If you’re starting a business as a freelancer, you’ll know that setting your rates can be a somewhat of a conundrum. Get it wrong, and you risk pricing yourself out of the market or getting stuck with an unsustainable business model.
One of the biggest challenges to setting your freelance rates is that it’s very rare to find one rate that will suit all your clients. The second challenge is settling on a rate that works for you and your lifestyle.
Here are four considerations and tips to bear in mind as you set your freelance rates:
1. You Must Understand the True Costs Involved in Being a Freelancer
One of the biggest and earliest mistakes that freelancers make is to assume that they should price their work based on what their current or previous employer paid them.
It sounds a reasonable assumption, but if you do that calculation ($x divided by 52, divided by 40) you’ll quickly realize you’re selling yourself cheap and unlikely to make a realistic living. Why? A regular salary doesn’t take into account the true costs of being self-employed; you simply can’t compare the two.
Take a look at what goes into your salary and you’ll soon see why – you get paid for a consistent 40 hours worked per week, healthcare insurance, paid vacation, sick days, life and disability insurance may also be included. Your employer also covers 50% of your employment tax, business expenses, use of the business facility, training, maternity coverage – you get the picture.
Now let’s take a look at what being a freelancer entails, financially.
Let’s start with healthcare premiums and deductibles. Add on the costs of doing business – computer, transport, gas, training, incorporation fees, liability insurance (some clients will require it at your expense), tax preparation, etc. Don’t forget those benefits that are normally rolled into a salary – vacation time, life insurance and the painful reality that you are now responsible for 100% of your self-employment taxes.
Then there is your non-billable time. Remember, no one pays you to market yourself, network, develop business, and solve your IT issues (which can suck the hours right out of your day).
All these costs should be taken into consideration when calculating your rate.
Now, if we revisit to the salary/freelance rate apple-to-apples calculation, if you earned $85,000 a year as a salaried graphic designer you’d be pricing yourself in the paltry range of $40 an hour (depending on the exact hours worked). Hardly the basis of a sustainable business, especially when you take into consideration the expenses incurred.
So how should you set your freelance rates?
2. There Are No Hard and Set Rules for Setting Your Freelance Rates
Many factors go into determining your rate – the market rate for your services; your experience; the types of clients you engage with. For example, you may need to price your services with affordability in mind for certain clients, and that’s ok, especially if they are easy to work with, afford you some flexibility in your work, and, best of all, give you consistent work. A consistent run rate business from these clients can be more lucrative than sporadic, higher paid work.
That being said, the market is likely to tolerate higher rates elsewhere. Larger clients, in particular, tend to have higher budgets.
3. Start with a Basic Calculation
It’s almost impossible to calculate all the costs involved in running a freelance business, but you need to start with a figure that you feel comfortable with and be prepared to deviate it when you need to. For example, if you determine that your hourly rate is $80, then you need to be prepared to able to tolerate a range of $20 below that or $20+ above it, depending on your client negotiations.
A good rule of thumb, especially if you’re starting out as a new freelancer is to take a look at what your annual salary equates to as an hourly and beef it up by 40-50%. Honestly! It sounds a lot but if you shoot high, then you have room to negotiate and find a footing that suits all your clients while covering your costs and making a living!
4. Don’t Get Hung Up on Hourly Rates, Take Advantage of Different Pricing Structures
One of the early questions you’ll always hear from a new client is “What’s your hourly rate?”. Don’t always feel that you need to go there. While an hourly rate is a useful indicator of the cost of doing business with you, it’s not always the most effective pricing strategy for you, particularly if you’re good at what you do and can turnaround results much faster than other freelancers out there potentially undercutting your billable revenue.
Consider the following alternatives:
Project Pricing – Depending on the nature of your work, pricing a flat project fee can be of benefit, especially if you have done this type of work before and have a clear scope from your client. However, there are risks involved. Sometimes scope creep can work its way in or you may find that you needed more hours to do the work than you originally anticipated, undercutting the profitability of the work.
There are a few things you can do to mitigate this.
When you present a fixed price project proposal, clearly outline the component parts of the work – this gives your client a clear view of what exactly you’ll be doing for the price. For example, a freelance writer might propose the following for developing a white paper:
Research: 4 hours
First Draft: 10 hours
Edits x 2: 4 hours
Total: 18 hours
By listing the hours that you’ll dedicate to the project, you can help prevent any project creep, but be sure to add a caveat to your proposal that clearly states that any work done over these hours will be charged at an hourly rate.
Use your normal hourly rate to calculate the fixed fee based on the number of hours predicted, or if you have a gut feeling that the work warrants a higher rate, increase your rate appropriately.
“Not to Exceed X Number of Hours” – A useful alternative to both the hourly and the project-based pricing structure is a hybrid version whereby you commit not to exceed a certain number of hours to complete the work. This is useful if you’ve received a sketchy brief from a client or you’ve worked with them on projects like this and found that the scope is never the same from one job to the next.
For example, if you are commissioned to write a white paper, your estimate could look something like this:
Proposed Scope: Research and write copy for white paper to include interviews with subject matter experts and independent research, where necessary. Includes 2 review cycles.
Pricing: $75 per hour, not to exceed 25 hours*
*Client will be notified well in advance should the contracted number of hours require review due to increased scope.
Don’t forget to put that caveat at the end. Then once you start the project, track your hours and bill only those worked. This method gives your client the reassurance of fixed costs, with some flexibility built in (it also shows you have integrity and aren’t in the business of ripping them off). Of course, the downside for you is that you run the risk of losing out on income if you come in under your estimated hours.
Knowing which pricing structures to use will become easier as you become familiar with the way both you and your clients work. Most freelancers end up using more than one pricing structure.