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Issue 10      November 2003
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Contents

Articles:

The psychology of design pricing
Now that the economy seems to be stirring again (cross your fingers), this is a good time to review the psychology of pricing graphic design services.

Justifying freelance pricing
You work alone, either by preference or because you’re just starting out. You are also very talented and have extensive experience. Yet, you have difficulty getting what you know your work is really worth.

Author

Publisher

Archive

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THE PSYCHOLOGY OF DESIGN PRICING

Now that the economy seems to be stirring again (cross your fingers), this is a good time to review the psychology of pricing graphic design services.

The right perspective
Although there is no question about the overall importance of pricing to the success of a design business, overemphasizing it is a common mistake. Many designers assume that pricing is a very important factor in success, which it is not.

Surveys of buyers of professional services consistently show that cost is never even among the top reasons clients give for choosing a supplier. Typically, the surveys show that cost ranks around tenth in importance. It is always lower than quality, service, dependability, flexibility, convenience, etc.

Creative Business knows of no similar surveys specific to the buyers of design services, but our experience among better clients with good projects is that cost ranks fifth in order of importance. Ahead of it are “chemistry,” or how much the client likes the individual(s) he or she will be working with; degree of relevant experience; portfolio quality and creativity; and service. Also relevant is that the more creatively challenging the job and more sophisticated the client, the less importance cost takes on. And vice versa.

Additionally, our experience is that skill in pricing ranks fourth in importance among the reasons some studios and freelances are more successful than others. Again, not number one. Higher in importance are the desire and motivation to succeed, the everyday working procedures that have been established, and marketing programs and efforts.

Getting what they pay for
Understanding the psychology of design pricing is important because most clients accept that quality, results, and price go hand in hand. The higher the quality, the better the results, the more something is thought to cost.

This belief is especially relevant to the design market because clients place orders without seeing what they’ll be getting. They make purchasing decisions on the anticipation of quality and results based on little more than samples of similar projects and their confidence in a firm or individual.

Similarly, once the work is produced it will usually be subjectively evaluated before any market feedback is received. Here, too, client satisfaction depends mostly on perceptions of how well they believe their needs have been met.

Aggressive (low) pricing in such situations sends the wrong signal. It can lead clients to expect a reduction in quality and results. It can also lead to a destructive pricing cycle: the more price-competitive a design firm is seen to be, the less their work will be valued; and the less their work is valued, the more competitive they will need to be in the future.

Aggressive pricing can also backfire when courting desirable clients. As many projects have probably been lost to prices that are too low as too high. This is especially true for freelances and smaller firms bidding on large projects. Clients often assume that a low price is due either to lower-level talent, not fully understanding the project’s scope, or cutting corners to “buy” the business.

So while aggressive pricing might occasionally be necessary, in the long-term it usually works against you. Pricing psychology is usually more effective.

An investment versus an expense
The first step in understanding pricing psychology is recognizing that for most clients the cost of design is an investment, not an expense. That is, the purpose is to make money for them by communicating the benefits of their products, or enhancing their images. This doesn’t mean that they will be less concerned about cost, but it does affect the context in which it will be viewed.

There will always be other designers who will charge less for similar services. When they are of lesser experience, talent, and skill the most effective response is to say that it is inappropriate to compare their price to yours without taking into account your superior experience or skill. Say that the greater return on investment (ROI) you provide will more than make up for the small cost difference. Isn’t higher response preferable to lower cost? If conveyed effectively, it should seldom be necessary to match the price of a less experienced competitor.

When faced with a lower-price competitor with similar credentials, the best response is to express surprise. Say that your prices are nearly always lower than others in your quality and experience league. Perhaps the competitor isn’t as busy as you are right now, or wasn’t as careful in estimating. Without denigrating them, cast doubt on how they could have possibly come up with a lower price while still offering your high level of quality and service. If necessary, you can then adjust your price as a one-time exception.

The effects of style and size
In an ideal world only experience and results, one’s track record, would count. But in the real world style and firm size often count as much or more.

