You’ve heard about hourly pricing. You’ve heard about package-based pricing. You’re still figuring out which one is the best for your business because it’s really hard to get a straight answer around here!
If you’ve been trying to figure which pricing model is best for you, wonder no more! I’m talking about hourly pricing vs. packages, breaking down the pros and cons of each, and talking about who should go hourly and who should price their offerings using packages.
Join me every Wednesday 12pm PST on good ‘ol Facebook for the next episode of The Andi Smiles show!
Don’t want to remember things (‘cause- ugh- things)? Get a reminder when I go LIVE by clicking here and I’ll send you a message via Facebook Messenger right when the shows starts (plus you’ll have the replay link in your pocket!).
Intentional Pricing (4:07)
The first thing you want to do when you set your price is to be intentional and the first step to being intentional with your pricing is to be proactive about your pricing instead of reactive.
What you’re probably doing at the moment is reactive pricing. Instead of being proactive with your rates, you’re reacting to external and internal factors. Those are the two types of reactive pricing.
External Reactive Pricing
External reactive pricing is setting your prices based on factors external to you. This is what most people do when they first set up their pricing model. They’ll do a bunch of research, look at their competitors, or a consultant will tell them how much to charge. There’s an outside force influencing their pricing decisions. While it’s not a bad thing to listen to the advice of others, your best friend, neighbor, or favorite blogger doesn’t know the unique details of your business.
Internal Reactive Pricing
Internal reactive pricing is based on our internal beliefs about value and worth around money. It gets infused into our pricing models. External reactive pricing tends to be practical, while internal reactive pricing is emotional. Internal reactive pricing is the byproduct of your limiting beliefs about money, money wounds or traumas from the past, and ancestral or generational trauma around money.
Three Phases of Setting Your Prices
When setting their prices, most people are in one of three phases with their pricing:
- You’re aware of your reactive pricing and actively working on it (taking action)
- You’re conscious of reactive pricing, but actively avoiding it (out of sight out of mind)
- You feel like something isn’t right, but you’re not quite sure what it is (intuitively know that pricing is off but not sure why)
When you set your prices from a reactive place, it doesn’t come from a grounded, confident place. Does any of the following scenarios sound like you?
- You’ve felt embarrassed about your prices
- You’ve felt afraid to say your rates out loud
- You’ve felt hesitant to put your rates on your website or Facebook page
If it’s hard for you to talk about your prices, you haven’t made intentional pricing decisions.
Intentional pricing is setting your prices from an authentic self-led place, which means that you know precisely why you’re charging your current rates. You know what your value is, and it’s not because of what somebody else told you. When you feel right about your prices, it’s easier to talk to people about them.
Hourly Pricing (12:25)
Hourly pricing is pretty self-explanatory: It’s what you charge for your services based on an hourly rate. You have a flat price that you charge per hour. However long it takes you to do your work for someone, you multiply the number of hours completed by your hourly rate. The final number is what you bill.
Pros of Hourly Pricing
Always get paid for your time: If you do the work, you get paid. It’s straightforward to bill for because of its linear model.
Easy to bill: The billing process for hourly pricing is straightforward and simple to complete via an invoicing system.
Easy for clients to understand: Your clients can look at your invoices and timesheets to see exactly what work you did, how long it took you, and what your hourly rate is. People can wrap their head around what they’re getting because there’s a direct connection between time and pricing.
Cons of Hourly Pricing
Income decreases as your skills improve: As time goes on, you’ll be able to perform your work faster because you’ll develop your skills. You’ll learn shortcuts and build automated systems. You’ll find that when you charge the same hourly rate, your monthly income will go down because you’re performing the work faster.
Time tracking: Lots of administrative work is required, and if you’re not good at time tracking, you may lose money.
Questions from clients: Sometimes clients don’t think something should take as long as it really does because they’re not in your industry. They may question your timesheets if they think you took too long on a single task.
You have to be really explicit about what’s included with your rates: Sometimes clients aren’t clear about what you’re going to bill them for. They think that weekly strategy calls or meeting in person for coffee are free and if you aren’t explicit about what your billing you could end up working for free.
Hard on your cash flow: Hourly pricing is unpredictable because you don’t know exactly how much you’re going to get paid until you complete the work. Unless you’re very familiar with your process and industry you could underestimate your potential income.
When Hourly Pricing Works
First starting out and you’re still building skill set: Hourly pricing is excellent when people are first starting out and building their skill set. When you’re new, you don’t know how long things will take. If you agree to a price on a project that you think will only take 5 hours, what happens if it takes 20 hours? You lose money.
One-off things or small jobs: For example, you’re a graphic designer and a potential client doesn’t want you to completely redo their website. Instead, they just a banner image or a logo. Hourly pricing is great for small jobs that require little time investment from you.
Upsells: You can add on “upsells” to your packages if a client wants to customize your services.
Ongoing support after packages: If your client wants ongoing meetings or check-ins after a package is completed, an hourly pricing model is an easy way to retain your client.
Working on-site: When you work on-site it’s easy for 1 hour to turn into 4 because on-site work is unpredictable. Hourly pricing ensures you don’t get stuck somewhere for 6 hours when you only meant to be there for 2.
