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Hourly Rates vs. Fixed-Pricing

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Pricing freelance projects can be a confusing and even contentious topic. If you’ve been freelancing for any length of time, you’ve probably heard about various billing strategies such as hourly rates, weekly rates, fixed pricing, and even retainers.

You might have also noticed that many experienced freelancers and consultants strongly oppose hourly billing. Instead, they advocate for fixed pricing or value-based pricing. But which should you choose?

Is there really a right or wrong answer? Can your billing strategy change depending on your industry, experience, project, or client?

In this article, I’ll explain my perspective on various billing strategies and which ones have worked best for me over the years as a web designer and developer.

Two types of pricing strategies

The first thing to understand is that all types of freelancing pricing and billing strategies fall into two distinct categories:

  1. Time-Based: this includes hourly, daily, weekly, and monthly rates.
  2. Fixed: this includes project-based pricing and value-based pricing.

Retainers are a bit of an anomaly because they can fit either category depending on how you structure them. But ideally, retainers are recurring fixed-price invoices. The client should be paying upfront to retain your availability, even if they don’t need the time they’ve paid for.

In practice, this means you should send a retainer invoice at the beginning of the billing period for a certain number of hours or a specified output. This way, you get paid regardless of the actual hours worked.

If the client only pays for the actual hours you work (or the specified output) at the end of the billing period, that’s not a retainer. You’re simply billing hourly while also preventing yourself from taking on extra work with the unused hours.

For the sake of this article, we’ll focus our attention on hourly rates and fixed pricing.

When to use each pricing method

Before we move on, I want to share the TL;DR on when to use each pricing method.

Time-based billing is better suited for projects where the scope is unclear. If there are a lot of unknown factors that prevent you from determining an exact cost, it’s usually better to use time-based billing. However, it’s still best to stay away from hourly rates. Instead, use a larger interval like daily, or weekly rates to help prevent micromanagement.

Fixed-price billing is better suited for projects where the scope is clear. If you have all the information you need to accurately estimate the cost of the project, it’s better to use fixed-price billing. This usually will align more closely with the client’s expectations.

❌ Disadvantages of hourly rates

As I mentioned earlier, many experienced freelancers and consultants strongly oppose hourly rates — and there are some good reasons why:

Reverse-Incentives

The main downside to hourly rates is that they create a reverse incentive for you and the client. The faster you work, the less money you earn. The longer you work, the more money you earn.

This creates a situation where you’re incentivized to work as many hours as possible to earn the maximum amount of money. In direct opposition to this, the client wants the work done as quickly as possible and they want to pay the least amount of money.

Misaligned Expectations

To make matters worse, most freelancers create an estimate based on an hourly rate, then present that estimate to the client. The client misinterprets the estimate as a fixed project cost. The result is fundamentally misaligned expectations between you and the client.

It likely wasn’t your intent to charge a fixed rate or commit to that exact cost, even if things take longer than expected.

But the client has been misled to believe they’re agreeing to a fixed project cost. When you tell the client it will cost more money because the project is taking longer than expected, they push back at the unexpected increase, and the situation escalates with contention.

Pro Tip: If you want to charge more if the project takes longer than expected, then by the same logic, you should charge less if the project takes less time than expected. If you don’t like that idea, then simply commit to charging a fixed price for that project.

Freelancers don’t want to work faster to make less money and clients don’t want to pay more for you to do the job slower.

Subjectivity

Another problem with hourly rates is that they are subjective. Two freelancers may charge the same rate, but that doesn’t mean they have the same experience or will provide the same results. That makes it nearly impossible for clients to accurately evaluate freelancers based on their hourly rate.

That said, there are two general assumptions clients can make:

  • if you charge a low hourly rate, you’re likely inexperienced and will provide lower-quality work.
  • if you charge a high hourly rate, you’re likely experienced and will provide higher-quality work.

This obviously isn’t true in every instance, but it is the case broadly speaking — particularly within the same geographic region.

