The Perils of Pricing: Why You Should Avoid Hourly Rates

When you’re just starting out on your freelance journey, there’s a lot to figure out. Finding clients, creating proposals, and learning how to communicate all require lots of fumbling and trial and error. Of all these new territories, one of the trickiest to navigate is pricing.

Start off too high and you risk scaring off potential clients. Ask for too little and you can end up undervaluing your work and setting a bad precedent at the onset of a new business relationship. Learning to value your work is one of the first hurdles to overcome in pricing. The next is how you go about setting your rates.

If you’ve had any part-time jobs previously, chances are you were paid at an hourly rate. So naturally, you might think this is where you should start with creative work as well. There are problems with this model, though, that prevent it from being applicable to this kind of creative work. First of all, hourly rates simply pay for labor or time, not value.

In work environments where the employer is buying your time, and your pay is not necessarily dependent on your output, hourly rates make sense. You agree to exchange 40 hours of your week for whatever tasks are presented to you, and that rate stays constant. You’re being paid for your time, not necessarily your value.

This is the key distinction between hourly rates and charging for solutions. As a freelancer, you’re a salesman. You’re selling the client a product in the form of a solution to their problem, and your pricing should reflect that. When you purchase a product, you know the price upfront and you can decide whether or not to buy it. When determining your pricing, you need to shift your way of thinking from the time it takes to complete a job, to the value of the solution it provides.

Another reason to avoid hourly rates is that you are actively working against yourself by becoming faster. Say you’ve just started an agency and you’re still getting adjusted to your team and workflow. In the beginning, designing a brand identity takes you roughly 60 hours of work. As your team begins to mesh and hit their stride, this number drops to 50 hours. While you may now have 10 spare hours to dedicate to another project, if you’re charging by the hour, the value of that brand identity has decreased by 17%.

You could increase your hourly rate to account for this, but because your speed will vary depending on project parameters and these terms need to be settled upfront, it’s much easier to decide on set rates. Some projects may come easier and others might require more time. By charging hourly instead of based on the value of your solution, you’re punishing yourself for completing the task faster. Hourly rates put a limit on your earning potential. If time is what you’re selling to your clients, there are only so many hours available in the week.

Revisiting the example from before, let’s say that 60 hours of work spent designing a brand identity was completed at an hourly rate of $166, making the value of this solution $10,000. Even if you manage to complete the project in 30 hours, charging an hourly rate ensures that the most you can make in a 60-hour workweek is $10,000. If you were to instead charge $10,000 upfront for branding identity, managing to complete the job in 30 hours would put you in a position to double your earning potential for the week.

Invoicing is much simpler when you don’t need to keep track of billable hours. You should still keep track of how your time is spent so you have an idea of how long jobs take and can avoid missing deadlines. But by pricing your work by its value rather than the time it takes to complete, when it comes time to send the invoice, there aren’t any surprises. The price reflects the agreed-upon terms and everybody is happy.

In creative work, the value of a solution isn’t tied to the time it took to create. There is no linear relationship between time and quality. If you can deliver the expected caliber of work at a faster rate, that should be rewarded, not punished.