As a freelancer, how you charge could have a huge impact on the success of your business – both in terms of your profit and business efficiency – so you’ll want to get this right. Depending on your career stage and the type of work you do, certain charging methods might work better for you than others.
For example, hourly pricing is a great model to use early in your career, and for projects without a clear scope. It’s straightforward and limits the risk of underpricing.
However, let’s say you’re an industry expert and you want to explore raising your rates (who doesn’t?). If this is you, a fixed-rate pricing option could work better. This model rewards efficiency and provides your business with income certainty.
Good news – we’re here to help! Let’s explore the pros and cons of both and help you unpick which option is best for you right now.
Hourly pricing
Hourly pricing is a popular choice for freelancers early in their careers. It’s straightforward and allows you to start working immediately – score!
Pros of hourly pricing
You don’t have to figure out how long the project will take to complete ahead of time, as you’re paid for every hour you work. This limits your risk when you take on a client – there’s no chance of working overtime without getting paid if the project takes longer than expected (we’ve all had those projects).
If you’re a newbie, you may not have enough industry knowledge to accurately estimate how long specific projects will take. It’s a skill best learned from experience, and so until then, hourly pricing might be a better option. Once you get comfortable scoping a project and estimating how long it will take to complete, you may want to explore other pricing models (we’ll get to that in just a sec).
Charging by the hour is also great for projects without a clear scope. When you take on a project, there is always a chance it will take longer than expected to complete, especially if the project scope increases over time. If you’re taking on a project with an unclear scope or one that could grow, charging on an hourly basis ensures you’re paid the entire time you work on it. After all, no one wants to work for free!
Cons of hourly pricing
The main drawback of hourly rates is that they don’t reward efficiency.
Once you have completed a few projects, especially for the same client, you’ll most likely get faster. If you’re charging on an hourly basis, your revenue per project will decrease as you become more efficient – which nobody wants, least of all you.
An hourly model can also make it more complex to raise your rates. This is because in this model, your client is effectively buying your time rather than the finished product. This could become an issue as your client may struggle to justify not finding someone who will sell time at a cheaper rate.
As a freelancer, you aren’t selling time; you’re selling an outcome. But if your client doesn’t see this, you might end up competing against other freelancers who charge lower rates, rather than for your actual work.
Fixed rate pricing
Using an hourly charging model is great for certain projects, but if you’re quick at what you do, you might not be charging what you’re actually worth. At this point, consider charging fixed rates!
This model is better suited to experienced freelancers. Before you can accurately estimate how long a specific project will take, you’ll need to have completed other similar projects.
Pros of fixed-rate pricing
Fixed-rate pricing is simple and offers many opportunities to increase your hourly rate. With fixed-rate pricing, you get rewarded for completing your work faster, which is why it can be beneficial for experienced freelancers.
With this model, you price the project in advance. This provides your business with income certainty, as you know exactly how much you will earn ahead of the project. This is terrific news for anyone who likes to budget.
It also gives you the opportunity to package together certain services which offer businesses more value – for an increased price, of course. Using fixed rates might help you achieve better sales margins, increasing your take-home pay.
Cons of fixed-rate pricing
The main drawback of fixed-rate pricing is that it exposes you to more risk. Although you gain income certainty, you sacrifice time predictability. If you price a project estimating it will take you five hours, but it ends up taking ten hours, your hourly rate will be cut in half. This is where you risk pricing too low – especially if there’s scope creep, where the project scope grows throughout the process.
Limiting scope creep
As a freelancer, you’re probably already familiar with this potential issue; it’s just part of the game.
The main way to limit this risk is to create detailed proposals that prevent the project scope from creeping over time. If you offer potential clients a detailed plan that breaks down exactly what you will deliver, it’ll be easier to estimate a timeframe for completion and potentially prevent the project growing larger.
However, creating detailed proposals takes time. Take this time into account when pricing your project to avoid underpricing. You need to find a balance between creating detailed proposals that limit scope creep and not spending so much time upfront planning that your hourly rate plummets.
Remember the hidden costs
When you’re pricing yourself, don’t forget the hidden costs that come from running a business.
As a sole trader in New Zealand, you need to allocate funds for time off, sick leave, business expenses, and of course, tax. If you’re registered for GST, you’ll also need to factor in your GST obligations. You’ll need to take all of this into consideration when choosing a pricing model, as it could significantly impact your net profit (aka your actual take-home pay) each year.
If you want to make it easy (who doesn’t?), you can always join Hnry! We’ll automatically calculate and pay your tax for you each time you get paid, so you don’t have to set aside funds manually.
How Hnry helps
If this all sounds a little overwhelming, we totally get that. But we promise it gets easier with experience.
Meanwhile, we’ve got your back. At Hnry, our goal is to make it accessible and affordable for anyone to earn independently. That’s why we’ve designed an easy-to-use app that allows you to invoice, claim expenses, and track your business profit.
The best part? Hnry automatically calculates and pays your tax each time you get paid, so you don’t have to stress. This makes it straightforward to track how much income your business is actually generating.
If you’re new to freelancing or want to improve the way you run your business to turn a higher profit, sign up to Hnry. We make it easy to be a sole trader by doing your financial admin for you. All you have to do is focus on growing your business.