A Guide To Setting Your Freelance Rates

Has this happened to you before?

You receive a lead from a new client. It’s for a juicy project you’d die for a chance to work on. But when he asks about the price…

You stutter because you simply have no idea how much to charge.

Believe me, I know how it feels.

This might sound harsh, but it’s true. Looking back at my early days of freelancing, I was nothing short of a web design prostitute. I tricked myself out to anyone with a few bucks. I didn’t care how much they paid me, as long as I signed the project I was happy.

Pretty soon I was booked solid. I was working 60-hour weeks but had little money to show for it.

To my defense, I was young, inexperienced and I had no idea what I was doing. I was undercharging my services out of fear of not signing projects if I asked for a higher rate. And needless to say, had I continued on that path for much longer, there probably wouldn’t be an Inbound Interactive today.

Luckily, I realized that something was wrong. Through trial and error I figured out how to charge top prices for my services and that’s exactly what I’m going to talk to you about today.

In this post I’ll show you how to:

  • Escape the “dollars for hours” economy,
  • Develop pricing structures that increase your business’s revenue,
  • Create value for your clients, and
  • Free your time to work on passion projects.

Sound intriguing? Well then, let’s roll…

Understanding Your Value

If you look at the most successful freelancers: Bob Bly, Amy Hoy or Paul Jarvis to name just a few, you’ll notice that one thing they understand very well about their business is:

The value they deliver to clients.

And it has been woven into every aspect of their businesses:

  • Their communications,
  • Client relations,
  • Processes and of course,
  • Prices they charge.

Because here’s the nugget of info I wish I’d known when I first started freelancing.

Clients decide what price they are willing to pay for a service based on its perceived value.

Therefore:

To charge top dollar for your services you first need to realize the value your services provide.

Here are some of the ways you add value to your clients.

Experience

If you have many years of experience in your profession or specialization, you are worth far more than someone who’s only entering it. Remember, people aren’t paying you just for the hours of work you provide. They’re also paying you for your years of experience.

Not to mention, you are likely to work more quickly, deliver much better results and also, know how to overcome many problems simply because you’ve experienced them before.

Specialized Knowledge or Skills

Any unique knowledge about your specialization, coming perhaps from previous job or education will likely add value to your clients.

And many clients prefer hiring highly specialized freelancers with knowledge and experience in one particular area as opposed to generalists.

Don’t be a jack of all trades but a master of none.

Education

Your education and training might also set you apart from someone without a degree in your field.

Although, to be honest, access to tutorials, resources, and information needed to excel in most freelance industries is readily available online.

Reputation

On the web, reputation is everything.

If you are a well-known service provider in your field, your clients can expect to gain a lot from purchasing your services.

Communicating Your Value

Once you know the value you provide, you need to learn to communicate it in a way that:

  • Makes it easy for potential clients to understand it and
  • Helps them make a decision about hiring you.

Boast about it on your website, include it in your Linkedin tagline and profile, mention it in any marketing materials you produce, email signature and the like.

By doing so, you’ll let any potential client know immediately, the value you provide. It will also help to justify your price.

Other Elements Affecting Your Rates

Here’s a problem with any rates you set:

In spite of the fact that you work for yourself, you won’t get to keep everything you earn.

Like the store clerk selling you a new t-shirt knows, only a portion of the money collected in the sale will be retained by the company. The rest will go to suppliers, manufacturers, taxes and to pay bills associated with running the store.

Freelance businesses have the benefit of having limited overhead in that we don’t have employees, pricey offices, inventory, or equipment. However, that doesn’t mean we get off scot-free. There are still expenses that will affect how you calculate your rates. Such as…

Admin Tasks

It’s an easy mistake:

When you exchange dollars for hours, you often calculate the hourly rate based on the full work week.

But as a freelancer you rarely get paid for the full 40 hours a week.

According to Katherine Reynolds Lewis, at least 30% of your time goes towards administrative tasks:

  • Marketing,
  • Networking,
  • Client meetings,
  • Writing proposals,
  • Dealing with emails,
  • Keeping business records and many others.

And so, if you’d normally worked 40 hours a week, you’ll spend at least 12 of them on non-billable tasks.

Overhead / Expenses

Running a freelance business isn’t expensive, but it also isn’t cheap.

Even if you work from home and have limited overhead, you’ll still very quickly drum up various other expenses:

  • Taxes,
  • Accounting,
  • Software licenses,
  • Various subscriptions,
  • Marketing materials,
  • Bills (Internet, Phone etc.),
  • Professional memberships and a lot more.

