Charging a fixed rate is often a good place to start when you’ve had a few years experience in your freelancing career. Fixed rate pricing is exactly what it sounds like - it’s a specific piece of work for a set price. This pricing model is usually suited to freelancers who have been in the game for a few years and have some experience under their belts.
The main positives about a fixed-price arrangement are:
- More income certainty for your business
- Potential to earn higher hourly rates
Hourly rates, in reverse
Hourly rates offer predictable income rates, but they don’t reward efficiency. If you try to work on client work for 20 hours every week, and you estimate that a project will take 20 hours, you probably won’t schedule anything else for that week.
But what happens if you work faster than you expected, and deliver the project in 15 hours? If you can’t pull another project forward to fill the gap, you’re going to be short 5 hours of your hourly rate.
This is how fixed rates offer you more certainty. Let’s say you want to earn $1,000 per week. If you can book four small projects for $250 each, you are guaranteed to meet your income target - no matter how long they take you. There is a tradeoff here: in exchange for this income certainty, you sacrifice time predictability. We’ll get to that in a second.
Earn more in less time
Again, this is the reverse of hourly rates. When you charge hourly rates, you get paid for every hour you’re working. But if you charge a fixed rate, you get rewarded for completing your work faster.
Let’s say you usually charge $100 an hour, and a typical project takes you 10 hours - so you earn around $1,000. If you change those projects to fixed rates of $1,000, and manage to complete them in 8 hours, then your hourly rate goes up to $125. If you can complete then in 5 hours, your effective hourly rate doubles to $200!
As you become more efficient - under fixed pricing - here is what happens to your hourly rate.
Fixed pricing: Your hourly rate as you become more efficient
Those are the two most compelling reasons to use fixed pricing. The big negative is that you take on more risk.
These are the three risks that come with fixed pricing:
- Risk of pricing too low, and ending up with a low hourly rate.
- Risk of scope creep, where the project becomes bigger than you anticipated - again, dropping your hourly rate.
- Spending too much time on detailed proposals
Pricing too low
This is the big risk of fixed pricing. Go back to that $50/hour example we just talked about. Let’s say you price a project at $500, expecting to take 10 hours to complete it. But this is really just a guess - it is hard to estimate how long a project will take (although it gets easier over time).
If you make a mistake, and you finish the project in 15 hours, your hourly rate just dropped to $33. If it takes 20 hours, your hourly rate will drop to $25.
On top of this, it’s going to be a stressful couple of weeks if you have other work to get to. Not only will you be earning a lower hourly rate than you’d like, you’ll also have to find time to fit in your other projects.
So pricing too low can make fixed price projects stressful and expensive for a freelancer.
Scope creep
The other problem that can come up is scope creep. This is when the initial project you signed up for grows over the course of the project.
The first step towards avoiding scope creep is to have a really tight scope to begin with. Before you start working, be very clear about exactly what you are delivering, and when. You should also be clear about how many revisions your client gets included in the fixed price (if that’s applicable to your industry).
But there’s always a tradeoff to make. If a client asks for something small that was outside of your original agreement, it probably won’t hurt to add it on - you do have a relationship with your client, after all. But at the same time, those small things can add up. Next thing you know, your hourly rate is plummeting and you’re chasing your tail to complete other jobs.
A good way to stay on top of this is to track your time, even if you’re not billing on an hourly rate. This gives you a clear view of how much time you’ve spent on a project, and how much “slack” there is for any extras your client may ask for.
But it’s still a risk! Especially when it’s death by a thousand cuts, with lots of tiny additional changes that add up.
Detailed proposals
This risk is related to the last one. To avoid scope creep, you need detailed proposals. But detailed proposals take time! You need to figure out what your client needs, put together a timeline and clear set of deliverables and put a price on all this. This takes time!
If you don’t account for this time in your price, you can end up in the situation we mentioned above - chasing your tail, earning a low hourly rate. This is especially true if your win rate is low - if you put together five detailed proposals, at three hours each, you’re going to have to recoup those 15 hours right out the gate. That’s tough to take, especially if you only win one or two of those projects.
So you need to find a balance. On one hand, you need to be clear in your proposals in order to limit scope creep. On the other hand, you can’t spend so much time on your proposals that your hourly rate plummets.
The chart below summarises the risks associated with the non-billable work required to make fixed-rate pricing work.
How your time is spend in a fixed rate model
Who is fixed pricing best for?
Let’s quickly summarize the pros and cons of fixed rate pricing.
Pros and cons of a fixed pricing model
Given what we’ve discussed in this section, fixed rate pricing is best for freelancers with a couple of years of experience. This is for a few reasons.
First, experience gives you a much better idea of how long things take. This is something that you can really only learn by doing, so having a handful of projects under your belt will give you the insight you need to price your projects appropriately.
Second, a couple of years of freelancing will give you access to a lot of old proposals. Once you have these, you can start recycling bits of them into your new proposals. This helps deal with the problem of spending lots of time on each new proposal. When you don’t have to start from scratch on each one, you can save a lot of time, which really helps increase your hourly rate!
On top of this, fixed price arrangements work best for clear, closed-ended projects. They don’t work very well for vague, open-ended projects because these projects are very hard to scope ahead of time. If you’re going into an open-ended engagement, an hourly rate will probably be more suitable.