Flat Fee Versus Hourly Rates – How to Charge for Your Web Design or Graphic Design Services



How to Get Paid What You’re Worth by Using the Psychology of Pricing and Focusing Your Clients on Value Received.

Doc, it Hurts When I Go Like This…

A woman goes for a routine checkup. After the examination the doctor tells her to sit down and pulls up a chair next to her.

“I’ve got some very bad news and some very good news.”

“Ok, give me the bad first.”

“Well, the bad news is you have an advanced stage of a very rare form of eyelid cancer. It’s already spread from the eyelids and is now active in your eyebrows, your ears and curiously enough, you’re left big toe. Until recently, your form of cancer was 100% fatal.”

“Ok, so what could possibly be the good news?”

“The good news is there is a new experimental treatment. It’s expensive, but the success rate is 100%. So that means you’ll most definitely live.”

“Awesome, so how much are we talking about?”

Well, it’s a very quick, yet extreme procedure. It generally takes ten minutes to perform and we charge $1,000 per minute.

“You’re shitting me right? One thousand dollars per minute? Why should I pay that much, that’s ridiculous! Who the fuck makes $1,000 per minute? That’s sixty grand per hour!”

“But I’m curing your cancer…”

“I don’t give a fuck all what you’re curing. For that price I should have a face lift, a tummy tuck and really great color and cut thrown in for free! What kind of bullshit scam are you running? I’m outta here!”

“But wait, what about your cancer?”

As the woman storms out, the doctor pauses to ponder the absurdity of the situation. Did this woman not care about curing her cancer? Why did she care about the cost per minute when I’m saving her life? It just didn’t make sense. He thought for a minute and then had an epiphany.

“Ah-ha” he said to no one in particular as the room was empty, “I know what the problem is now!”

He walks over to the front counter, “I’m ready for my next patient.”

As luck, or extreme misfortune would have it, depending on which side you are on, the next woman has nearly the same symptoms and situation as the previous patient. The doctor tells her to sit down and pulls up a chair next to her.

“I’ve got some bad news and some good news.”

“Hmmm, well give me the bad first.”

“Well, the bad news is you have an advanced stage of a very rare form of eyelid cancer. It’s already spread from the eyelids and is now active in your ear lobes, your left nostril and curiously enough, you’re right pinkie finger. Until recently, your form of cancer was 100% fatal.”

“I see…so what could possibly be the good news?”

“The good news is there is a new experimental treatment. It’s expensive, but the success rate is 100%. So that means you’ll most definitely live.”

“Awesome, so how much are we talking about?”

“Well, the entire treatment costs $10,000.”

“So for ten grand you can cure my cancer?”

“Yes”

“That’s fucking cheap! I’d pay ten grand to stay alive any day.”

“Great, so we have an opening for next Friday. My assistant will be in touch.

“Thanks Doc!”

So what is the difference between these two scenarios? In the first example the focus is on the commodity (hours worked). In the second example the focus is on value received (curing your cancer). Same total cost to the patient. Same results. Same value received. However, in the first situation the patient makes a dramatic shift to the cost per hour, which at $1000 per minute, rightfully sounds outrageous. She’s so caught up in the cost per minute, and mentally computing it to an hourly wage and then comparing that wage to commonly know rates per hour for other types of work, that she completely loses focus on the value received. Curing her cancer takes a back seat to expressing her indignation at being presented with such an outrageous fee.

Two hours later the first woman comes back to the office. She’s had time to cool off but she’s still stuck on the cost per minute.

“So Doc, you say it generally take ten minutes to cure my cancer with this treatment. So that’s ten minutes at $1000 per minute right?

“Yes, that is correct.”

“So, do you think you could cure my cancer in eight minutes?”

“Huh?”

“That’s just two minutes less than you think it should take. Maybe you can just work faster or not put some much effort into it. It’s only two minutes. How much difference can it make?”

“Look, for the treatment to work as intended it needs a certain amount of time. Our experience has shown ten minutes to be optimal for full recovery”

“Yes, I know, but I don’t need anything fancy. I just need my cancer cured. Maybe you can just do eight minutes and then I can finish the rest at home on my own. I took a class on first aid once so I know a little bit about medicine and stuff. Also, my brother’s friend is a nurse’s assistant. Maybe he can finish it. How hard can it be?”

“I’m sorry but that would just be irresponsible of me. I know from experience how long this treatment takes. There are no shortcuts. I can’t do it faster. If we cut two minutes off the treatment you will probably die”

“Hmmm, I see. So what can you do in nine minutes?”

Sound familiar? If you’ve worked as a designer for any length of time you know the routine. Itemizing bids and hourly rates bite you in the ass every time. To get paid what you’re truly worth you need to move away from itemizing and hourly rate fee structures and to a flat fee value based model.

Value Based Fees Are Good For You and Your Clients.

Flat fees are not just good for you, they’re good for your client.

For you it’s a statement about your confidence and professionalism. You’re telling your client that you know exactly what you are doing and keeping their focus on the value of your services. How long something takes is irrelevant. A kick-ass logo has the same value to the client whether it took you one hour or three days to complete. Flat fee pricing removes this completely from the equation.

