and stay on-budget. Most project time trackers will also offer this functionality, but automatic ones like Timely take it to the next level – letting you set multiple project rates and review budget spend in real-time.