And that doesn’t include the money you withdraw for personal expenses, entertainment, rent, etc.

A good way of dealing with this is creating a list of your monthly expenses and label the break-even point. This way you’ll always know the minimum amount of money you have to earn to at least break-even.

Money management has a handy guide for creating a personal balance sheet that you may way to check out.

So, why do freelancers undercharge?

Given all the elements affecting your rates, why so many freelancers undercharge (or at least think they do)?

Some don’t know how to estimate projects properly

It doesn’t matter if you price per hour or a flat project fee (more on these and other pricing models later), you still need to know how long a project might take to complete to properly price it.

But that’s hard to do when you have little experience.

If you’ve never worked on a particular project before, it’s going to be hard to forecast what amount of work you’ll have to put into it.

And therefore you’ll most likely undercharge.

Others lack the confidence to ask for the rates they believe they deserve

There are two ways to negotiate the project fees:

  • Quote a price that will guarantee you get the gig or,
  • Build the courage to quote the fees you’re really worth.

But only one of them leads to building a thriving business, guess which one.

Many freelancers, however, lack the confidence to request higher rates or walk away from the project if the client can’t afford them. As a result, they sell themselves short, hindering their business’ growth in a long run.

5 Pricing Models to Charge for Freelance Services

I’m sure you’ll agree that part of the problem with setting rates is the amount of different pricing models a person could use.

After all, should you charge per hour, day or bill clients per project? Or maybe even offer a price based on the value you’re going to deliver?

Well, let’s take a look.

Hourly Rate

This is by far the most popular pricing strategy among freelancers. The hourly rate model works on a very simple premise of billing your services based on the amount of hours you spent working on a project.

Let’s say you’ve spent 5 hours redesigning a client’s landing page and your hourly rate is $55, then the cost of your service will be $275.

The biggest benefits of using an hourly rate is that…

  • It’s easy for customers to understand
  • It’s easy to develop pricing for your services

Many clients don’t understand the intricacies of your work. And therefore, time is the only way for them to establish if they’re getting value for their money.

But…

Hourly rates commoditize services. Using this pricing model, you can quickly get trapped in the “dollars for hours” economy. The problem is, there are a limited amount of hours you can spend working on billable tasks. As a result, your earning potential is capped unless you manage to raise your hourly rate, clone yourself, or take on staff (which is a whole other ball of wax).

However, when you’re starting out and aren’t sure how long projects might take, hourly pricing might be the best pricing model for you to use.

Day Rate

In this pricing model, you specify a fee for a full day.

This model is ideal if you are an established authority in your field and can justify a higher rate. With day rates, especially for larger projects, you can charge a king’s ransom for services due to your experience and expertise.

Just take a look at what Laura Belgray charges per day.

laura-belgray copy

 

Fixed Project Pricing

This is the opposite approach to hourly or day rates in which you and the client agree on a fixed rate for the completion of work.

In many industries, fixed pricing is the recommended pricing model. Unlike hourly rates, your earning potential is capped only by the speed at which you work. If you quote a project at $500 and complete it in 2 hours, you ultimately earn a hefty $250 per hour.

By introducing various processes to improve your productivity and ensuring a healthy per project rate, you can greatly increase your earning potential.

One example is Wheelhouse, a collection of freelancer-created products that take the risk out of buying services. It may give you some ideas for productizing your service offerings.

There are, however, some opponents of the fixed pricing. And one common argument against it is that for it to work, your estimate for the work must be 100% accurate. Otherwise, you may find yourself doing more work than you’ve budgeted for (and thus, earning less money).

Later in the post I’ll show you some scenarios when fixed or hourly pricing is better. At least in my humble opinion.

One thing’s for sure:

To benefit from fixed pricing you need to firmly set client expectations and develop processes for a service offering.

Since fixed pricing is based on a very accurate estimate of how much work will go into completing a project, you need to set parameters around what you intend to offer.

The information you collect from client has to be complete and final (TIP: To ensure this, develop a project questionnaire asking for all information you need before you’re able to give a quote).

The scope of work can’t change. In most cases, the only way to prevent that is by adding a clause in Terms and Conditions about additional charges due to eventual change of scope.

Also, you need to ensure that you clearly define what you’re going to deliver and not leave anything to interpretation.

For instance, if you’re going to write an eBook for a client, you should define its length, content and deliverables (i.e. Word document) before committing to a price.

Lastly, you should always expect projects to take longer than you’ve anticipated and budget for that in the quote.

