The Math & Benefits Of Fixed-Fee Pricing

0:00I want to show you what it looks like when you move from an hourly rate to something that's a fixed price project. So you might have a project where you charge $75 an hour. Let's say it takes you 100 hours. You've done this kind of work for a bunch of different clients, but you realize within this 100 hours, there is a project that you can package. And next time somebody asks you for it, you know more or less, it might take you around 100 hours. So you say, "Okay, I'm going to do clearly defined deliverables. It might be a process you show them." And you might even raise your ambitions beyond what you're capable of. Maybe some design work, maybe helping them run a workshop, things like this.

0:44And you say, "Okay, I'm going to charge you $20,000 for that." So you move to something where you're essentially going to get $200 an hour. Now the magic of this is not simply to charge more. It's to take advantage of the slack capacity that this creates, which you can either spend in two ways. You can either spend more time on the project. So you could spend more hours doing a better job. Or two, you could spend it on outsourced resources. So as a freelancer, they can't control how you do the work and you can bring in people to help you, help you with design, help you do some of the research, help you to perform some of the interviews.

1:30So let's say you end up at 150 hours, right? You're still at $133 effective rate. The real magic of this is that it really helps you continue to grow. One of the challenges as a freelancer is that you're not improving always. You're doing the same work over and over again doing a project like this. It could be terrifying. The first time I did a fixed price project, it was terrifying. But it pushed me well beyond what I was capable of. Because I charge a higher price, I wasn't looking for other work at the time. I was able to spend more time on it. I hired a designer to help me upgrade some of the end products I created for them.

2:12And overall, it was great for me and it helped me move beyond the rate I had been charging before. The danger with this is that scope creep comes in. Scope creep is when the client just starts demanding more and more and more. There's a danger when you have a fixed price project that they feel like you're a member of the team and they just start throwing work at you. This is where you need to make sure you're checking in with the problem you defined and the work you're doing and make sure that you're communicating clearly. You can put something in the project that says, Hey, if we go over this many hours, we'll revisit and make sure the pricing is right. And maybe there's a clause where you can charge, start charging a daily rate or an hourly rate if you're doing more work.

2:56But you really need to be explicit about that at the early stages of the project. The key here is that charging a higher price, charging fixed price, charging per product, charging is a package, shifts the focus from X rate for this work to what is the outcome on the client. And this can go both ways. You can spend less time and get paid more for the work you're doing because it's more focused and targeted or you can invest those resources into doing more work or spending more time on the project.