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The lost art of Pricing and Negotiating

Disclaimer: I am in no position to offer you financial advice. I am not a financial advisor. What I want to do, is share my personal experiences on freelancing for a living. This blog is tailored to suit freelancers, so if you’re in a different situation—applying for a full time job, for example—the techniques implemented should be different. That being said, it doesn’t mean that you can’t take away something from this article: useful techniques to tip the scale in your favour.

Negotiating? No, it’s insulting!

Negotiating has gained a bad connotation throughout the years, especially in western cultures. We are ashamed of negotiating and we feel that it cheapens us and insults the person we’re negotiating with. This doesn’t happen in eastern cultures, where negotiation is synonymous to transaction.

As far back as I can remember my father—I come from a poor, communist era, family—always used to negotiate the initial price of a product. At the local food market if apples used to cost $0.45 per kilo, he would say “I’ll give you $0.30 per kilo”. If the salesperson denied, he would implement techniques like arguing that a week earlier the price was $0.30 or say stuff like “the guy at the market entrance was selling them for $0.30”. When electronics came around, he didn’t do so much “price beating” because the prices were fixed by the store, but he would go around asking for any offers and special discounts they might have.

Throughout the years, my freelancing experience has taught me to identify patterns of this business. In freelancing, it sort of goes like this:

The client sends me an email saying that they saw my work on my website—or on Dribbble, lately—and they liked it. They explain what they want and describe their project and ask if I’m available. If I am, I say “yes” and they respond with more details, ideas for the design, and finally asking me my hourly rates or project cost estimations. What usually goes through the mind of the designer/developer: “Oh oh, Here comes the money talk!. Let’s get this over with quick…”.

Wrong!

I used to do that in my early stages: avoid the money talk. Now, I name the price beforehand—continue reading to learn why—from my first reply to the initial email. Something like:

“Sounds great! I usually charge $150 per hour for development, can you afford me?”

I will go into per hour VS per project pay later.

I know—I shouldn’t be talking money first, and I should’ve waited to see if the project is a good fit. I usually can tell if I’m going to like the project and company/person. In other words: I would have done my research before replying.

Conventional wisdom

Every marketer, financial advisor, blog, website, etc., and conventional wisdom will tell you to avoid being the first to name a price. Because in doing so, you could be leaving money on the table.

Example: say a big company has setup a budget of $40,000 to get their website developed. They ask you to name how much you would need to develop everything (quote). If you name your price first, out of the blue and with your little experience, and you say $20,000, you will be leaving $20,000 on the table, “cutting” your pay in half of what you could be earning.

Instead, they say that you should be making the other party name a price first. And so it begins, the cat/mouse race:

“So, how much would you need to create our website?” “I don’t know exactly, what’s your budget?” “We don’t have a fixed budget yet; what’s your hourly rate?” “It depends on the complexity of the project. You must have a budget. What’s the maximum amount of $ you setup for creating this website?” “We don’t know yet, we’re waiting from you to tell us an estimate and we’ll check with our financial dept.”

and so on… Until someone, usually the freelancer, gives in and names a price/quote.

My method

I decided to skip all the fluff, save myself the headaches, and avoid wasting my time and the client’s time by going against conventional wisdom: name the price first.

If you don’t have enough experience, nailing the price will be hard at first. Let me give you some indicators that could help you. If after naming your price, the client goes something like:

“Great, let’s start now!”

you priced too low. You left money on the table. Note it down—all the factors: like the company’s type (NGO, Government organisation, startup), the company’s size, the type of project (design, UI, UX, back-end development)—and next time you find yourself in a similar situation, add 30% to your initial price. Keep doing that until you reach the next scenario. If the client goes something like:

“Sounds good but it’s a bit high for us. We will have to lower it down by $5,000”

means you’re somewhere close for them and their budget. Although, most of them will just want the very best deal they can possibly squeeze. Most likely they will receive a pat on the back for hiring you with less money, or maybe they’ll get a free restaurant meal from their manager and you will end up $5,000 “poorer”. This is where your negotiation skills kick in.

Lastly, if the client goes something like:

“Insane. You are way above our budget. Thanks very much, we’ll be in touch…”

or they don’t even respond, you guessed it; you priced too high!

In order to avoid attracting clients who can’t afford me, I wrote two paragraphs (Update: I removed them when I redesigned this site) on my homepage to let people know I won’t do cheap work. I also added a state your budget button to my contact form (although not mandatory to complete). This worked! It scared away 90% of the potential clients who couldn’t afford me and it cleared my email inbox.

In order to develop your estimation skill, without getting burned and still nailing projects to pay the bills, there are a couple of things you can do. But first, I want to talk about pricing by the hour VS by the project.