Style. As used here, style doesn’t necessarily mean creative expression. Rather, it refers to sophistication, polish, “coolness” or je ne sais quoi. Clients expect that individuals involved with design services possess a certain amount of it. It makes them more comfortable, and more comfort means less pricing pressure.

It is also crucial to not only appear as though your work is worth whatever you charge, but that your prices are routinely accepted by other clients. Clients should never, ever, see you sweat about pricing. It creates the impression that your prices are arbitrarily derived.

Keep in mind, too, that too much stylishness can also connote too expensive. As a rule, most clients feel most comfortable with designers who are a bit more stylish than themselves. Psychologically, they are seeking an alter ago, someone to accomplish what they would, if they only could.

There is another style factor to consider as well. Stylishness and sophistication are usually associated with success. The more successful designers appear, the more desirable they are to clients. The appearance of success creates demand, which creates more success, which creates more demand. And so on.

Size. Most client organizations (either the company or the responsible department in larger ones) are bigger than most design firms. The greater the disparity, the more apt client individuals are to use the power that accompanies size to try to negotiate a better schedule, conditions, or price.

You can’t change the size of your firm, but whatever its size you can avoid the trap of appearing small, dependent, and vulnerable. If your firm is multiperson, stress its resources and teamwork; if you work alone, position yourself as a creative consultant, rather than a freelance.

Take the initiative and be assertive on all creative and strategy issues. Challenge any uninformed or negative input. And never modify a price without indicating that it is a one-time exception made for a specific purpose. Otherwise, you’ll be subsidizing a client at your expense.

Saying “no” can make you more attractive
Client budgets, timetables, and other conditions are seldom sacrosanct and often not even rationally arrived at. So don’t be intimidated or succumb to pressure to meet them unless it can be done profitably. It is not your obligation to reduce prices, compress a schedule, or change your procedures because of unrealistic client expectations.

Also keep in mind that turning down a project usually enhances your professionalism and makes working with you more attractive. Most schedules, budgets, and conditions aren’t as inflexible as might be first indicated. Project specs can usually be changed. And even if you do end up losing a project, taking a strong, professional stand will enhance your chances of working with the client on others in the future.

Don’t be defensive
Your company provides an essential service at competitive rates, which are determined by market demand, costs, and the need for a fair profit. No explanation of pricing practices beyond this is necessary. Nor should you be defensive, especially about the need to make a profit—why should your business be different from any other?

To be concerned about client reactions sets yourself up to be taken advantage of. All you can do is price fairly, then let the chips fall where they may.

Your firm’s hourly or daily labor rates should never be a subject for negotiation or even discussion. They are based on your costs, which are none of the client’s business.

As for the price of a specific project, if necessary to explain it (not justify it) do so by breaking down the labor (time) involved. This demonstrates that the price was rationally, not arbitrarily, derived. It also reinforces your command of the complex development process. And, if necessary, it will permit you to modify a project’s price by adjusting how some of the many tasks involved could be handled differently.

You’ll never get ‘em all
Whatever the client’s stated or unstated reasons—price, compatibility, style, service, convenience, etc.—there are some projects you just aren’t destined to work on. So one other aspect of pricing psychology is not to agonize over those that get away.

Creative Business surveys show that when averaged over six months or more, most design firms get only about 50 percent of the multi-bid projects they compete for. The success rate of competitive projects from existing clients is about 75 percent. Larger firms in very competitive situations can average as low as 25 percent (1 out of 4 proposals).

In addition, and assuming normal marketing efforts, successful firms should probably turn down 10 percent or more of opportunities that come their way because of potential project, client, or price incompatibilities.

Losing a bid or turning down a project is part and parcel of the business. It becomes significant only when opportunities are few. In some cases, more competitive pricing might be necessary. But it doesn’t address the real problem—having too few opportunities. This can only be solved by increased marketing activity. In the long term it is far more productive to spend money this way, which will decrease the need to be aggressively price competitive, than to spend it on price reductions.

