The Science of Pricing

Editor’s note: The information below is an excerpt from the article “The Art & Science of Pricing” by Ilise Benun. Get more expert advice on pricing when you read this article in the November 2011 Issue of HOW.

Data, tools and process may remind you of certain scary subjects you shied away from in school. But they’re not. They’re subjects you can easily ace. And by acing them, you get a steady income that makes your work rewarding, profitable and secure. Let’s break it down.

The Data
You start with raw data gathered over time that’s organized in a usable way. Here’s what you need to know:

• Actual time. Profitable pricing depends first and foremost on accurate time tracking. It’s the difference between, “It felt like I spent forever on that project,” and, “I spent 21 hours on the design development phase and 15 hours in production.” Even if you don’t directly tie your fees billed to the time spent on each project, your actual time must be accounted for and used in order to estimate future projects. Without the data, you won’t know if your prices will keep you afloat. And if you don’t know, they’re unlikely to do so for long.
• Hourly rates. You need fixed hourly rates for yourself and your staff to calculate accurate estimates based on the actual time tracked. These numbers can be calculated simply by dividing your available working hours by your overhead and expenses and then adding the realistic profit you want to earn. Build your profit directly into your hourly rates.
• The bottom line.What are your annual financial goals? Your pricing should be designed to help you reach those goals. Project both your income and your expenses, even if all you do is make a reasonable guess. It becomes more accurate the more you do it.

The Tools
The data you accumulate—actual time, hourly rates, your goals—goes into three essential pricing tools:

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1. Time-tracking System. We (humans) are notoriously inaccurate when it comes to “guestimating” how long things take, with wishful thinking playing a starring role. The only way to know for sure how much time any project or task actually takes is to track it. You can do that on paper or by using software. Any time spent advancing the project counts as billable time. Be sure to include non-billable tasks in your time tracking also. You do need to know how much time you spend on non-client work, such as administrative tasks, marketing, etc., to get a clear picture of your profitability.

2. Estimating Worksheet. To standardize the pricing process and to make sure you’re covering all the possible facets of a project, use an estimating worksheet every single time. Develop a list of tasks that’s as detailed as possible for your creative process. That task list should correlate identically to the task list in your time-tracking system.

3. Standard Pricing Memo. This is essentially a spreadsheet that lists by category all the jobs you’ve done, the actual time spent and the fees billed, then averages them to give you a ballpark range for every type of job you do. For example, if you’ve done 20 corporate identity systems, this document will provide a quick snapshot of your most and least expensive projects in that category, as well as the average. This tool alone can save you hours of time estimating jobs you’ll never get and having conversations with people who can’t afford to work with you.

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