Pricing: by the hour VS by the project

When you’re inexperienced, you have no idea how much time it will take you to complete a project. After you’ve completed enough projects, covering a vast area of fields (portfolio websites, e-commerce, web apps), you can estimate more accurately how many hours it will take you to complete a project and price accordingly. It’s up to you then if you want to charge by the hour or by the project. There is a major pitfail in charging hourly, described very well by Jessica Hische:

Say you have two designers that charge $100 per hour but one designer works much faster than the other. Both are equally talented, but one is far more efficient. At the end of the job, the designers turn in their invoices — he worked on it for a total of 18 hours and she a total of 7 hours. He is paid a respectable fee of $1800 and she $700 for producing the same result.

I’m pretty efficient and I prefer to charge by the hour but in case the client wants to do by the project, “we have a budget of X for this”, I can give an estimate for the total cost. In the back of my mind I still gauge things hourly though. But sometimes I get stuck, the creative juices stop flowing or I get distracted with other issues. It happens even to the best of us. In that situation, I make a mental note that for example my two hours today were not actually two “full” hours. So, I put in more work outside the schedule (either that day, in the weekends or in the near future). It’s all about getting to know yourself and how efficient you are.

Tools of the trade

If you’re pricing by the hour be prepaired to show your employer/client where every minute of you working went in their project. A good way of doing that is to use time tracking software. There are many tools out there; I use Toggl for that. All you have to do is type-in the part of the project you’re currently working on and start the timer. Save the progress once you are done and mark that time as billable. Another popular tool I use daily is Basecamp. This tool allows you to collaborate with others, share files and track time. Dropbox is another tool I use daily and has honestly simplified my life! Lastly, a very useful tool I use for invoicing my clients is Freshbooks. I honestly cannot overstate how much I love these products!

Knowing what to charge

Prepare before the battle! First, you should do your research on Salary.com (and other websites) to find out how much others are making in your field. This should give you a rough estimation on how much you should be charging.

Next, you should research the company/person and find out as much as you can about them. For example if you found out that the person who’s looking for a photography portfolio website hasn’t made a buck from photography and they work at Starbucks I will honestly tell them to setup a free website/blog get some followers and sales and tell them come back in the future, to build them a custom professional website. There’s no point diving into deep waters when you don’t even know how to swim yet.

Third, you should gauge their interest. Are they interested in you (if yes, how badly do they want you?) or is this a copy/paste job offer email, ultimately competing against 1000 other designers/developers for the same spot? If they like you and must have you on board, you can tip the pricing scale in your favour.

Fourth, have a positive, assertive attitude (not cocky). Quote respectable prices, because you’ll be doing us all in the industry a disservice by pricing too low. Remember that you are talented and that you have value—you should probably consult a therapist if you have low self-esteem issues. There are enough companies out there (PSD2XHTML to name one) that cripple us by pricing low (they profit by getting a ton of orders and completing projects fast) and automating the process of developing a website. There’s no need for new designers/developers to shoot themselves, and like a domino us, in the foot.

Nowadays, I’m working on many things and when I’m unable to take any more projects on board, I don’t reject them. I simply quote high prices to “scare” the client off. But even when my schedule wasn’t/won’t be full, I still wouldn’t/won’t take projects that pay ridiculously low (except from when I entered this industry; one has to start from somewhere). You know what I do instead? Work on personal projects (more on that below)!

The Art of Negotiating

Many studies have shown that the first offer has a strong psychological pull and the resulting agreement tends to be won by the person who proposed the first offer. I use that in my favour and quote first the price. Check out this scenario:

“Thanks for contacting me. For the job you want me to do I charge $90 per hour” “Umm, it’s a little high, how about $45?” (from the previous emails I deducted that they liked me, so I play hard-ball) ”Look, you told me you liked my designs and that you want something minimal and simple. I can do that, as you can see from my portfolio. So, let’s make it fair for the both of us: $80 is a good rate” “Yeah we do like your designs, but how does $50 sound?” “Playing it hard, are you?”

Somehow, calling their bluff will make them give in; though be careful how you phrase it: it can kick back and they could take it as an insult. So I continue:

“Listen, $75 is my final offer and we can start immediately”

or include another small bonus. Or you can leave the bluff-calling out, and say something like:

“Let’s keep it $80 (or $70 if you want to show some sympathy), see how it goes. We can re-negotiate the terms of the contract in the future”

The idea is that you should have a personality—be careful to not become annoying—and be willing to drop their offer if it sounds ridiculous. You should give the impression that you are busy. Hell, you should be busy! You don’t have clients or commercial projects to work on because you haven’t developed your portfolio or skills yet? Great! Get a 9-5 job for six months to pay the rent and work on personal projects two hours per weekday and in the weekends five hours totalling 20 hours per week. Following this schedule, you should get your skills up in no time. Quit your boring job once you lock-in a few awesome projects and start working on the things you love.

