Articles

Getting the Numbers Right

How Do You Determine Pricing?
by FunctionFox Systems

FunctionFox meets with Mary-Lynn Bellamy-Willms, President of Suburbia Advertising and Founder of FunctionFox Systems Inc.

Suburbia Advertising is a full-service design, advertising, and multimedia company specializing in retail branding. We asked Mary-Lynn some of the common questions that many creative professionals ask with regards to pricing.

How do you determine pricing in your company?

Always ask for the budget and scope of work for the assignment. So often designers are asked for a quote, but they don't ask the client for a budget, which means you're shooting in the dark and most likely giving a price that's low so that you get the work. A good client will have a budget allocated to the work and will share it with you. If they don't have a budget and are telling you that they have no idea how much they need to allocate to their project, try throwing a number at them as a 'blink test'. For example, 'our minimum project fee for this type of work is $5,000.00'. If they balk, you'll know not to waste any more of your time.

Like most firms, we are always keen to take on new clients, especially if we believe we can get the door open to what might appear to be a great long term piece of business, but never lose sight of the fact that you're an expert and that clients looking for the cheapest price (as opposed to the best expertise and value for money) are usually not good long term clients.

If you've developed a price for a project and the client can't afford the price but wants you to do the work anyways, try these ideas:

  1. Reduce the scope of the project. For example, if the scope included two sets of minor type revisions - reduce it to only one set of revisions. This will force the client to stop the endless cycle of revisions. If more revisions are needed, you can now say the requested revisions are 'out of scope' and provide a quote for the additional work. In this way, you will not only be demonstrating your commitment to the client but will also be setting the standard for expectations from the outset.
  2. Hold true to your price, but offer a small discount that will be applied to future projects. In other words, if they can afford only $4,000 for the $5,000 you've estimated, suggest that you charge the $5,000, but will apply the $1000 'discount' to future work valued at $20,000. This will reduce your loss from 20% to 5%, and will also ensure you receive more work from them in the future.
When do you raise your rates?

You should be achieving 60% or more Billable Efficiency in the company before you even think about raising rates. Charging a higher rate won't solve billing problems and in fact, if you raise your rates too soon, you'll probably just write off more time overall.

If you are achieving 60% or more, you can afford to raise your rates. Better still, start to package price by thinking about the value of the work you're doing. Package pricing will ultimately allow you to achieve a much higher hourly rate overall. In our firm, we offer a number of services at a set price. We have not yet had a client balk at the price as we are providing excellent value and to get the pricing, we always talk about value of the outcome of the work versus purely the cost. To do our package pricing, we review our previous project reports for similar work to see how much real time the work took, and then build a package price from there.

My goal is to bill 60% or more of all staff time combined. The industry average is 42%, which means most firms are not achieving their potential billings. If you're not even achieving the 42% billable efficiency, then you're giving away far too much of your time.

Here's an example:

You have 2 full-time and 2 part-time people, so count 3 people. Multiply 3 people x 40 (hours worked per person per week) x 47 (number of billable weeks after 2 weeks vacation, 2 weeks statutory holidays and 1 week sick time). TOTAL AVAILABLE TIME = 5,640 hours.

Strive to bill 60% of the total available time (this means everyone's time - not just those you consider 'billable'): In this example, 60% of 5,640 = 3,384 hours.

If the firm in the example above has a rate of $100/hr, they should achieve an Annual Gross Income (AGI)* of $338,400 if they manage to hit the 60% goal. If they are hitting the industry average of 42%, they will only bill 2368 hours or $236,800. This would mean that they're leaving $101,600 on the table (in other words, they've given away all those hours for free!)

*Total Revenue (Sales) – Cost of Goods (COGS) = Annual Gross Income (AGI). AGI is an important indicator to determine how you are doing with all other benchmarks and in comparison to the industry. Provided by ReCourses. For more information please visit their website at: www.recourses.com.

This article has been provided by FunctionFox Systems Inc. For more articles and resources, see www.functionfox.com/articles/.