For your client they can now budget properly. They don’t have to worry about a big budget busting hourly bill at the end. They know what they are in for when they hired you. The fact that they hired you at all tells you they are satisfied that your flat fee truly represents the value they will receive (or even underrepresents the value). With costs under control, the client can now focus exclusively on the end result. This is immeasurably helpful to them and results in a better product.

Another problem with charging by the hour is that it punishes for getting get better and faster. To keep up with your increasing speed and skills your hourly fee must keep rising. With an hourly rate you can paint yourself into a corner because at a certain point an hourly rate will just sound ridiculous, where the same total fee, when presented as a flat fee, sounds reasonable because it focuses on value received and not the commodity (hours).

A good example of this is the lawyer. Lawyers are universally hated and treated with suspicion. I believe the main reason is their hourly rate fee structure. Because of their hourly rates, which are shockingly high at $250 to $500 per hour, their clients are constantly focused on what this will cost them. They question the billing and ask for justifications for every itemized second. This not only makes their clients treat them with suspicion and resentment it also shifts their clients focus away from the value received, which is winning their case.

However, Doctors use a flat fee structure. A visit costs a fixed amount. Labs charge by test. Getting a mole removed has a fixed fee. When you’re talking with your doctor you mostly focus on value received (getting better) because you already know the cost (price for total visit or treatment).

The Hourly Rate Myth

There is a myth promoted by the by-the-hour-crowd. That an hourly rate ensures you get paid fairly for your time. There are three major problems with this.

Wheat, Corn and Oil are Commodities. Your Design Aren’t.

You are not supposed to get paid for your time, you’re supposed to get paid for your results (value). Time is a commodity and utterly meaningless. Does someone go shopping around for a six-hour logo or a logo that will differentiate them from their competitors? Does a client demand a 20 hour website or one that increases sales? Clients shop for value received.

You’re Going to Make Exceptions Anyway

The idea that you will always get paid for your time if you charge hourly is not that accurate in real life situations, particularly with long-term clients. We all know that if something ends up taking way longer than expected, you’re going to shave hours off that bill anyway to adjust it closer to your client’s expectations. This is just smart business. Everyone does it, especially businesses run by individuals that don’t have a payroll to make. You just can’t drop a bomb of a bill on your client’s desk and expect them to be happy, no matter how justified. So you make adjustments to the bill. So without even realizing it your hourly rate just became a flat fee anyway.

The Punisher

Hourly rates punishes you for being fast and good and punishes your client for your fuck-ups. Why should you get paid less for solving the problem quickly? Why should your client pay more because you can’t get you act together and keep wasting their time. Imagine that! Paying someone more for screwing up. Talk about a reverse incentive!

Two Real Life Examples of Value Based Pricing

You Can’t Handle the Tooth.

My own dentist recently filled a tooth that had a hole in it. I was in and out in 15 minutes. Total charge…$240. That’s $1,000 an hour! But not really. I paid $240 to fill a tooth. How long it took is really irrelevant. Still, it did feel like too much, but not because of the time, but because it’s hard for me to judge the value received. I wasn’t in any pain and it wasn’t a cavity. Should I have just waited and rolled the dice? Could I had waited another year? Would waiting ultimately cost me a root canal in 3 years? I don’t know, I’m not a tooth expert. Because the case for value received was not clear I wasn’t quite comfortable with the price. If the Dentist had made his case for value received clearer or I had asks more detailed questions perhaps I’d feel differently.

Now if I was in raging pain, the $240 would be a bargain because the value received is quite clear at that point.

Mo Money, Mo Money, Mo Money!

A couple of years ago the CEO of an established successful company called me up about SEO. She knew their site wasn’t performing as well as they’d like and she wanted some advice. I spent about two hours with her on the phone going over their site and telling her what they needed to do. She took detailed notes a reviewed them with me for accuracy.

“Great. So how much do I owe you?”

“Hmmm…$1,200.”

“Wow, that’s a bit more than I expected. We only talked for an hour and half.”

“Yes, that’s true, but I just told you everything I’ve learned over the last eight years and given you a specific plan to implement. It doesn’t take that long for me to analyze a site and suggest a plan of action. But it took me eight years of hard work, experimentation and analysis to be able to get to that point.”

“I understand, but this is out of line for what I wad budgeting for this. Would I take $500?”

“Sure, it’s only fair since we didn’t discuss pricing first. That was my fault, but I didn’t realize we’d be getting this involved and actually design an SEO plan for you. It’s just that one thing led to another and I get so excited about solving problems I kind of get lost in the moment.”

So she implements my suggestions and then calls me back a year later and says thanks to my advice they landed an extra $250,000 in work due specifically to implementing my SEO suggestions. They know this because the client found them on Google using a phrase that they never used to show up for until I fixed their site. And I know this because I was periodically monitoring the site to see how they implemented my suggestions.

So in two hours of my time I made her company an extra $250,000. And since this was a structural solution, it will continue to produce results for years to come.

So $500 turned out to be the bargain of the century for her. In hindsight, $10,000 would have been worth it.

This Isn’t Written In Stone. Using the Right Fee Structure for The Right Job.

