When figuring out how to charge a client for creative services, designers have several different pricing models to choose from. How do you select the most appropriate one? This article explains each category of pricing.

Time and materials
You track the actual hours spent on a project and bill them to the client at agreed-upon hourly rates. You also track out-of-pocket expenses and bill the client for reimbursement. Travel-related expenses are usually reimbursed at cost, but all other expenses should be subject to a standard markup of 20%. A time and materials relationship is the easiest to understand and document, but your billings will not reflect the ultimate value or impact of your creative services.

Fixed-fee
A fixed-fee contract is usually a better approach for design firms, but there are some risks. Before starting a project, you agree on a flat amount for services. This creates the opportunity for you to make a profit or loss, depending on how well you estimate and manage the work. The goal is for your total price to reflect the real value of the work to the client, as measured by the positive impact that it will have on their business. At the same time, your total price must be competitive within the marketplace for design services. It's important for your fixed-fee proposal to be very specific about the exact scope of work. Clients will almost always make additional requests after the project has started, and you need to be able to identify them as change orders. We'll discuss fixed-fee proposals in more detail in the next article.

Licensing: use-based
Use-based pricing is common for photographers, copywriters and illustrators. The price is determined by the ways in which the finished work will be used or reproduced. Talk with your client about the usage rights they need; then sign an agreement that specifies:

• The category of media to be used (magazine cover, billboard, etc.)
• The total number of items that will be produced (for example, if your work is being used on printed materials, the agreement may specify the size of the print run)
• The geographic area of distribution (North America only, Europe only, etc.)
• The time period of use (for example, a six-month campaign)

If the client later decides that additional rights are needed, you will have to negotiate additional payments.

Licensing: royalty
Licensing is common for those who have an image or design that can be applied to manufactured items. The creative professional is the licensor, providing an original design. The product company is the licensee -- they provide everything else, including manufacturing, marketing, inventory control, distribution and customer service. Compensation to the designer is in the form of a royalty, which is a percentage of the money received from net sales of the product (gross sales adjusted for any returns or discounts).

Hybrid
On a large project, a hybrid approach to compensation sometimes makes the most sense. It's not unusual to see several different types of compensation included in one deal. For example, an industrial design firm might be paid a fixed fee for the initial phases of a project, followed by a royalty to be paid after the new product goes into mass production.

Free
There is "good" free and "bad" free. An example of "bad" free is speculative work. Spec work is when a client asks you to generate a few sample ideas without actually hiring you. Spec work can cost you quite a bit in payroll and out-of-pocket expenses and there's no guarantee that you'll be able to recoup those amounts.

"Good" free is doing pro bono work. It refers to services that are donated to political, social, or religious organizations. In the U.S., there is a tax aspect to this that you should be aware of. In order to report this type of contribution on your tax return, the client organization must have federal non-profit status and you can only deduct actual out-of-pocket expenses. You cannot deduct the value of your labor.

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