I do a little of both.
I have come to realize that the amount of effort required for a painting is mostly the same regardless of size, but within a respected size. Meaning that painting a head is mostly the same amount of work if the head is 5 inches high as it is if the same head is 8 inches high. Now if it's 2 inches high....
None the less, the public needs some way of generally determining prices and publishing a price list gives you an excellent chance to set some customer expectations. For example, I have had people ask for an 11x14 inch full-figure portrait. Hand them a pricelist that sets their expectations.
Like most portrait artists, I have requirements for what size a composition needs to be in order for me to do it proper justice. Head and shoulders in oil begins at 16x20 inches - waist up begins at 18x24 - full figures begin at 24x36. I set these expectations by posting relative sizes and listing these positions.
I also have requirements of size for additional figures, hands, complex compositions, etc. Each generally also adds 1/3 to the price as they require additional work.
I don't know about pricing by the inch - as others have said, it kind of makes portraiture seem like you are purchasing a commodity - "portraiture by the pound", "people pulling out calculators" sort of feel which I don't think is how we want people to think of our profession.
IMO, it is not about the size, it's about the effort required.
Also, if you are at all concerned about the future value of one of your works and that work being resold, then I would recommend putting a resale clause in your contract - that way if the painting is sold down the line, you get paid a percentage.
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