Episode 70: Learning from Pricing Failures

Entrepreneurship involves risk. The possibility of failure can never be erased from the equation. Among the many points of failure in business, there is one that hurts the most. The failure to accurately price our work, so that we end up taking a bath on our projects. When we underestimate our work, we are forced to either damage the client relationship by asking for more money, or—more commonly— we absorb those costs ourselves. The more we miss the mark on our pricing the greater this burden becomes. I don’t know a single creative entrepreneur that has avoided this failure entirely. But of all the lessons we must learn from failure, gaining the skill of accurate pricing may be the most important of all.

Podcast: Play in new window | Download

During the early stages of business development, as we engage prospects about their needs, the big question that both parties dance around is how much the work will cost. Delivering on creative services is not an exact science. Any project can present circumstances beyond your control that impact how long it may take to deliver. But unless you are able to cost out your work with some degree of accuracy, you risk real damage every time you take on a new project. If you don’t estimate well, you’ll face all manner of stress and failure.

So how can you get better at estimating and costing your work? There are some professional practices that can help. But the biggest lesson is not to waste your failures! You will get things wrong, and it will hurt. But when it happens take stock and don’t make the same mistake twice!

In order to avoid estimating failures you have to have some history with points of comparison to draw from. Unfortunately many creatives fail to gain estimating skills because they rarely do the same thing twice. If every project involves significantly different deliverables, wide ranges in scope, or unique problems you’ve never faced before—because you offer such a wide variety of creative services—then every estimate will be based on guess work. The only way to benefit from your past experiences, and past mistakes, is to perform similar projects over and over again. Most creatives are turned off by the idea of repeating similar work, and so they never gain realistic benchmarks of the costs involved in producing their work.

Another tool that you’ll need, in order to learn from past mistakes and gain proficiency in pricing, is an accurate data source. If you don’t consistently and accurately track your time, then even if you do perform similar projects, you’ll have to rely on your memory of how long things took. Your memory is usually faulty, and highly susceptible to the pressures you feel when you need new business in order to stay busy. If you fear not having enough work you’ll become desperate to close new projects—conveniently mis-remembering the true amount of time needed to do your work. That, or you may be so attracted to a creative opportunity, despite the fact that it doesn’t have a sufficient budget, that you’ll fudge on your numbers.

But if you do perform similar kinds of projects, over time you’ll build a valuable history of time data, and you’ll have the core tools needed to gain critical estimating skills.

Before we conclude this episode I want to stress that proper estimating skills are necessary for costing out your work. But your actual pricing does not need to be rigidly tied to your costs. You never want to price below your costs, but there’s no reason (if you use fixed-fee pricing—not billig strictly by the hour) that you can’t determine your actual costs, and then—based on the value of your work—add significant profit margins to your price.

If you never move to fixed-fees, then you will never be able to grow the value of your business beyond whatever margin you build into your hourly rate. And let’s be honest, even if you bill by the hour, there’s a limit to how much clients are going to pay. When you go over your original estimate clients will ask you to cap your billing. And then you lose even the margin you’ve built into your rate.

Fixed fee billing allows you to capture your costs and more, perhaps a lot more if you provide great value and insight. But fixed fees are risky too, if your estimating is way off. And so in either case, learning to calculate your costs accurately is an essential skill for becoming a successful creative entrepreneur.

Until next week: don’t let the business of creativity overwhelm your creative business.