-------------------------------------------------------------------------- JUSTIFYING FREELANCE PRICING

You work alone, either by preference or because you’re just starting out. You are also very talented and have extensive experience. Yet, you have difficulty getting what you know your work is really worth.

How do you break clients’ mindsets that small size should equal cheap prices? How can you get more respect?

Understand this
Although smallness is not always a pricing obstacle (freelance “stars” often charge more than multiperson firms), generally it is. It can also be combated successfully. First, though, you have to recognize the following.

You’re only worth what clients think you’re worth. Clients pay good fees only to freelances who combine talent with an aura of business know-how and sophistication. How you dress, what you say, and how you conduct yourself are at least 50 percent of pricing acceptance. You must look and act like someone whose work should be worth more than what is being asked for it. If not, and try as you may, it is unlikely you’ll ever break out of the pricing cellar. (See “Invest In Positioning” below.)

Some clients just can’t afford more. Attempting to talk small retailers or unsophisticated manufacturers into paying good rates is fruitless. They are probably right when they say they can’t afford more. Save your breath. Concentrate on clients where your talent can make a real difference; where a dollar spent on quality will produce several dollars more in additional client business. They are the only ones who can afford to pay for your talent and experience.

Freelance pricing usually is a bit less. “Star” talent excepted, freelances and small studios typically charge up to 20 percent less than larger studios and agencies for similar quality work. (See “Get Rid Of Any Client Misconceptions” below for the reasons.) Since clients tend to lump together firms of similar size when making comparisons, this means your freelance and small studio competitors affect local pricing norms.

Today, larger design firms estimate jobs based on fees ranging from a low of $125 to well over $200 an hour. The billing rate that established, self-supporting freelances charge clients is typically from $100 to $150 an hour. As the AIGA|Aquent Salary Survey documents, the amount design studios pay freelances to work on the studio's projects is considerable less (as would be expected). Assuming you have talent and experience, you should probably charge in this range or higher if you wish to maintain a viable businesses.

Act more like a company, less like an individual
A client’s major advantage in working with a freelance or small studio is flexibility. But it can come at a price when clients think of you more in personal terms than business terms. This mindset can affect everything from what they believe your work is worth, to everyday working relationships, to how quickly you’ll get paid.

The more extensive procedures of larger design firms usually create a value aura greater than that created by the flexibility advantage of a freelance or small studio.

To take advantage of this paradox, promote the advantages of being small and flexible (but never cheap) when pitching clients. When it comes to actually working with them, however, it is better to adopt most of the style and procedures of your larger competitors. You’ll still be providing greater flexibility and personal service, but it will now appear more businesslike.

Get progress payments. They are standard procedure. Not to ask marks you as small and makes you vulnerable.

Keep relationships on a professional level. Being too close to clients can keep you from being taken seriously and trivialize your efforts. Keep your private life private.

Stand up for what you believe in. The more clients respect you, the more they’ll be willing to pay you. Define yourself as a creative consultant with strong convictions on what is right for your clients. Creative wimps get little respect and make little money.

Don’t jump through every hoop. Give clients 110 percent of the service they are paying for, including occasional extraordinary efforts. Otherwise, stick to your schedule and procedures. Only masochists and insecure designers acquiesce regularly to inappropriate requests. Draw the line on what’s doable and when.

Watch your accounting. Potential income can easily disappear when there’s no boss requiring you to fill out time sheets and expense records. Inadequate record keeping also causes similar jobs in the future to be estimated too low. If your hourly rate is appropriate and you’re still not making enough, this could be the problem. (Another is not having enough work, a marketing issue.)

Be neither too fast nor too slow. Sometimes an immediate response is necessary and appropriate (rush job, client schedules, etc.). But keep in mind that quick-turnaround concepts and executions, no matter how good, are seldom as valuable as those delivered after a lengthier period. You want to be faster than larger firms, but not so fast that your work appears less carefully thought-out, or that you’re not busy and prosperous.