Clients who evaluate freelancers primarily based on their hourly rates are indicating that they aren’t prioritizing the quality of the work or the value it will provide to their business. While it’s perfectly normal for freelance clients to compare rates, collect quotes, and evaluate their options, over-indexing on a freelancer’s rate can be a sign they will be a difficult client to work with.

Misaligned Goals

Lastly, hourly rates don’t align well with the client’s goals. No freelance client wants to pay for your time (and this is true in all industries). They want to pay for what you can do with that time. In other words, what they really want to pay for is the final outcome.

That’s why hourly rates often add an unnecessary layer of confusion between freelancers and clients. If the client is only interested in the final outcome, they should also only be interested in the total cost. But when you start talking about hourly rates, the client starts to focus on the rate rather than the desired outcome.

✅ Advantages of hourly rates

For all their drawbacks, hourly rates have their place in the world of freelancing.

Accessibility & Familiarity

First, hourly rates are familiar and accessible. Many clients across various industries are familiar with hourly rates. You might find it challenging to propose a fixed price with certain types of projects and clients.

Hourly rates are also an easy way to start charging for your work if you don’t have much experience pricing projects. You pick an hourly rate, multiply it by the number of hours you expect to work, and you’re done. While this can be a bit subjective at first, it’s easy to gradually increase your rate over time and forecast your projected income.

Scope of Work

Lastly, hourly rates are ideal for projects where the scope of work is unclear. For example, maybe you understand what the final outcome should be, but it’s not exactly clear how long it will take or what unknown factors you’ll uncover after starting work.

Time-based billing is a pricing strategy that will help you avoid undercharging for the work. However, you must ensure to communicate this clearly with the client and set proper expectations.

Rather than presenting a fixed price or total cost for the project, present a daily or weekly rate along with a minimum number of days or weeks. Make it clear to the client that if the work takes more time, they will be billed for each additional day or week.

When expert freelancers and consultants oppose hourly rates, I think they oppose the small unit of measurement — not time-based billing as a concept. Daily rates, weekly rates, or even monthly rates are almost always more effective billing intervals and help prevent the client from micromanaging you.

❌ Disadvantages of fixed pricing

There are very few disadvantages to charging a fixed price for a freelance project. However, you do risk charging too much or too little if you estimate this cost incorrectly.

Charge too little and the project may not be profitable for your business. Charge too much and you’ll risk not getting the project in the first place. The key to fixed pricing is accuracy and commitment, which are both skills you can improve over time.

If you do undercharge for the work, honor your commitment and take it as a learning lesson. If you charge too much and still get the project — well, maybe you didn’t charge too much after all!

✅ Advantages of Fixed Pricing

In many ways, fixed pricing is the best way to charge for any freelance project. As previously mentioned, fixed pricing more effectively aligns expectations between you and the client. Once the contract and proposal are signed, both parties can focus on the outcome, results, and impact of the project rather than tracking hours.

But fixed pricing is still ultimately rooted in time, right? You still need to establish a final cost by estimating how long the work will take and multiplying those hours, days, or weeks by a rate. All you’ve really done is changed the packaging and presentation.

Your time is finite and there is an upper limit to hourly rates (maybe around $200/hr in much of the U.S.). Beyond that, you’ll have a hard time justifying your pricing. That means eventually you won’t be able to raise your rates anymore without a new way to justify the premium cost to your clients.

Value-Based Pricing

Where fixed pricing really shines is when it’s based on the value of the work. This strategy is known as value-based pricing and it removes the upper limit typically imposed by fixed pricing.

In other words, value-based pricing is simply fixed pricing where the rationale for the cost is driven by the value the work will provide to the client’s business and has little or nothing to do with the amount of time it will take you to do the work.

The classic example is logo design. Let’s say a huge client wants you to create a logo that will be seen by millions of people. You charge an hourly rate of $200/hr, but have a stroke of brilliance and get the work done in 10 hours. The logo costs the client $2,000, which is incredibly low. Your work will help them earn hundreds of thousands or even millions of dollars.

