Project Pricing, Costs, and Profit Margin: A Guide for New Founders

If you’re a new founder, you’re probably trying to acquire tons of new knowledge about different areas of your business all at once. I’ve been there, and it can be both fulfilling and confusing.

As a team leader, you’ll never stop learning. But there’s something you’ll be grateful to learn early.

In this post, I’ll share everything I know about how to estimate the budget for a project and how to price it right.

We’ll explore:

• Why project pricing is a challenge
• What is project cost estimating
• How to estimate the cost of a project
• How to price a project (beyond costs)
• How service productization saves the day

Throughout this post, I’ll combine some traditional knowledge with my first-hand experience as a marketing agency founder.

Ready? Let’s get started!

The Challenges of Project Pricing

If you struggle with pricing your projects, you’re not alone, especially if you’re transitioning from freelancing to running a team.

In mid-2020, my freelance practice scaled so much that I had to hire people to help me. Back then, when a client reached out and asked me for a project budget, I’d do a simple calculation in my head:

“I charge $XX an hour. This gig will probably take me X hours, so that’d be $XXX.”

This approach to pricing was pretty flawed for a freelancer. Even more so, it would have been a death sentence for an agency.

There were some key costs I wasn’t considering, such as:

• Software & resources
• Strategy – the amount of time I’d spend understanding my client’s needs and exploring the best ways to address them

Additionally, like most freelancers, I wasn’t estimating a profit margin, i.e., how much money I’d have left after paying myself.

Generally, freelancers and new service business owners struggle with pricing because:

• There aren’t any “reference prices”
• Self-confidence is in the mix
• It can be hard to assess a project’s scope in advance

Let’s dive into each of these challenges.

1. Reference Prices

A “reference price” is the average price buyers are willing to pay for a product. Typically, this “reference price” is informed by the buyers’ previous experiences.

Reference prices help both buyers and sellers to:

• have some price predictability
• assess if something is competitively priced

A lack of reference prices is particularly widespread in countries experiencing inflation. But it can also be a consequence of working in a global marketplace, where people with different costs of living are competing for the same pool of clients.

A 1000-word blog post can cost you anywhere from $25 to $4,000. The $4,000 blog post will probably be better than the $25 alternative. But will it be significantly better than a $400 post?

What if one of the sellers is in an area with a low cost of living? Should they charge the same as someone living in New York or London?

All these questions make it harder to estimate a project’s pricing. 

2. Self-Confidence Affects How You Price Your Projects

Back when I was getting started, the reason why I wasn’t charging for strategy wasn’t that I didn’t know it was possible. I did, but I wasn’t sure a client would pay for it.

This may sound like magical thinking, but you’re probably getting outcompeted by people with the same skillset who simply trust themselves more.

There’s no shortcut to becoming confident, and it implies a lot of personal work. But, as you grow and add new success stories to your portfolio, don’t hesitate to raise your prices.

Surely, there will be hard proof backing up the quality of your work. Eventually, you’ll start charging for your entire process, not just execution.

3. Scope

When developing a budget, most new freelancers and agency owners don’t define the project scope clearly enough, leading to “scope creep.”

Scope creep is what happens when unpaid work sneaks into the project because “it’s necessary” or “it should be included.”

A typical example of scope creep would be a client trying to force an agency to add a set of social media pieces to their logo design project for free.

As we’ll discuss when comparing hourly pricing vs. project-based pricing, some pricing methods are better at preventing scope creep than others.

Estimating Your Costs

Now that we’ve covered these common challenges let’s start working on your project pricing.

In the following sections, I’ll share:

• What project cost estimating is, and why it isn’t enough
• How to estimate the cost of a project

Let’s go!

1. What Project Cost Estimating Is and Why It Isn’t Enough

You probably already know what project cost estimating is. But, just so we’re on the same page, let’s define it.

Project cost estimating assesses how much it will cost to complete a client project. Having said this, it shouldn’t be the same as your final pricing.

Your costs are the baseline for a project’s price. For instance, if it costs $6,000 to complete a project, you shouldn’t be charging under $6,000. Otherwise, you’d be losing money.

Also, you shouldn’t charge anywhere near $6,000. Why?

Let’s assume one of your team members gets sick, and you have to hire external help to cover for them. The partnership won’t be profitable if that type of change occurs.

Besides, if you want your company to grow and remain competitive, you’ll probably need to reinvest in training, marketing, new software, and more.

So, on top of your costs, you’ll have your profit margin.

Your profit margin will:

• Determine how much your company will get for completing a project
• Ensure that you can handle emergencies and surprise costs
• Ensure that you can reinvest and continue to attract new customers

We’ll take a closer look into profit margins when discussing how to price a project.