Invest in positioning. Changing how clients perceive you is not that difficult nor expensive. All it takes is consistent promotion—a campaign focused on creating an impression among targeted clients of sophistication and success. Then, when you pitch a client, your size and pricing will either be immaterial or much less significant.

Get rid of any client misconceptions
Adopting the preceding will go a long way towards ensuring client acceptance of realistic pricing. Equally important, however, is getting rid of the misconceptions that affect freelance pricing. Sometimes these surface as direct questions, in which case they need to be addressed without hesitation or defensiveness. More likely, however, is that they are thoughts that need to be brought out in the open so they can be dealt with.

Note that each of the following responses raises the subject of pricing in a different, yet positive way.

Home office. You don’t have rent or expensive office furnishings. So why aren’t your prices much lower?

Actually, my prices are about (x percent) lower than what larger firms charge for work of my quality backed by my experience. But the location of my office, or any supplier’s facilities, is really irrelevant as long as the prices you pay are competitive and your service unaffected.

Working alone. You don’t have staffing expenses. Shouldn’t that make your prices lower?

It does. If I needed to cover payroll and benefits costs, my fees would be higher. Instead, I’ve opted to work alone and only with a few selected clients. This way I can provide them with better (creativity, personal service, response time, etc.) at below-market prices. When necessary, I do bring in people to help me out on an a-la-carte basis. But I avoid permanent staffing expenses.

Hourly rate. It can appear high, especially to an individual who is being paid a fraction of what you charge.

I wish I actually took home that much every hour. In truth, just like any other business, I have substantial overhead expenses, not the least of which are buying my own health insurance, paying business taxes, and constantly upgrading high-end computers and software. Then, too, remember that I don’t get paid for every hour. Only about 50 percent of my time is actually billable.

Chargeable time. It doesn’t look like the project took all that long. So why is your fee so high?

What you see represents only a fraction of the time that went into the project. I spent many other hours trying out various ideas and concepts. Preparing the final (art/copy) also involved a lot of labor-intensive polishing. And, of course, there was the time spent traveling to and attending meetings as well as making changes. It all adds up pretty fast.

Sell the advantage of your smallness
Finally, forget pricing. There are more important reasons clients should consider you over your larger competitors. Promote them.
Each client is more important. The smaller the creative organization and the higher the percentage of time each job takes up, the more valuable the client and job are. Further, the more that’s riding on satisfactory results, the more incentive there is to do whatever is called for to please a client. The greater the size differential between competitive organizations, the more relevant this advantage is to the smaller one.

With me, your job will never be just another in the queue. It represents very important business, and you can be assured I will treat it accordingly.

Nothing gets lost in translation. Talent is talent, regardless of the size of the organization. With a freelance or small organization there are no layers between the client and the person doing the work. And the person doing the work also has a direct financial stake in making sure the client is happy.

When you work with me there are no sales or account reps to filter and translate what you say. Also, I will not be handing your work off to a lower-level talent when I get back to the office. You’ll be communicating your needs and concerns directly to the person doing the work.

 

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These articles were condensed and specially adapted for AIGA members from more detailed material originally published in the Creative Business newsletter. They are copyright by Creative Business. Articles on other subjects and information on subscribing to the Creative Business newsletter can be found at www.creativebusiness.com.

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Publisher

AIGA Design:Business is published every 4 weeks, 13 times a year by AIGA (American Institute of Graphic Arts), 164 Fifth Avenue, New York, NY 10010, www.aiga.org. The editor is Richard Grefé, who is available at designbusiness@aiga.org. AIGA Design:Business is a benefit of membership and is not available to nonmembers. AIGA seeks articles for this publication from knowledgeable, respected and experienced authors whose opinions are deemed relevant to the business practices of design studios and sole proprietors. The opinions expressed by the authors are theirs alone and do not necessarily reflect the opinion or judgment of AIGA; further, they represent only one point of view and are not intended to be an exhaustive treatment. For further discussion of the issues with your colleagues and peers, please visit the AIGA Design Forum at www.aiga.org.

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