However, if you had based the cost on the value of the work, the project fee might have been $200,000 — and the amount of time the design took would be irrelevant. You’d get paid the same whether it took you 10 hours or 1,000 hours.

What Most Experts Don’t Tell You

Value-based pricing requires having sophisticated business and financial discussions with the client to determine how much potential financial value your work can add to the client’s business.

The value of the project isn’t something freelance clients have readily available. You have to be comfortable talking about money and you have to ask strategic business questions to help the client determine the value. It requires helping them develop a perspective they may not have previously considered.

This simply isn’t something most new or inexperienced freelancers can do effectively.

This also isn’t a strategy that works well for every type of project. If you are a content creator who wants to write a blog post, you likely won’t be able to have a discussion about how much value the post will add to the client’s business.

Instead, an hourly rate, daily rate, or fixed price might be more appropriate.

Value-Anchoring

There are two ways you can adapt the value-based pricing strategy as you gain more confidence and experience.

  1. Charge a fixed price based on time (hours x rate). If needed, you can modify this number or pad the hours to make sure you don’t charge too little. You can base this on the scope of work and nothing more. At the same time, try to ask strategic questions to learn as much about the client’s business as possible.
  2. Anchor your price against the financial upside. In other words, maybe you do charge hourly or a fixed price based on a scope of work, but you still ask strategic questions in an effort to understand how helpful and valuable this project will be for the client. If you can even vaguely estimate this, you can anchor your price against that financial upside. This strategy is called value-based anchoring and it’s essentially just fixed-pricing with an added layer of intention.

With both of these alternatives, you afford yourself an opportunity to practice asking business and financial questions without needing to base your entire project cost on what you learned about the client’s business.

Once you get more comfortable having these discussions, you can graduate to true value-based pricing.

Can you use more than one pricing strategy?

Yes! You should absolutely feel free to use different billing strategies for different types of clients and projects.

Over the course of my web design and development career, I’ve used a variety of pricing strategies depending on the client and the project:

  • Hourly Rates: To this day, I still maintain an hourly rate of $150 so I can lean on this as needed. I still find it helpful even if I present the client with a fixed cost or use value-based or value-anchored pricing. If I get work as a subcontractor, hourly rates also come in handy.
  • Fixed Pricing: Almost all of my larger projects have been presented as a fixed price. Sometimes the cost is value-based and sometimes it’s value-anchored, but I always commit to the fixed price regardless of the time I spend working on the project. I consider this a guarantee to my clients to put them at ease.
  • Retainers: I use monthly retainers for large, long-term projects where it’s impossible to accurately determine the scope of work upfront. I also use retainers for ongoing commitments where the client needs work done each week or month.

I started out using hourly rates, but presenting the project as a fixed cost (oops). I slowly increased my hourly rate and eventually started experimenting with fixed pricing. As I gained more experience, I stopped creating hourly estimates and started using ballpark figures based on the number of days or weeks I anticipated working on the project.

Eventually, I started experimenting with value-based and value-anchored pricing, which have worked rather well over the years.

Summary

When it comes to hourly rates vs fixed pricing, there really isn’t a right or wrong answer. But generally speaking, time-based billing works best when the scope isn’t clear or can’t be well-defined upfront. Fixed pricing works best when the scope of work is clean and well-defined upfront.

If you currently charge by the hour, try graduating to daily rates or fixed pricing instead. This will help shift the client’s attention away from micromanaging you and your time. Instead, you and the client will be able to focus your energy on the goals and outcomes, which will make for a better portfolio and better testimonials.

About Matt Olpinski
I've been freelancing since 2009 and have worked with over 100+ clients including some of the biggest brands in the world. I later started my own company Matthew’s Design Co. and now teaches 50,000+ freelancers each year how to succeed through his personal blog, newsletter, and community for freelancers.