When Hourly Pricing Doesn’t Work
Established skillset and systemized processes: If you’re quick and efficient with what you do, hourly pricing will drag down your rate.
Projects that span over time: Since you bill hourly pricing AFTER work is complete, long projects can be a pain to bill for via hourly pricing. Even if you bill in intervals, you have to stay on top of your billing and make sure you’re billing regularly enough to support healthy cash flow in your business.
Work dependant on the client: If you’re doing work that requires information from the client and they’re slow to give you what you need, you’ll be waiting to bill them or scrambling to get the work done at the last minute.
Packages are when you bundle several services together and sell them at a set price. Many of you have probably based your pricing on packages. Packages are the hip new kid on the block and they are awesome! But keep in mind, we’re focusing on intentional pricing, which means they might not always be for you.
Pros of Package Pricing
Earn more than hourly rate: If you’re charging by a package, you’ve figured out how long it takes you to do complete the work and you’ve added wiggle room to your packages, in case you need more time. Most package pricing is based on the high end of how much time it would take you, which means often you get paid more than an hourly rate.
Paid upfront: When you sell packages, you’re more likely to get paid something before you start the work. If you offer payment plans, people make some type of investment in the beginning. You know you’ll get paid for your work.
Terrific for your cash flow: It’s much easier to project your income and set sales goals with packages. For example, If you’re selling a package at $1,000 per month, and you want to make $5,000, then you need to sell 5 packages.
Easy to boost the value: It’s super easy to add in extras to make your package more robust and valuable. For example, graphic designers could add pre-made social media templates or coaches could add digital workbook. You can get really creative with your packages!
Cons of Package Pricing
Higher price: Because your packages are probably priced higher than an hourly rate, there will be some potential clients in your audience who may not be able to afford your services. It can get really discouraging if you hear no a lot.
You need to give details: Since packages tend to cost more, you have to be really detailed about what’s included in the package. You’ll need to be clear about what’s involved in your packages, either on your sales page or your emails or your discovery calls.
Lose money if you underestimate the work: If you don’t have a process or a system in place, or you don’t know what you’re doing, you’ll lose money if you underestimate the work.
When Packages Work
Experience and a replicable process: Packages work best for people who know how long their work takes them. If you have a process that you can replicate, and workflows that automate parts of your package, you’ll benefit from package pricing.
Clients need more support: For example, a lot of coaches have packages because they know that six coaching sessions are much more transformative than a single intensive session. Packages force your client to get what they need out of your service and the transformation they’re craving.
Existing digital products: If you already have a digital product suite, it’s easy to add these products to your package and boost the value without creating extra work for yourself.
When Packages Don’t Work
New business owners without a process: If you don’t have a process set up, and you get easily lost in the details, then package pricing could cause you to lose money. You’ll end up feeling overworked if you underprice your packages and oversell them.
Unpredictable work: Packages are not suitable for unpredictable work. If you cannot tell the scope of the work, then don’t choose package pricing. If you do extra work that’s not included in your packages, then guess what? You’re not getting paid for that extra time, and it’s another thing that causes burnout.
For example, graphic designers may have to do some groundwork of transferring files and content from the old website to the new site sometime during the design process. That’s a ton of admin work that you may not have been prepared for when you set your prices.
Ongoing client communication: This loops back to predictability. If you have needy clients who are sending you daily emails, you’re going to be spending a lot more time than you anticipated on your package…and that means you lose money.
Hybrid Models (38:30)
What do you do if you have a service that you love offering but it’s actually hurting you? There are significant benefits to hourly rates and package pricing, but sometimes you have to get more creative with your prices. Hybrid models help you prepare for the unpredictability of working with some clients.
Package with Add-Ons (based on hourly rate)
Set a starting price, then separate your add-ons. Tell your clients that your starting rate is $1,000 per month, but if they want additional support, that will cost more. For example, your starting price includes 30 minutes of email support per week, but a potential client wants an hour per week. You can add that on as an hourly rate to your starting price.
Hourly Minimum + Hourly Rate
This model helps when you’re getting faster and better at your job, which leads you to earn less on a standard hourly pricing structure. In my own bookkeeping practice, I require a 2-hour per month minimum, and I get paid for that time even if it only takes me 90 minutes. If the client needs more than 2 hours each month, I charge an additional hourly rate after 2-hour base fee.
This hybrid model stabilizes your cash flow because you know the minimum you’ll be paid. It ensures you’re not losing money as you get better at your job. After all, if you’re more efficient at your job, you should be making more money, not losing it! The trick to this is that you need to come up with an hourly minimum that is fair to you and fair to the client. It needs to feel fair and appropriate to both you and the client.
I hope this helps you get closer to choosing the pricing structure that’s best for you. I know the biggest struggle to getting all of this sorted out is figuring out what you want to charge for your services. There’s got to be some sort of formula for this, right?
There is and I’ve created a killer pricing spreadsheet to help you price your services. Download the Perfect Pricing Spreadsheet and learn my formula for setting your prices.
Tell me in the comments: Which of these pricing models will you be implementing in your small business?