I’m not saying never charge by the hour (I do it myself depending on the situation) just be careful with it because at a certain point the psychology of pricing will work against an hourly fee structure where as a flat fee is infinitely scalable.

Also, using a flat fee doesn’t mean you don’t put conditions and restrictions. A flat fee can include a specified number or revisions or comps. It can include an hourly rate for features out of scope. It’s your fee so structure it in a way that makes sense for you and your client.

A good time to use an hourly rate is when you are doing consulting work or solving an elusive, unknown problem. Both of these situations are so open-ended that a flat fee model is mostly unworkable. Hourly rates are often the only way to charge when you have employees as well. An independent sole proprietor can adjust their fees as they see fit as they are the only ones getting paid. If you have a payroll, a flat fee becomes much more risky and difficult to implement.

However keep in mind one simple truth. Your client is looking for someone to solve their problem. They are looking for value. So you can either honor their intentions and match their value based expectations with a value based pricing model, or you can pull them off course with hourly rates and detailed itemized invoices.

Good luck.

File Under: Pricing Methods for Designers – Design Fees – How to Charge for Your Design Work – Graphic Designers and Pricing – Web Design Fees – How to Charge for Your Web Design or Graphic Design Services – Use Value Based Fee Structures to Avoid Being a Commodity

Funny story about pricing. A couple of years ago the CEO of an HR recruiting firm called me up about SEO. I spent about an hour and a half with her on the phone going over their site and telling her what they needed to do. She then goes, great how much do I owe you. I said $1,200. She said, that’s a bit more than I expected and we only talked for an hour and half. I said yes, but I just told you everything I’ve learned over the last eight years and given you a specific plan to implement.

I told her it took me eight years to learn what I can now explain in one hour.

She asked if I would I take $500. I said sure, it’s only fair since we didn’t even discuss pricing first.

So she implements my suggestions and then calls me back a year later and says thanks to my advice they landed an extra $250,000 in work dues specifically to the SEO. They know this because the client found them on Google using a phrase that they never used to show up for until I fixed their site.

So $500 turns out to be the bargain of the century for her. In hindsight, $10,000 would have been worth it.

So in 1 1/2 hour of my time I made her $250,000.

9 comments


  • That was such a witty, funny story! It’s great to be able to laugh and be enlightened at the same time. Yep, it makes a lot of sense. It all boils down to value for money and if you will be able to provide solutions to your clients’ dilemmas and needs. One’s choice of words can really make a huge difference.

    January 24, 2011
  • This post is totally spot on. Inspired me to write up a proper pricing structure based on flat rates. Now I’m off to laminate that puppy.

    April 20, 2011
  • John G Quandt

    It would have been nice to have read this article before doing my first website. I nearly fell into the itemized hell hole a year ago. I had done a per page pricing. Upon seeing it the client’s eyebrows rose considerably. He stated for that price he could do the type himself. After mentioning tags, SEO, links, page orders along with another half dozen of the likewise he realized there was more to it than meets the eye.
    I quickly did the numbers; gave him the flat rate for the site build. He questioned, “For the whole thing?”
    I answered in the affirmative.
    We continued with our pizza and beer. Life continued as it should in paradise.
    Great tips, all of them, straightforward and useful. Thanks.

    May 25, 2012
    • Clay Butler

      Great story. Glad you turned that one around.

      May 28, 2012
  • Gh Fran

    One thing I realized when it comes to an hourly rate for features out of scope is that the hourly rate shouldn’t evenly be a divisor for your flat fee or you’ll definitely have clients doing the math!

    January 12, 2014
  • Stu

    I have a question :)

    I’m totally with you on the need not to charge hourly rates. However, the invoice on the left for $1,200 doesn’t give any details of what’s being done. At all. It’s like a black hole or “I just made up a number”.

    Has anyone has experience of putting a breakdown of fees in front of clients (not the hourly rates, just the fees that make up the total), perhaps even before doing the work?

    For example:
    Total cost $1,200

    Which is made up of:
    Design $600
    Consult $100
    Research $150
    2 x mock-ups $200
    Revision and fine-tuning $150

    In particular, has anyone used this approach with lawyers, accountants or any clients who come from this kind of background?

    Keen to know if this variation might be best for this type of clients

    Stu

    February 5, 2015
    • Clay Butler

      Breaking down the invoice like that is equally problematic as I illustrated above. You’ll get fights over everything on the list.

      February 19, 2015
  • Chaudhari

    Hello,

    Very nice article. Often heard of the phrase, value based pricing but author put it in simple words. Nevertheless, the challenge is to find out the real value for the business. Furthermore the value for e.g. SEO may not be same for all different customers. That means in some cases overestimation might happen which eventually, lead to the situation of loosing the work.

    Is there some method/way to find out the value for the customer?

    March 26, 2015
    • Clay Butler

      I’ve found that with the internet and a global marketplace, pricing has leveled out a bit. So the big extremes between what a big corporation feels is fair value and what a mom and pop feels is fair value is closing. I’ve worked for both and they are not that far apart anymore. So my pricing based upon what I feel what my value is in general.

      April 16, 2015

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