Every freelancer has been faced with the problem of deciding what to charge for their work. Often the first question out of a client’s mouth is, “How much will it cost?” And I think we all do quite a bit of agonizing over coming up with an answer. If we’re a the point in our careers where our schedules aren’t full, we worry about not knowing where the next job will come from and what will happen if we don’t get this one. If the customer is an old friend just starting out and or someone with a just cause like the preservation of puppies and kittens, you might be wondering how much can you discount your rate. If you’re like me, when you tell someone how much your services will cost, you have this nagging thought in the back of your head, “That’s a lot of money! I’d be shocked if someone asked me to pay that much.”
Of course this is a big subject and there’s a lot writing out there that addresses it. And it’s a subject that I plan to touch on frequently in this blog, to educate clients, help colleagues and promote some discussion that I hope will help me get better at pricing. Today I’m going to talk about one aspect of the question, why you don’t want to sell on price, in other words, be the cut rate provider in order to get more business.
Feed the machine
“We’ll lose a little on each unit we sell, but we’ll make it up in volume.” I don’t remember who it was that I first heard this ironic comment on the dangers of lowballing. In some situations, you can make bigger profits by selling more at a lower price, but that’s a diminishing returns equation. You can’t ever go below what it costs to produce your product. Now you might argue that as a freelancer you are providing a service, based on hours of work, and your costs are very low, you don’t have much in the way of raw materials or production costs, just the time it takes to work your brilliant magic on the project at hand. I’m here to tell you that’s crazy talk.
One of my clients has a laser cutting machine. It cost well into the six figures to buy and there are all sorts of ongoing costs to keep it running so it can make money for the company. Since they probably didn’t buy it with cash, they have to make the payments plus interest, they have to maintain it so that it operates at peak efficiency and lasts a long time, they have to pay the salaries of operators who have the skills to run it. If they don’t charge enough for the work the machine does to cover those costs plus a reasonable profit, they will be very sorry they bought it.
Why do I bring up a basic manufacturing model in discussing pricing in what is really a service business? Because as a freelancer, you are the machine. Beyond the cost of your office rent, your utilities, your tools and supplies, there is an intrinsic cost in keeping the machine running. You have to eat, right? You might have a family, a mortgage, a lifestyle that you want to maintain, a plan for retirement. You need to support you and all those things involved in being you. That’s the cost of running the machine. FreelanceSwitch.com has a great calculator to help you figure out what to charge based on these costs. Don’t make those costs plus a profit, you will soon find yourself out of business. I can tell you this from experience.
It’s you against the world
The world economy powered by the internet is driving prices for graphic design and development to the ground. With sites like oDesk and Fiverr out there we are competing with the world, just like manufacturers in the US getting beaten up by cheap labor off shore. The graphics department I managed for 13 years no longer exists, the work is now all being done in India. Designers in first world countries would starve if they tried to work for the rates (as low as $5 and hour) that are actually great wages for designers in developing countries.
Perception is everything
Another reason to not try to compete as the low cost provider is that your clients will start to think of you as just that, the cheap alternative. They even if you have a track record of doing excellent work the will associate you with “cheap” and they will associate that with low quality. When they have a have that big budget project that would make your year, they’ll go out and hire someone who charges more because they will have the perception that the higher priced provider will deliver a higher quality product.
So, how does one sell their design and development services in this market. That’s the subject of my next blog.