How do you decide how to price your services (Your hourly / daily rates)?

[PaulMaplesden]

I am currently trying to understand how self-employed, freelancers, consultants etc. price their services in the right way, specifically anyone that charges for their time (by the hour or day).

I’d be grateful if you could let me know how you worked out the pricing for your services, including any specific examples, if possible.

So far, I believe that the following should be factored into pricing calculations:

1. Covering your personal / business costs

The amount you need to charge to make the work worth your while, in terms of charging enough to meet your personal costs, business costs and to make a profit

2. Understanding the market rate

Establishing what the expected costs are in your market / niche. Some initial thoughts: Competitors websites, wages paid for similar salaried positions, rates paid for similar contractor / consultant positions. I’d really appreciate any advice you have on how to do this effectively.

3. Competitor analysis

Finding out what your competitors charge, either through understanding their hourly / daily rates or doing some ‘mystery shopping’ for a particular scenario or service. Again, some specifics of examples here would be great.

Am I missing anything out when setting rates, outside these three areas? Any feedback / comments very gratefully received.

Thanks,

Paul.

[Freelancier]

Pricing is marketing. This is partially reflected in your #2, but not entirely, because it also has to do with the psychology of purchasing decisions. People don't want to over-pay for something, but the smart clients -- the ones you will want -- know they have to pay a certain amount to get a certain level of service and performance.

If you want to charge $100/hour, you're still going to be undercut by people offering to do the same job for $20/hour, so get used to using your rate as part of your marketing messages about reliability and total cost.

Also, setting your rate once is not a good idea. Remember to raise your rates once a year (or with every new client if you're starting too low). A lot of freelancers set their rate and then get afraid to raise it; don't be one of those people, because your life costs will go up over time regardless of whether your rates go up.

[Harold Mansfield]

You have to be sure that you are communicating value in your pricing. It's easy to just say "Well other people are charging this much, so I can too". You have to take into consideration the service that they provide for those rates and if they are actually successful.

There is always going to be someone higher than you, and people lower than you. You cannot win on price alone.

I frequently look at sites of people who charge more than me and many are just charging an arbitrary number.

-They make it extremely difficult to do business with them.
-The only contact information they present is an email address or form.
-They have no set hours of operation.
-They provide very little information about their services
-They make potential clients jump through a bunch of hoops just to get in touch with them.
-They have very few examples of thier work, not enough product info, or don't offer a functioning demo.

In other words, they make the potential cleint do all of the work.

Your pricing is not always about the product, it's also about the customer service. I'm a firm believer that you can set your prices however you want, if you are good at what you do and can execute well so that people feel that they are getting their money's worth.

[nealrm]

The market sets the rate. The market will determine what it wants to pay for your combination of quality, service, supply and product. Your job is to determine what that rate is. A starting point would be to analysis what others in your market are charging, their level of quality, service and supply. Supply is an extremely important item, DON'T GET INTO A MARKET THAT IS OVER SUPPLIED.

Once you have determined a starting point, you can tweak your pricings. As a general rule of thumb. If you have too much business, increase your price; too little business decrease your price. It is possible to undercharge to the point that people lose confidence in your product, so watch out.

Unfortunately, your costs has nothing to do with the price the market will pay. I know there many that will dispute that and say "I can't sell below cost" or "cost plus 10%" or ...... However, they are wrong. The market doesn't care if you make or lose money. Simply put, if the market price is $10 and your cost is $20. You will either lose $10 on each sale or not sell any at $20. If the market price is $100 and your cost is $20, you will make $80 per sale.

This is not to say that your cost are not important, they are very important. The difference between the market price and your cost is one of the main factors in deciding if you should offer a product. If you can't offer a product or service at the market price and make enough money to live, then you shouldn't offer that product. If the market price is extremely above cost, then expect competition to enter the market and drive down prices.

[Harold Mansfield]

Unfortunately, your costs has nothing to do with the price the market will pay. I know there many that will dispute that and say "I can't sell below cost" or "cost plus 10%" or ...... However, they are wrong. The market doesn't care if you make or lose money. Simply put, if the market price is $10 and your cost is $20. You will either lose $10 on each sale or not sell any at $20. If the market price is $100 and your cost is $20, you will make $80 per sale.

This is not to say that your cost are not important, they are very important. The difference between the market price and your cost is one of the main factors in deciding if you should offer a product. If you can't offer a product or service at the market price and make enough money to live, then you shouldn't offer that product. If the market price is extremely above cost, then expect competition to enter the market and drive down prices.

I wish more people understood this. So many times I see people setting prices based on what they want to make, instead of building a business that can sustain the lifestyle they want to keep.
It's how I see companies sending out proposals that are 5x's higher (or more) than mine, for the exact same work or even less. They have higher overhead (office, staff, etc), so they're trying to hit a home run on every client. But the market rates don't support that kind of mark up. People don't care how much your office cost or how much your car payment is. If the margins aren't high enough, then you are in the wrong business or you need to add additional income streams.

On the flip side, I can't complete with someone who lives in a place where $300/16,000 Rupies allows you to live well for a month. And I don't even try.

