Your Hourly Rate is Killing You
May 1, 2019
6 min read
Many freelancers in the creative field have their hourly rate, they have their day rate. The typical interaction between a client and the vendor starts with the job description and ends with price negotiation.
Dealing with some clients, especially in the corporate world, they will want to know the estimated time it will take to provide the services. What a freelancer naturally does is provide estimated hours and their appropriate rate- this document better known as the Quote:
Shooting — 10 Hours x $50/hr
Editing — 40 Hours x $30/hr
Once the client agrees on the estimated time and hourly rates, it’s time to get to work.
The freelancer shows up on location, starts filming/photographing/writing — whatever the job is. They end up working the estimated 10 hours.
Then it’s time for editing. The freelancer works the estimated 40 hours.
This is the perfect scenario. The client expected to pay $1,700. And the freelancer expected to get paid $1,700. Everyone’s happy.
For a freelancer who’s new to the game, this sounds like the perfect exchange of time for money; a fair bargain. The new freelancer finds the logic quite simple:
“If I work, I get paid appropriately. If the job takes longer than expected, then I get paid more. If the job is shorter, then I get paid less.”
This logic follows the pricing model known as “Time and Materials”. The client pays the vendor the cost of time and materials needed to complete the project.
The Increase in Productivity
The new freelancer is no longer new to the game. It’s been a couple of years now, and the freelancer has gained quite a bit of experience, and increased their productivity. Fantastic!
Now it takes less time for the freelancer to complete the job needed. What took 50 hours of time, now takes 30 hours:
Shooting — 5 Hours x $50/hr
Editing — 25 Hours x $30/hr
If the freelancer's rate remains the same, they now earn $1,000 for the job — previously it was $1,700.
Their increased productivity is now killing their revenue.
The natural thing to do now is to raise their rate. The freelancer now charges $100/hr for Shooting and $60/hr for Editing. They have doubled their rate across the board.
Now let’s readjust the job:
Shooting — 5 Hours x $100/hr
Editing — 25 Hours x $60/hr
It’s the same product, the freelancer doubled their rate, they’ve improved productivity, and they have increased their revenue on the job by 17.5%. Pretty good, but let’s push back a bit.
From the client’s perspective, the freelancer has produced the same results quicker and at an increased cost. Let’s say the client isn’t in need of faster turnaround time. Getting the final product on Wednesday instead of Thursday isn’t so much a priority, what’s really the priority is to do the same job at a lower cost. The freelancer has doubled their rate for the same job. Perhaps the client agrees to the rate increase but asks if the freelancer can stay within or below the old budget of $1,700. Again, the client holds the power and the freelancer can agree to work within the budget or be substituted by someone else.
Welcome to the World of Commodity (and the Race to the Bottom!)
In this classic scenario of client vs. freelancer, the freelancer lacks the power to price-negotiate and to control the interaction. From the start, the freelancer has trained the client to expect fixed cost for time and materials. The client values the final product to a certain extent but cares equally if not more about the total cost to create that final product.
By chaining themselves to cost-based time, the freelancer’s increased productivity slowly kills off their revenue when the exact opposite should be happening. Unless the freelancer turns to be lying about their hours to get what they think is worth (a quick way to ruin one’s reputation), they will be able to finish jobs more quickly and make less money in doing so.
How to Avoid the Trap of Selling Time
- Articulate the Value - The freelancer must find a way to better translate the value of their work and how the client will receive this value.
- Understand a Commodity - Freelancers must realize if they are in a commodities business. Can the client easily find your skills on Craigslist, Fiver or TaskRabbit? If so, then you’re a commodity.
- Become the Expert, Not the Vendor - Take on an expertise position with new clients. An expert isn’t replaceable — a vendor is.
- Bundle Your Services - Charge for the project as a whole. Avoid breaking down the job into hours and rates. An hourly rate is easily haggled down.
- Stand By the Policy - Inform old clients that there will be a new policy change effective immediately in regards to the pricing model. “I’m sorry, it’s our policy.”