Pricing demands a lot of experience and perspective. It is perhaps one of the most difficult stages in every project. It cannot be just a business negotiation, for a major mistake in pricing often determines the success or the failure of any project.
There are many types of pricing, all of which involve time and scope: scope of the project and number of man-hours to do it. Even experienced business negotiators sometimes err in this very important and delicate decision. The important thing to remember is that every aspect of a project is variable, and can either be directly or indirectly dependent on each other.
Here are some pricing methods that can help you get pricing perspectives.
The Fixed Package
When the project has a fixed-price, both the client and the agency agree up front on the cost of the project. Usually, we arrive at the amount by estimating the number of man-hours necessary to complete the project and multiplying the figure by the hourly rate. The cost arrived at will be what the client will pay, regardless of the actual time spent.
The variable factor here is defining the scope of work. Clients’ objective is to get the most deliverables that they can get and they push hard for this while ours is to finish the project as fast as possible. Less time spent for us means greater profit.
But what if the client keeps on pushing for add-ons and other extra stuff, which may not be included in the original scope of the project? Clients tend to ask for such things. From a business perspective, it is their right. Unfortunately, sometimes the extra stuff they request can be unreasonable, in terms of additional man-hours. To prevent this, it is necessary to: (1) put a strict timeline on the project; and (2) define what’s included and not included in the project.
Since the project has a fixed price, we already know how much cash is coming in. And that will help us in pretty much defining what we are required to do. Again, it is necessary that at the beginning of the project, we define the actual scope and boundaries of the project and make it clear to the clients what they are getting for their money.
As the name suggests, hourly rate simply means we get paid by the hour. In our line of business, hourly pricing connotes that what’s really being paid is not so much as our deliverable but more our service and expertise. This means the work is finished when the client tells us.
Since clients pay by the hour, their tendency would be to question if what they are making us do is worth the money they are spending. So the hard decision of deciding what to do falls on the client. We, on the other hand, just work by our hourly rate. The longer and bigger the scope of the project, the more profits for us.
A big disadvantage to this method or pricing is we can only earn as much as our hourly rate dictates. To get more profits from clients, we need to increase our rate. Another problem with this method is that since the budget is normally not an issue for the client, they will not be in a hurry to complete the work.
If the project is delayed due to the clients’ inability to come up with decisions, then our work is interrupted and we lose money. Again, this must be defined clearly at the beginning of the project in order to avoid loss in terms of project delays.
This is similar to hourly rates but with a distinct difference. If we are being paid by the week or by the month, clients pay the same amount regardless if there is an actual work done in the project. The good side of this method is that most companies operate by weekly or monthly project deadlines. We, as contractors, are incorporated in the clients’ schedule. That simply means the clients include us in their working schedules. If clients don’t work on weekends, they will make sure we get enough work to do.
Working on the same page as the clients makes cost estimation easier. We are encouraged to work as efficiently as possible since our weekly or monthly rate is already covered.
Value of Work
Value pricing is perhaps the most difficult to establish. This is where lots of perspective and experience come into play. This is almost always a fixed price. The difference is that unlike in fixed package pricing, where the client pushes for more deliverables, the value pricing puts a price on every piece of work that the clients ask, limiting the clients’ options in making us perform works that are clearly not on the project scope.
All in all, the value pricing is perhaps the best method of pricing a project. It clearly defines what is to be done and what is not. By having a checklist of the tasks on hand, with corresponding prices for each, our work is clearly defined for us, with minimal loss as to the hours spent by the staff. This method allows us to properly delegate tasks to our employees who are best cut out for the project discussed.
In summation, pricing can be tricky. But with proper planning and perspective, we will be able to pin down the correct price for every work we do.
Remember: Pricing can determine the success and failure of every project so it is best to get it done proper at every start of the project.