A note on personal projects: Aside from being fun, many clients have contacted me because of the cool personal projects I did (like the Twitter CSS button). Personal projects are also important to you, and your well-being—they create the feeling of doing something purposeful. Google, Microsoft and other large companies have figured it out. They saw that their employees were more happy and productive when they had a small side project going on. So, nowadays they encourage employees to devote 20% of their time to self-initiated projects.

Lastly, you cannot publish many commercial projects in your portfolio, at least in the web/design industry, because of the killer NDA (Non Disclosure Agreement) you have to sign. An NDA is a contract signed by both parties agreeing not to disclose information covered by the agreement (such as: copyright, trade secret, and other proprietary information, techniques, sketches, mock-ups, wireframes, drawings, models, inventions, know-how, processes, etc.). So, the only way you can show-off your skills and progress is by posting personal projects: designs, web apps, plugins, open-source, code snippets, etc.

When negotiating a salary or a payment, try to make them see your real self—the one your grandma would be proud of—and why you stand out from the rest. Outlandish stories stick in the memory of your employer/client. For example if you backpacked through Europe for eight months, don’t be ashamed and ommit to mention it! Here’s a scenario for a job position as customer service assistant (via phone) at an International e-commerce company:

“Sorry, but we can only go as high as $55,000 p.a. (per annum)”

Without even acknowledging it:

“Let me tell you something: when I backpacked through Europe for eight months, as you can see from my big gap in my résumé, it was insane! I learned how to find my way through countries where they don’t even speak English! I had to deal with my flight cancellations and rebookings via the phone several times. That one time, I was at Charles de Gaulle and because my flight was delayed I would miss my 15:00 o’clock train from Amsterdam Centraal so I had to call…”

Don’t make the story too long and get to the point: what you’ve learned from that experience:

“This experience has taught me to always put myself in the caller’s shoes and be patient, understand their problem and try not to insult them. It’s not who they are; it’s the circumstances that has transformed them and now they’re angry. That’s what makes me unique and why I believe I’m best suited for this job and this pay rate. No one can fill the spot and help your company minimise complaints better than me”.

Make them remember you. If they still decide to go with a lower salary from the one you wanted, implement the technique described in the “negotiating a raise” section below.

When negotiating, never disclose your previous salary. Tell them that it’s confidential or that your employer requested you to keep it private. Moreover, make a statement explaining that you have more experience, you improved your skills, and in general you are better qualified now, than when you started working for X in 2004.

Negotiating a raise

The same thing applies if you’re looking for a raise. Ask them:

“I’ve been with you for six months and things have been going very well. How about we raise my salary to $80,000 per year?”

If they say: “Yes, here you go!”, then awesome! Give yourself a pat on the back. If they decline, ask them what it would take for them to raise your salary up to that point. Note the points down and make sure they’re quantifiable. For example: produce 30% of entire coding for the new web app in four months or for each new feature, provide more design sketches and draft ideas.

Finally, try to help them out and guide them:

“Thanks, it’s in my best interest to help your company grow and become more effective” (make it about them). “In order to do that, in six months I will get 80% of the coding done for the X feature. If and only if I do an awesome job, would you be willing to have this discussion again?”

Working from home

Another popular situation people try to escape from, is the 9-5; You break that pattern by working from home on your own terms. Again, the same techniques apply in this situation as well. To improve the odds, you can start by working a few hours from home—on the same project you’re working at your job—and measure the results of this experiment. Then you can schedule a meeting with your boss:

“I want to propose an experiment. The previous week I worked on my own time from home, for one hour on the X project and delivered 20% more code with 10% less errors…” (give them stats and quantifiable results)

“What it means is that I’m more productive from home. Thus, we produce faster results and your company is more efficient” (make it about them). “Basically, you get more bang for your buck! Would you be willing to test working from home for the next week and see how it compares to coming to work? We can totally return back to where we left if things don’t work out; there’s no pressure or strings attached”

Tim Ferriss writes excellently about this in his book 4-Hour-Workweek.

Conclusion

I could go on forever, but I have to stop somewhere. At 3,000+ words, I doubt anyone will read this article from start to finish. If you did, I want to hear from you: what are your experiences? what would you add to improve this article? If you didn’t read it entirely, and read only this conclusion, I still want to hear from you: what made you stop, apart from your laziness/lack of time, and how do you think I could improve this article? Contact me on Twitter.

Useful links

Negotiations.com (very good resource on negotiations and techniques I didn’t discuss in my article) Jessica Hische Tim Ferriss Ramit Sethi 21 Times for a freelancer to say no 1000 True Fans (not exactly about pricing or negotiating but what it takes to make it)

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