Overview
How you decide to cost and price your services can have a big impact on the success of your business. Pricing a service too low can have negative connotations on its perceived quality and low revenue may mean that you won’t be in business for very long. Pricing it too high could mean that customers can’t afford to buy from you and will go to your competitors instead.

The difference between costing versus pricing your work is your expenditure versus your income.

Costing and pricing services
Before proceeding further it is helpful to first distinguish the difference between a product and a service:

• A product is a tangible object that is produced and that a client can buy and own
• A service is ‘to give assistance to’, and is focused around people’s skills and knowledge

There are major differences between costing and pricing your services compared to products. These relate mainly to the fact that that a service is intangible and the client can never be 100% sure of what they will receive for their money. Purchasing is therefore perceived as a higher risk.

Great consideration is given to who is providing the service, their personality and attitude, as people buy people rather than just their services. Customers are likely to have been influenced through personal recommendation and word of mouth, so it is important to build your profile and network effectively. Price consideration and comparison is therefore far less important for clients when buying services.

Graphic design, illustration, photography, the performing arts, web design and copywriting are some of the sectors that often provide services rather than products.

What are services?

• Intangible: cannot be sampled, tasted or touched; customers are not sure what they will receive
• Inseparable: only exists when the customer experiences/consumes them; production, selling and consumption happen at the same time ie a theatre show only exists when it is happening
• Heterogeneous: the standard of service varies each time depending on who provides it
• Perishable: cannot be stored or used later
• No ownership: service purchase gives the right to use the facility, but it does not transfer ownership

Costing services
Every new project for every client should be costed separately. Develop a clear project brief that explains what you are going to do. Include a separate quote, which explains what exactly is expected, the delivery schedule and related costs. This ensures clear communication, which improves the working relationship with your clients and is part of managing expectations on both sides.

Plan carefully how you will execute the project. Predict your time spent on meetings, producing the work or dealing with subcontractors. If you have kept time records on past projects you should have a realistic overview of how long a comparative project should cost you in time. Add on 10-15% just in case and give a total figure rather than an hourly rate.

Predict your costs for materials, transport, insurance, subcontractors etc. Add all these costs up and again have a 10-15% contingency.

Research any manufacturing or subcontracting costs before committing and get their quotes and lead times in writing too. Check they available and can work to your timescales. Subcontractors might quote excluding VAT and if you are not VAT registered you will have to add this on (17.5%).

Calculating your hourly rate
Calculate your overheads:

• Make a list of your annual overheads and calculate your weekly overheads by dividing the total annual overhead costs by the numbers of weeks you work in a year ie £6,000/48 = £125.00 (this takes into account four weeks to cover holiday and sickness)
• The number of hours spent each week on undertaking paid work (so do not include marketing, bookkeeping etc) Keeping a timesheet for six weeks can help if you do not know ie 24 hours spent on paid work per week
• Calculate your hourly rate by dividing your weekly overheads by your weekly worked hours ie £125/24 = £5.21
• If you work with employees this calculation is as follows: £120,000/48×5 = £500/15 = £33.33

Calculate your living costs:
To work out your weekly living costs (what you need to earn at least in order to live):

• Make a list of your annual personal living expenses (incl. holidays, rent, food, clothing, transport) and calculate your weekly living costs by dividing the total annual personal living costs by the numbers of weeks you work in a year ie£12,000/48 = £250.00
• For an hourly rate that covers your weekly living costs of £250.00, divide the weekly total by the number of hours spent making objects ie £250/24 = £10.42
• If you are not a sole trader then use your total annual fixed costs or overheads instead of personal living expenses

The last steps:

• To calculate your total hourly rate: add the living hourly rate to the overheads hourly rate ie £10.42+£5.21 = £15.63. This is the absolute minimum that you need to earn every hour that you are undertaking paid work to make a living
• Add in the profit margin, a freelancer’s profit margin can range from 15-40%, with 20% being considered fair in most markets
• Add all these together and you will have your hourly rate: £10.42 + £5.21 x 20% = £18.76

How to set your price
Price setting can be done in three ways:

• By cost: based on the cost of producing your service plus profit margin
• By competition: what is the going rate?
• By demand: what your customer is willing to pay for your service

The most important consideration is how much does the customer value your service and what are they willing to pay for it?

In principal you can compete on two things: price or quality. However, it is very difficult to compete on price alone in the creative sector, as sales of services and luxury goods are less influenced by the price than by the quality of your work and how you do business.

Lower prices will NOT automatically mean that you will sell more, it will show that you don’t know the going rate or people might think your services are not very good!

What if this price is not competitive?
If you have done your competitor research and these prices are unrealistic, the following should be considered:

• What impact has this price got on your profit?
• Can you work more effectively and efficiently, by developing your admin or production systems?
• Can you decrease your overheads or living costs?
• Are there other potential income streams that could cover your overheads or living costs?
• Can you focus on a niche market that would be willing to pay more?
• Can you add value without adding cost, as in offering a faster turnaround time? For it to have a positive impact it is important that the customer values it

Factors that can affect your pricing strategy
In order to be able to set the optimum price for your service, you ideally want to the find the largest number of customers who will pay the biggest profit margin.

Competitor research
Research what your competitors are asking; check their website, visit retail outlets or trade fairs and undertake mystery shopping. Some trade organisations also give an indication of fee levels on their website.

Own experience
Knowing the market and your own worth is the number one indication. Also if you are selling a service and your clients accept the fee price straightaway you are probably too cheap.

Profile
The higher your profile, experience and brand recognition, the more you can charge.

Objectives
Are your objectives to make a living, become rich or to be non-profit.

Client dependent
If you really want to work with this client you might go lower in price, if you expect it to be a difficult project or a slower payer, then you might want to increase your price.

Expect negotiation
Add 10% to your price so that you can give a discount or negotiate down as trade or services clients might expect this.

Turnaround
The client gives a price that they are willing to pay, and you let them know what you can do for that fee.

Job satisfaction
For creative people to be satisfied, new projects and clients need to offer them creativity, money or profile. Earning money without creativity and profile can quickly lead to boredom and frustration. However, you won’t be able to survive financially on creativity and profile alone. Ideally you should find a balance between projects and clients that can provide you with all these criteria.

Changing your price
It is easier to reduce prices than to increase them, however low prices may attract unprofitable customers and be perceived as inferior quality. However, if you want to decrease or increase your prices you could;

• Introduce new services at the new price level and gradually phase out older, cheaper services by improving the specification and raising the price
• Sell existing services to different markets that will accept the new price level
• Add 3% to your prices annually to cover inflation

Checking your prices

• Review your prices regularly to ensure that they are optimal
• Keep up-to-date with the going market rate
• What are customer’s perceptions of the value of your service?
• Keep track of the relationship between your prices and turnover, and between prices and costs
• If clients always agree immediately to your fees, it is a good indication that you are probably underselling yourself

Financial proposal/quote for design services

For each new project a financial proposal or quote should be produced and include:

• A design brief and terms and conditions with your proposal
• A request to the client to sign off each stage and for you to invoice them separately for each stage
• An explanation of each stage of the project
• What the client will receive at the end of each stage and the final outcomes
• How long each stage will take
• How much each stage will cost
• How any unforeseen circumstances - such as extra amends - will be charged for
• Include how long this quote is valid for

Ultimately, good communication between you and the client will avoid problems and late or non-payments.

Further information

Equity - the theatre and musicians union (includes daily rate information)
Association of Illustrators
Design Trust Handbook

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