The Difference Between Pricing Products and Services
Before making purchases, most people want to have some idea about what they should expect to pay. Internet searches and conversations with people you know can often give you an accurate price range for the items you want to buy. For example, a 2018 Toyota Prius is going to cost between $24,000 and $32,000 depending on the features—not much less and not much more. If a dealer quoted a price outside that range, you’d be able to shop other dealers and compare features to make sure you weren’t being overcharged for the vehicle. After all, a 2018 Toyota Prius, like many things, is made in a factory. Whether you buy one from Dealer A or Dealer B, you can expect the quality of the vehicle to be the same.
But when it comes to purchasing many types of services, it can be difficult to accurately determine price ranges and to compare the quality of the deliverable. For example, many people claim to be website designers and only charge several hundred dollars. Others charge tens of thousands of dollars. Even if the examples they show look good on the surface, how do you know that the underlying code is clean and stable? How do you know if the service provider chose the best platform and structure for your needs and if they’ll be around if you have a question or problem? And how do you know if you’re paying a fair price when the price range is so wide?
Think Like a Service Provider
Thinking like a service provider can help to answer those questions and give you confidence the next time you negotiate for services whose deliverable, unlike a car, cannot be easily compared side to side.
Gross versus Net Income
When a prospective client asks a freelance service provider, “What does it cost?” what they’re really concerned about is how much money they’re going to pay out of pocket. What the freelancer must be concerned about is how much money goes into their pocket.
This is not an equal exchange. One thousand dollars out does not equal one thousand dollars in.
Professionals—full-time freelancers—are 100% responsible for tracking and paying many things that 9-to-5ers have paid or administrated for them: taxes, overhead (rent, hardware, software, office equipment and supplies, continuing education, insurance premiums, etc.), and retirement savings.
Here’s what that $1,000 looks like for many professional freelancers.
Taxes (20%) $200
Overhead (20%) $200
Savings (10%) $100
From revenue (gross) of $1,000, the freelancer may pocket (net) only $500.
It’s helpful at this point to consider how sustainable working for the freelancer’s listed rate is. How many projects like yours would the freelancer have to do in a month to make a reasonable, sustainable living?
Billable versus Nonbillable Hours
We often think of overhead in a strictly financial sense—business expenses/bills. But, freelancers also have time overhead. When 9-to-5ers go to work, they are paid for every hour they work, typically 40 hours per week. This is not the case for freelancers who only make money when they’re actually doing the work a client has contracted them to do.
Freelancers make money only when they are producing for clients. Productive hours are billable hours.
Nonbillable time includes but is not limited to general correspondence (emails and phone calls), going to meetings and events, marketing and pre-contracting consultations, writing and revising proposals and agreements, continuing education, travel/driving, accounting, planning and organization, writing blog posts, and the list goes on. These tasks are critical to the success of a business, but clients do not pay for them directly.
These tasks consume between 40-60% of a freelancer’s time. Let’s assume 50%. That means in addition to taking home only 50% of the price the consumer pays, the freelancer must make twice as much per billable hour because they are only “working” 20 hours per week.
Using Price as an Indicator of Quality
While not foolproof, price can be a good indicator of quality because if you can reasonably assume based on the generalities above that a freelancer is running a sustainable business, you can have some confidence that the person has matured in their craft and will be able to maintain their business. If, however, the math shows that it’s unlikely that the freelancer can pay their rent and feed their cat, that’s a strong indicator that either the service provider doesn’t have the skills to charge fair market value or that they do not have the business acumen to maintain a stable business. If either of those is the case, you may lose in the long run.
The Link Between Goals and Budget
Before you reach out to service providers and start talking price, it’s important to consider your goals. The higher your aspirations, the more money you will likely need to spend.
There is a general rule thumb: You may have any two of the following but not all three.
- Low Price
If you want high quality and you want it fast, you should expect to pay a higher price. If you want a low price and want it fast, quality will suffer. You may be able to find a professional who can accommodate you if you want high quality and a low price, but the turn-around time will be much slower. Taking some time to identify your goals can help you negotiate the deal that serves you and your project best.
When you think like a freelancer, you’re more likely to find the service provider who can meet your needs and expectations and has the freedom to over deliver—someone you can trust and who will likely be there for you for years to come.