[billbenson]

Until recently I set prices high because if they were lower I couldn't handle the volume of calls. Now that I have a partner, I am discounting to resellers. That was a market segment that I wasn't getting much business with because there was no profit for them at my list price. We are now getting a good amount of business from resellers which is great. It's also a good example of why having a partner can be important. He has really brought some good new ideas to the table.

[vangogh]

Already some great advice in this thread.

Like Neal said the market sets the rate, though I'd add there's not one specific market. Differ people will see different value in the services you offer and there are so many things that go into those differences. Some are based on what you actually offer. Your experience. The quality of your work. How quickly you can get the work done. Some are based on the client. How much do they need what you're offering. What do they perceive it's worth. How many others have they already talked to.

There are also things based on the situation. A client might normally think your service is worth $100, but they absolutely need something done today and everyone they contacted before you can't begin for a month. That client might decide your service while normally only worth $100 to them is worth $200 or even $500 for today only. On your side you might normally think your service is worth $100, but you haven't worked for a few weeks and can use the money. If someone is offering $75 you might say yes. On the other hand if 10 people are seeking your services at the moment you might decide to charge $200 for the same service figuring at least half the people who would have said yes to $100 will say yes to $200.

And keep in mind some people just natural value what you do more than others. They'll be willing to pay more, though there might be less of these people.

As for how to set rates I think you want to do a few things. Do what you can to understand your costs. It's possible no one is willing to pay more than your costs, but you still need to understand them. If something costs $20 and no one will pay more than $10 you need to either figure out how to get your costs down or find something else to sell. Once you know your costs think of that as the low end of a price range. More important figure out what value you offer and what people will be willing to pay. You'll probably need some trial and error to get a handle on this. Use your costs, check what the competition is charging, but ultimately you'll need some experience to find the right price.

Start out with something you think fair. If people keeping saying yes then raise your prices. If people keep saying no, either lower your prices or figure out how to find clients who'll say yes. Keep adjusting and keep evaluating. It's ok to lose some clients by raising prices. For example if 4 people are willing to pay you $75 and only 3 people will pay $100, it's the same amount of money, but you don't have to work so hard with the higher price. However do keep in mind you probably need to offer more value in order to get people to say yes to a higher price.

[PaulMaplesden]

Firstly, I’d like to thank everyone for the fantastic response to a recent question I had around setting hourly / daily rates for freelancers, consultants and professionals in general, there was some great feedback and information.

I’d like to ask a follow up question though, specifically relating to how you go about researching the market and competitors in your niche, as regards their pricing and service.

Please share how you have approached the following:

Market Research - How did you determine what a fair rate in your market areas is? Did you look at job advertising sites for similar roles, salary checkers (like Glassdoor), contracting sites or elsewhere? Are there any other good market research tools out there when it comes to setting rates?

Competitor research - How did you go about finding out the rates your competitors are charging and the services they are providing? Mystery shopping, calling up and asking or some other means?

I’m very grateful for the responses - I am currently putting together an ebook and pricing model that (I hope) can take many areas into account and provide a useful resource for people wanting to price their services.

Thanks,

Paul.

[Freelancier]

A lot of places won't quote you a price just because you call and ask for one. What I tend to do is ask my new clients whether my rate was higher or lower than the competition and who my competition was. And if I can get a client I lost to talk with me for a few minutes, I can ask why I lost the gig and get that feedback.

But the key word in your questions is "competitors". What if you don't really have many? Yes, there are a lot of developers in my market, but I don't compete with most of them, because I aim for jobs bigger than what the average freelancer would handle, but at the bottom of the types of jobs the bigger companies (who have a salesperson taking a 15-30% commission off the top of every sold job) would be interested in doing. What if you live in the middle of nowhere, but have to compete with people who live closer to a big city... or on the other side of the world? Do you consider their rates?

As I wrote earlier: pricing is marketing. Just one component of your marketing. Picking a viable niche is also important to your marketing ... and to determining your rates. There's no "model" that's going to replace just landing gigs and raising (and sometimes lowering) your rates as you go along to help manage your workload and backlog.

[Harold Mansfield]

Market Research - How did you determine what a fair rate in your market areas is? Did you look at job advertising sites for similar roles, salary checkers (like Glassdoor), contracting sites or elsewhere? Are there any other good market research tools out there when it comes to setting rates?

Competitor research - How did you go about finding out the rates your competitors are charging and the services they are providing? Mystery shopping, calling up and asking or some other means?

I researched this before I even thought seriously about starting a business. It's pretty simple, go to a bunch of competitor websites and look at their rates. Look at competitor advertising. Listings on industry websites and directories.

Seriously, it's about 10 minutes of work.

Yeah, you can call around and pretend to be a potential client and ask about rates. People have done that to me a few times. They're pretty easy to pick out, but that's just part of working for yourself and answering the phone everyday.

But for the most part what you charge is going to be your decision, using others as a guide so that you stay competitive...if that is your goal.

Salary checkers aren't the same thing. If you base your prices on what an employer will pay you, you will severely under pay yourself, unless you are going to work as a sub or independent contractor and devote 40 hours a week to just one client.