2. How to Estimate the Cost of a Project

The exact way to estimate the cost of a project will depend on the following:

• Your industry and niche
• Your team’s structure
• Your company’s resources

But generally, it’s about asking a few questions. And most of these questions have to do with time. When approaching a new project, ask yourself:

1. How long will it take us to complete this project in terms of hours, days, and weeks?
2. How many team members will this project require?
3. Who should be involved?
4. How much do we pay them per hour?
5. What tools will these team members need to do their best work?
6. How much do these tools cost? How should we include them?
7. Who will manage this project?
8. How much do we pay this manager per hour?

With these questions, we’re covering:

• Hourly team costs
• Software costs
• Overhead expenses

3. How to Add Software Costs to Your Project Pricing

There’s no surefire way to include software costs in your project pricing. But make sure to include them.

Depending on your industry, your main expense may be software. For instance, employing industry-specific software is extremely common among freelancers and SEO experts, who usually spend hundreds of dollars a month on digital solutions, even if they’re running a solo business. A wise decision is to opt for an all-in-one project management tool that covers as many features as you need so as to cut costs.

In most cases, I’d recommend pro-rating software expenses. So, if you pay $400/month for software and use it across ten clients, you should charge each client a $40 tool fee.

How to Price a Project (Beyond Costs)

We’ve already covered the basics of how to estimate the cost of a project. So, let’s dive into how to come up with the final pricing.

This includes:

• Calculating your profit margins
• Determining whether you’ll charge an hourly or project fee
• Preventing potential scope issues

1. How to Calculate Your Profit Margins

For example, the average service business has a 20-30% profit margin. In some industries, you can thrive with a 5-10% profit margin, while others average 70-80% profit margins.

When it comes to design, marketing, or software development services, a profit margin of 30-50% could be a good target, especially because you don’t want to lower the quality of your service in an effort to cut costs. And you don’t want to become extremely expensive either.

However, what profit margin is right for you will depend on your goals, needs, and business structure. As a quick aside, consulting with GovDocFiling S-corp formulation services in Texas can help determine the optimal business structure and profit goals based on your specific circumstances and objectives. Feel free to experiment with your pricing as you’re growing. And, if you raise your price, ensure your service improves accordingly. 

2. Hourly Fee vs. Project Fee

According to Contra’s 2021 State of Independence report, 74.7% of freelance software engineers charge an hourly fee. Meanwhile, 60.6% of freelance writers prefer a project fee.

Which option’s right for you will vary. Personally, I recommend project-based pricing with a clear scope.

By defining a project fee, you:

• Give your customer the clarity and pricing predictability they need
• Prevent objections related to how many hours the project would take
• Make it easy to include other fees within your pricing, such as software costs

The most significant advantage of hourly pricing is that you can easily prevent scope creep.

If you’re charging per hour, more work equals more pay. It’s as simple as that. Plus, time-tracking tools have never been easier to use.

It can be a little harder to negotiate against scope creep when pricing per project—unless you clearly define the project’s scope.

If you combine the conciseness of a project fee with a clear list of deliverables, you could get the best of both worlds.

You could also work on a retainer, which is an agreement between you and your client for a number of hours per month. This agreement gives you a better cash flow estimate and generates regular income.

3. Service Productization Saves the Day

Service productization consists of turning your services into concise and scalable offerings. In other words, products.

To productize your services, you’ll need to:

• Define your value proposition in concrete terms
• Set up a transparent pricing structure
• Optimize onboarding, feedback-gathering, and cross-sell processes
• Systemize your fulfillment processes

That way, your services will have:

• A well-defined and consistent scope
• Predictable pricing
• Predictable outcomes
• A standardized process

Basically, productization transforms your services into discrete, well-defined solutions instead of vague, undefined promises. That’s why service productization can be a true antidote to “scope creep.”

What’s more, it can help you to:

• Improve your market positioning
• Increase your profitability
• Make your services more scalable
• Bring certainty to your business planning

Productization may be the way to go if you find yourself consistently struggling with pricing and customer satisfaction.

Key Takeaways

In this post, we dove into calculating the costs of a project and turning those costs into reasonable prices for clients that are profitable for you. Clearly, there is no one-size-fits-all solution in this matter.

Nevertheless, some things are for sure:

• Pricing your projects requires some trial and error, especially when you’re just getting started
• You’ll need to conduct a thorough analysis of your market and competitors
• There’s more to pricing than just your costs
• How well you define project scope will make a huge difference
• Keeping the company’s growth and competitiveness in mind is always a good idea

Pricing projects can be tricky. But, with a good project management platform, completing them can be a much simpler and smoother process.

First published on February 7, 2023.