Should I Charge Hourly or Flat Rate?
One of the most common questions freelancers or about-to-be-freelancers search online or ask their friends is, “Should I charge hourly or flat rate?” There’s a lot of hoopla from consultants out there about one being better than the other. There is a time and place for both. My objective is to help you better understand the real differences, advantages and disadvantages of each type of pricing structure. I love both and I use both. I’m also going to tell you exactly how I structure my freelance business, which provides stability and predictability in my income.
HOURLY RATES
Hourly rate tends to be best for ongoing work where you’re committed to a client long-term. "Committed" meaning that you’ll keep going from project to project as if you were on their team, but you are not locked into them and they aren't locked into you for a specific amount of time. As your client’s needs and priorities change, you can instantly pivot the activities you’re doing for them.
Pros:
You are guaranteed a certain amount of money for the time you put in. This is a freelancer’s source of comfort, knowing they won’t be taken advantage of by a client. If the project grows or the client wants many changes made, the client will have to pay you more. The advantage is that you know you won't get any less than your rate. The disadvantage is that you can’t get more either.
Your income can be more predictable if you have hourly contracts with long-term clients that give you consistent work.
The client gets familiar with what they’re paying you and it’s predictable to them as long as you have set a maximum number of hours per week. What I often do with my hourly clients is ask them, “What is the maximum number of hours you’re willing to budget out for me each week based on my hourly rate?” This is after I’ve already reduced the risks of working with me and pitched to them the return they can expect on their investment.
Even though I ask them, I always come prepared with a recommendation of how many hours I believe I will need to put in each week to hit certain milestones in a certain amount of time. Then they will tell me what they can afford. Often, they are perfectly fine with my recommendations because I usually only pitch 5 hours per week.
I like diversifying my employment as much as I can without sacrificing the quality I can bring a client, so if one client drops off, my income is only scratched and I have enough time to find someone to replace them.
If they can’t afford my recommendations then we meet in the middle and I tell them how much longer the projects will take having less time per week. And they end up having to compromise their original desire. Sometimes though, they end up accepting my original recommendation because they want things done faster but were just trying to bargain.
With that said, I try to stay away from clients that try to bargain too much because it means they are just looking for cheap work and they care about cost more than quality of the deliverable I give them. Those types of clients aren’t a good fit for me, so I move on.
It provides the most flexibility as client needs and priorities change.
Cons:
You can appear to be more expensive to your client. With hourly, some clients can’t understand that your rate has vastly different factors influencing it than their hourly employees. You have overhead expenses and you are only usually billing 25-30 hours per week. The rest is administrative time you have to account for to run your business and find clients.
They could end up seeing you as an expense, rather than as an investment. That’s usually because you didn’t communicate well enough the value you will bring them. It could also mean you don’t take yourself seriously as a business owner and that lack of confidence made you communicate as if you were an employee. How do I know? I've been there. For a while I didn't see myself as running an actual business, I saw it as just a gig. When you see yourself as a business owner, not just a freelancer, your clients are much more likely to see you as that, even with hourly contracts.
They might have a hard time trusting that you’re focused totally on them during the hours you bill. It takes more of an honor system. They know you’re working at home and can easily get distracted. Some clients get their pants in a twist over the idea because they are still stuck in 2002.
Fifty percent of Americans are projected to be freelancing within the next 5 years, meaning they will likely be working at home. Companies have to get over it and start trusting that the results that freelancer brings them is far more important than a detailed record of every minute they spent.
Freelancers that run the clock on a client while doing other things won’t last very long, because they won’t deliver results to the client. Millennials, which make up the majority of the workforce want to be trusted from the get-go and then if they break the trust, the client has reason to pull back. I don’t work with clients that can’t trust me.
Micromanaging is not in my world. I’m perfectly okay with delivering reports every week summarizing all the activities I did for them and they can compare that to the hours I billed. But ultimately what makes the client satisfied with the hours I bill are the results I’m getting for their business. So they don't question my time.
It can be much more difficult to raise your hourly rates on an existing client. They budgeted out a certain amount for you each week and they are used to your rate. With flat rates, you can easily increase it because it’s a project by project rate, and the client never knows how much time you spent.
There are ways to raise rates on existing clients but that topic is for another blog. The simple version is, communicate what increased value you will be bringing them to justify the rate increase. For me, I just wasn’t charging enough from the beginning to stay in business because I didn’t account for all the overhead. I saw my rate as an hourly wage and so when I tried to raise rates with former clients, it was like pulling teeth. Part of that is because I didn't know how to communicate my value increase. Anyways, I ended up having to just let them go. But that story is for another time.
FLAT RATES
Flat rates are best for shorter projects where there is a very clear deliverable. There also must be very exact expectations and little chance of the project changing. So you need to evaluate the confidence of the client in wanting and needing this project as it’s described from the get-go. Because if something changes halfway through or the business has a new priority, you have to write new contracts.
