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Job costing vs pricing

In the dmzine surveys, one of the most often quoted issues is job costing. In this article we look at a way to think about job costing and job pricing.

Apart from getting the design right, getting the costing and pricing right are probably the most important parts of running a design studio. So, let’s start by defining what we mean by job costing and job pricing.

Job costing is the thing you do when you work out what the job will cost in terms of hours and resources. You look at the cost of running the studio and then you arrive at an hourly rate. This just covers operating costs and so you need to add a profit margin (at least 15%) to get to your true cost rate.

Job pricing is what you do when you look at the cost of the job and add a figure for the value-add that you are giving the client.

Jobs should not be quoted on the job costing model.

Take an example where you are working in an industry that you know very well. You quote on costing (plus a profit margin) based on the hours you think it will take. Another designer with less knowledge of the industry quotes the same way, but they have to allow many more hours for research because they have to get up to speed on the industry. In this case you should be adding in a $ figure to take account for you pre-existing knowledge. That’s getting paid for the added knowledge you bring to the job.

However, it is still selling hours instead of value.

Job costing is easy, job pricing is a dark art

Job costing is simple as long as you get the maths right, include all of the costs, ensure you have control of productivity and understand how many billable hours you can expect from a designer.

Job pricing has an almost infinite range of factors to consider. Each client throws up a different set of factors. Consider the difference in costing for a website for a business consultant who just needs a billboard in the ether that he can direct potential clients to, with an online merchant who is selling imported products that have a 400% markup. The risks for each client are different, as are the rewards. The business consultant does not rely on the site for his income while the merchant does and that means he is taking a greater risk (for a greater reward). How do you calculate the value of your design to each of them?

The client viewpoint

One way of looking at it is to take the client’s view. The online merchant has a lot at stake and will be concerned about the design, functionality, ecommerce integration, SEO and SEM. The consultant’s major concern will be that the design represents him correctly when he directs people to his site.

The merchant is going to need a lot more hand holding and convincing that the site will perform. This moves the job to a higher level of consultancy and should result in a higher level of fees. Immediately this shows up in the costing of the job and will automatically lead to higher pricing.

How do you set prices?

In the Job pricing E-course I propose a ‘premium’ pricing approach. I think there should be a fair trade in risk and reward when designing for a client. Clients accept this principle with insurance premiums where they pay a fee based on the risk that they pose to the insurer. The higher the risk the higher the premium.

This would seem to be a very good way to explain it to the client.

Begin by establishing what the risk is for the client. In the example above the online merchant will have projected minimum and maximum sales for the year. By exploring these you are able to determine the risk value to the client. The value of the design should be seen as alleviating the risk by ensuring that the sales reach the maximum.

Does that mean you take a share of the risk?

Maybe. This could be one way of selling design value by getting a cut of the profits. Given you will have access to the ecommerce functions you will be able to see the sales and know if they have hit their targets.

You could set a ‘premium’ of 10% of sales above the minimum sales, to be paid on an annual basis as your value add payment.

If you don’t want to share the risk you could calculate what the difference between the minimum and maximum sales would be over a 5 year period and quote for 5% of that as the premium.

Of course this relies on you having a very open working relationship with the client. If the client isn’t open and does not want to give out sales projections you would need to do some projections based on industry data. Dun and Bradstreet or IBISWORLD have such information.

If you want to get a grip on Job pricing it's detailed in The business of design and in the Job pricing E-course

 

Greg Branson

Greg’s passion is the research and development of methods that improve design management and the role of design in business.

Greg has developed a series of business tools to help designers manage their business better along with a series of workshops that show designers how to use these tools.