Source: Articles on Smashing Magazine — For Web Designers And Developers | Read More
Discover effective pricing strategies for digital projects. Learn how to balance fixed pricing, time and materials, and value-based approaches while managing client expectations and scope creep.
Pricing projects can be one of the most challenging aspects of running a digital agency or working as a freelance web designer. It’s a topic that comes up frequently in discussions with fellow professionals in my Agency Academy.
Over my years in the industry, I’ve found that there are essentially three main approaches to pricing:
Each has its merits and drawbacks, and understanding these can help you make better decisions for your business. Let’s explore each of these in detail and then dive into what I believe is the most effective strategy.
Fixed pricing is often favored by clients because it reduces their risk and allows for easier comparison between competing proposals. On the surface, it seems straightforward: you quote a price, the client agrees, and you deliver the project for that amount. However, this approach comes with significant drawbacks for agencies and freelancers:
While fixed pricing might seem straightforward, it’s not without its complications. The rigidity of this model can stifle creativity and adaptability, two crucial elements in successful web projects. So, let’s look at an alternative approach that offers more flexibility.
Time and materials (T&M) pricing offers a fairer system where the client only pays for the hours actually worked. This approach has several advantages:
However, T&M pricing isn’t without its drawbacks:
T&M pricing can work well in many scenarios, especially for long-term or complex projects where requirements may evolve. However, it’s not always the perfect solution, particularly for clients with strict budgets or those who prefer more certainty. There’s one more pricing model that’s often discussed in the industry, which attempts to tie pricing directly to results.
Value-based pricing is often touted as the holy grail of pricing strategies. The idea is to base your price on the value your work will generate for the client rather than on the time it takes or a fixed estimate. While this sounds great in theory, it’s rarely a realistic approach in our industry. Here’s why:
While these three approaches form the foundation of most pricing strategies, the reality of pricing projects is often more nuanced and complex. In fact, as I point out in my article “How To Work Out What To Charge Clients: The Honest Version”, pricing often involves a mix of educated guesswork, personal interest in the project, and an assessment of what the market will bear.
Given the challenges with each of these pricing models, you might be wondering if there’s a better way. In fact, there is, and it starts with a different approach to the initial client conversation.
Instead of jumping straight into deliverables or hourly rates, I’ve found it more effective to start by discussing what 37signals calls “appetite” in their book Shaping Up. Appetite is how much the product owner is willing to invest based on the expected return for their business. This concept shifts the conversation from “What will this cost?” to “What is this worth to you?”
This approach is beneficial for several reasons:
To introduce this concept to clients, I often use the real estate analogy. I explain that even if you describe your ideal house (e.g., 3 bedrooms, specific location), a real estate agent still cannot give you a price because it depends on many other factors, including the state of repair and nearby facilities that may impact value. Similarly, in web design and development, many factors beyond the basic requirements affect the final cost and value of a project.
Once you’ve established the client’s appetite, you’re in a much better position to structure your pricing. But how exactly should you do that? Let me share a strategy that’s worked well for me and many others in my Agency Academy.
Here’s an approach I’ve found highly effective:
This approach combines elements of fixed pricing (for each sub-project) with the flexibility to adapt between phases. It allows you to provide more accurate estimates while still maintaining the ability to pivot based on what you learn along the way.
This method offers several key benefits:
This sub-project approach not only helps with more accurate pricing but also addresses one of the most common challenges in project management: scope creep. By breaking the project into phases, you create natural points for reassessment and adjustment. For a more detailed look at how this approach can help manage scope creep, check out my article “How To Price Projects And Manage Scope Creep.”
This approach sounds great in theory, but you might be wondering how clients typically react to it. Let’s address some common objections and how to handle them.
You may encounter resistance to this approach, especially in formal bid processes where clients are used to receiving comprehensive fixed-price quotes. Here’s how to handle common objections:
“We need a fixed price for the entire project.”
Provide an overall estimate based on their initial scope, but emphasize that this is a rough figure. Use your sub-project process as a selling point, explaining how it actually provides more accurate pricing and better results. Highlight how inaccurate other agency quotes are likely to be and warn about potential scope discussions later.
“This seems more complicated than other proposals we've received.”
Acknowledge that it may seem more complex initially, but explain how this approach actually simplifies the process in the long run. Emphasize that it reduces risk and increases the likelihood of a successful outcome.
“We don't have time for all these phases.”
Explain that while it may seem like more steps, this approach often leads to faster overall delivery because it reduces rework and ensures everyone is aligned at each stage.
“How do we compare your proposal to others if you’re not giving us a fixed price?”
Emphasize that the quality and implementation of what agencies quote for can vary wildly. Your approach ensures they get exactly what they need, not just what they think they want at the outset. Encourage them to consider the long-term value and reduced risk, not just the initial price tag.
“We’re not comfortable discussing our budget upfront.”
Use the real estate analogy to explain why discussing the budget upfront is crucial. Just as a real estate agent needs to know your budget to show you appropriate properties, you need to understand their investment appetite to propose suitable solutions.
By adopting this approach to pricing, you can create a more collaborative relationship with your clients, reduce the risk for both parties, and ultimately deliver better results.
Remember,
By being transparent about your process and focusing on delivering value within the client’s budget, you’ll set yourself apart in a crowded market.