Flat rates are also best when you have enough experience to know how to project how long it will take you to complete the gig. If you don’t know how long it will take, don’t accept flat rates because you could end up getting $5 per hour because you massively underestimated the time.
Pros:
You can end up getting paid much more than your normal hourly rate for your time. I’ve had times where I got upwards of $200 per hour doing flat rate projects instead of $60/hour for an hourly rate. So if the project was $600 and it only took me 3 hours, the client was still satisfied because they felt that the product I gave them was worth $600.
Price is relative to the buyer. Something is only worth what a buyer is willing to pay for it, period. Remember, always deliver beyond the value the client expects and they will be willing to pay you higher for a project.
The focus is more on the deliverable or the value of what results you give them rather than the time you put in. Employees get paid for their time more than anything else. And you don’t want to be seen as an employee. You are a business and your rate is your price for the business partnership.
Cons:
If you don’t set really clear objectives and features for your deliverable, and the client keeps growing the project, then you could end up getting paid much less per hour than your hourly rate. One time I got like $5/hour because of how much the project grew and I didn’t have a specific enough contract to protect me.
You have to keep creating new contracts if the project changes. So, you must have more specific contracts with flat rates and if projects change, which they do ALL the time, then you have to write a new contract and it can be a pain.
You might not estimate correctly how long something will take you. If you’re not totally confident in how long a project will take, don’t offer a flat rate.
You’re getting paid for what the client wants when they hire you rather than what they need weeks down the road. If you want to always be relevant to your client even when their needs change, do hourly contracts. With a flat rate, they are more likely to just let you go rather than change what activities you’re doing for them.
So hopefully that clears up your confusion on whether to do hourly or flat rates. As you can see, there is a time and place for both. And depending on your line work, you need to make that determination. I told you I would tell you exactly how I structure my pricing that gives me stability. Here it is:
I determine how much money I need to earn each week to live, accounting for my current needs and wants. Then I find enough hourly long-term clients that combined together pay that weekly amount. These clients typically work with me for 6-18 months. That way, I don’t have to constantly be looking for new clients. I provide video consulting, YouTube management and growth strategy so it requires a longer relationship to produce results.
Then throughout the year I find additional flat rate projects that bring in extra income. You never want to rely on the flat rate gigs to support your family because they are too inconsistent and it requires you to look for new clients every week.
With the flat rates, I package my consulting services into specific deliverables that have a certain price. And sometimes those projects actually turn into my next long-term client. For example, I sometimes create a video marketing strategy for them for a fixed amount, or I facelift their YouTube channel. Some who like my work then wanted me to implement the strategy I developed for them. That's when they become a long-term client.
Now how do enroll potential clients into those long-term hourly contracts? Here are 4 ways you can convince them that it’s better for the both of you:
Tell them you’ll be in constant communication about what you’re doing and what results you’re getting them, so they see the return. I like to deliver weekly reports, at least bi-weekly, so they know what I’ve accomplished because until they get the final product, they don’t often see anything for the time I put in.
Tell them they are only committing to you a week at a time, so if they feel they aren’t getting the results for the hours they’re paying you for, then they can always bail. They aren't locked into you for a time.
Tell them that you would rather be in a contract where you can adjust on a dime and switch what you’re doing to fulfill their most urgent needs. Projects often change and new needs surface and if you’re in an hourly contract you can address those needs immediately. If you’re in a flat rate, you have to renegotiate a whole new contract. That’s administrative time for them. Plus, you can work on a greater variety of activities that all support their needs rather than only the one project. That allows you to remain relevant to them as the world and business changes.
Tell them you’ll use a time tracking app and send an invoice from that because that shows them you are clocking in and out, you aren’t just estimated how many hours you worked that week. And some apps take pictures of your computer too but you have to be careful in case sensitive information is on your computer screen like passwords and email. Most of my clients just trust that I’m focused on them 100% while I’m clocked in. As long as I keep delivering value, they are at ease.
When I’ve done those things, I’ve always been able to convince a new client to do hourly even though they didn’t know me well. When I’ve received referrals, the enrollment process was usually much quicker and easier but when it’s a stranger, these strategies help reduce the risks associated with hourly.
There are risks because there are dishonest freelancers out there. And that’s unfortunate because they are sabotaging their own career, but they do exist and that's why some businesses are skeptical. The truth always reveals itself so if you’re honest, you’ll naturally communicate differently with the client and they are more likely to trust you.
Overall, if you want to be a successful freelancer, whether you do flat rates or hourly, focus on output. Focus on the value you provide, rather than input, the effort and time you put in. Poor people focus a lot on input. They believe they deserve a certain amount of money for the effort and time they put in instead of the impact they had on the business or world. If you want to thrive as a solopreneur get in the mindset of providing value.