If you've worked with a consultant or freelancer, you have probably paid them in one of these ways: hourly rate or fixed price per project.
In this article, I will explain the pros and cons of those methods and the benefits of a method that is increasingly becoming more popular: a subscription model.
Let's look into the issues with the commonly used methods.
Issues with using hourly billing
When the project's scope or duration is unclear, it can be tempting to negotiate an hourly rate with a freelancer. The idea behind this method is that the freelancer will log the hours she is working on a timesheet and, at the end of the month or project, multiply the number of hours times the agreed hourly rate.
An hourly rate makes it easy for the hiring company to compare rates between freelancers. Still, it has drawbacks for both the hiring company and the freelancer.
For the company
From the perspective of the company hiring the freelancer, they must trust how accurately the freelancer is counting the hours. Some companies use draconian systems that ask the freelancer to record their screen.
Suppose the company doubts the accuracy of how the freelancer has counted the hours. That can open an uncomfortable conversation, and the freelancer may feel she isn't trusted enough.
In any project, time is money. Be it a new website, an app or a logo, the faster it is done, the more valuable it is for the hiring company. Yet, an hourly rate discourages this since the freelancer can earn more money as the project takes longer to complete.
For the freelancer
From the freelancer's perspective charging per hour can quickly go wrong.
As time goes by, a freelancer will probably get more efficient at their work. They may find tools that boost productivity or use their experience to solve problems faster.
Anything that leads the freelancer to get work done faster will take money out of their pocket.
To fix this, a freelancer can try gradually increasing their hourly rate. If the freelancer still needs to finish the project, any attempt to charge more will confuse or upset the client.
Furthermore, an hourly rate requires the freelancer to keep a log of hours worked and periodically send custom manual invoices. The freelancer has to spend time doing back-office work that she could spend on giving more value to customers or finding new clients.
With all of the above said, sadly, hourly billing is widespread. I recommend you check out Jonathan Stark's content on ditching hourly rates. Jonathan's podcast is an excellent well of wisdom for freelancers to improve their billing and income.
Issues with using fixed price
The other common alternative is to negotiate a fixed price for the project. The freelancer will receive all the requirements from the client and make a custom proposal that includes a fixed price for the whole project and a timeline.
In the case of graphic design work, the freelancer will also include a maximum amount of revisions in the proposal. Each change that the client requests to a design count as a revision.
Let's now look into the drawbacks of a fixed price for the freelancer and their client.
For the company
Agreeing on the project's scope before it has started may put you, the company, in an uneasy scenario if you wish to increase the size of the project halfway. By then, a budget will already have been approved for a fixed amount and getting approval for more money may not be possible.
There is also the possibility that the freelancer, from lack of experience, underestimated the project's complexity or defined a scope that does not reflect what you want. With a fixed approved budget, there may be no way of getting more funds to supplement the initial proposal.
The freelancer may feel that the project is no longer profitable, which puts the project at risk.
For the freelancer
From the freelancer's perspective, the biggest issue with a fixed price per project is scope creep. Scope creep is the gradual expansion of the requirements of a project after the project has begun.
As the client adds new requirements, the project's scope grows gradually, or "creeps", pushing the deadline further. The riskiest thing about scope creep is that it can often go unnoticed until you realise: "oh crap, we won't be able to ship on time".
The teams at risk of scope creep are those that don't adopt or adhere to project management frameworks, such as Shape Up, Scrum, PRINCE2, etc.
Scope creep can be the fault of the freelancer who needed to define the project's scope better or the company adding new requirements as the project evolves.
Once scope creep occurs, the project is a candidate for a timeline delay, making it less profitable for the freelancer. Since the project will take longer than expected, the freelancer could get the company to pay more. With the risk that the company may reply: "Sorry Harry, unfortunately, we don't have more budget".
At this point, the project may no longer be financially attractive for a freelancer, which jeopardises the project's success.
Welcome subscription model to the rescue
Subscription-based billing is an increasingly popular way freelancers charge for their services. I use this billing model with Product Alchemy and am not alone.
With tools like Stripe, freelancers can open up an account with just a few clicks and accept online payments as recurring subscriptions.
Let's look into the benefits of a subscription-based model for the freelancer and the company.
For the freelancer
The freelancer can create different tiers that customers can choose from. These packages eliminate the need for custom proposal writing or signing custom contracts. Clients can choose what tier of the service they want, just like you can select with Dropbox what monthly plan is best suited for you and, within minutes, pay with a credit card.
Stripe offers automatic invoicing, which means the freelancer has more automation and, thus, more time to give his clients value or find new ones.
Lastly, it gives a recurrent business model crucial for a stable livelihood and sustaining a freelance career.
For the company
The company gets no billing surprises and knows the amount the freelancer will bill them monthly. The company can cancel the subscription anytime if they aren't happy with the services.
Because a monthly subscription has flat fees, choosing the best-suited plan is much easier—no need to negotiate a custom price or review a lengthy proposal.
The time-saving means for the company the project can get started faster, sometimes in days.
Charging per hour demotivates a freelancer to deliver a project faster. Any time savings mean less money in their pocket. On the other hand, using a fixed price for a project where requirements aren't unclear from the get-go can render the project less financially attractive and thus at risk.
Subscription-based billing for freelance work fixes that by allowing freelancers to charge for their work in a recurring way. The most significant benefit for the company is predictable costs and the financial control any moment to stop the subscription.
The company can subscribe to the freelancer's services and cancel the subscription when they don't need them anymore. When they need the freelancer's service again, they can resume their subscription with just a few clicks.
Some freelancers, like myself, even offer a 30-day money-back guarantee which gives the hiring company more financial peace of mind.
Freelancers can be a powerful asset to a team and reinforcements on mission-critical projects. Finding the right way to pay the freelancer is fundamental to building a long-lasting partnership. A subscription model offers a simple yet intelligent way to hire a freelancer.
Need a design freelancer? I'm available!
You can learn more about my design subscription here: Product Alchemy