Rush Pricing

I’m sure you’ve already noticed that clients aren’t the most organized bunchThey often leave projects hanging to the last minute and then come knocking at your door asking you to complete them for the next day. But when your clients need something done for “yesterday”, you are in a position to charge a rush fee.

This typically means adding a premium, often in a region of 25-50% (although I know freelancers who would charge even an additional 100% for super-urgent work) to your base price.

Even though charging a rush fee might be a great way to increase your income there is a danger in accepting last minute projects.

It might affect the work you have schedule for other clients.

You might be tired after working all night and not be able to deliver great work scheduled for the next day. Or the rush project could run long, turning your schedule upside down.

So be careful when accepting last minute jobs and always ensure you have sufficient time allocated to accommodate any unexpected requests that might arise.

Value Based Pricing

So far we’ve talked about pricing models based in one way or another on the amount of time spent working. However, the Cadillac of pricing models is value pricing.

Value based pricing takes a different approach.

In this model you set the price based on the actual value you can deliver to a client, as opposed on the amount of time required to complete the work.

For instance, a copywriter who can confidently increase a conversion rate by 30% on a landing page viewed thousands of times each month which will bring thousands (if not tens of thousands) of dollars in additional revenue to a client.

If he is able to prove that he can deliver that amount of value, he can charge accordingly and not per hour or day. Not to mention that his fee would be considerably higher.

But…

To use value-based pricing is based almost exclusively on your ability to deliver on your promises. You need to be sure of the value you can deliver and be able to prove it to the client. You need empirical evidence to convince clients to pay the fee: a proven track record for instance or case studies from past customers showing the results you’ve been able to achieve.

So, how do you set your value pricing rates?

Unfortunately, there isn’t a hard and fast rule to follow in developing value pricing. And, one of its drawbacks is that it is situational, and will change dramatically from client to client and project to project.

Let’s look at an example…

Using our previous example, let’s assume a new startup receives 25,000 visits to a landing page per month and that 1% of the website’s visitors convert into customers. Let’s also assume each new customer is worth $50 per month to the business. And, that you believe you can increase the landing page’s conversion rates by 30%.

Now, let’s look at the math…

A 30% increase to the existing conversion rate (of 1%) would translate to a new conversion rate of 1.3 %. Or an additional 75 new customers per month and $3,750 in added monthly revenue.

As a business owner what would you pay for $3,750 in added monthly revenue?

Assuming the customers stick around for at least 12 months, the business could generate an additional $45,000 per year in revenue ($3,750 * 12). Regardless of whether the actual pen to paper writting requires 10 hours, 5 hours or 15 minutes, the value remains the same. A 30% increase in conversion rates, is equal to $45,000 per year in revenue.

Therefore, a conversion copywriter could conceivably charge a rate of 10% (or more) of the value he will provide (or $4,500 for 10 hours of work), make well above his hourly rate ($450 per hour), and still provide a tremendous amount of value to the client ($45,000 – $4,500 = $40,500).

This is the weird and wonderful world of value pricing. It’s the bees knees of pricing models and the end game for freelance businesses.

So which model should you choose?

I’ll be honest with you – There is no perfect answer.

Every pricing model has its pros and cons. However, there are certain situations when some models work better than others.

For instance:

  • You’re hired for an on-going role encompassing many projects. In such a situation, hourly pricing is typically best. Otherwise, you spend too much time quoting, billing and managing administrative tasks.
  • Client doesn’t have a defined scope of work. This is another scenario when an hourly rate is better. Without a defined scope of work, it’s almost guaranteed that your tasks will vary; the direction of the project will change. And therefore, it’s almost impossible to predict how much time and effort you’re going to have to devote to the project. There is another benefit of charging an hourly rate in such a situation. Not having the final price in front of them and being aware that the fee increase with every hour of work might make the client more focused about what they want.
  • Client is on a budget. It might be hard for a client on a strict budget to accept a project that will cost $55 per hour and might take 10-20 hours to complete. But, provided it’s within their budget, they are more likely to purchase a productized service.
  • You aim to productize your services. If your goal is to offer bundles and product-like services to work on a recurring revenue model in your business, then project-based fees are a better choice.
    • It’s easier to sell packaged services if they come with a fixed price tag. Having said that, you could sell hourly packages, including a specific amount of hours you’re going to work on client’s tasks. However, because by their nature they aren’t fully defined (meaning that you could do different tasks for each client), many clients find them harder to understand.

So how do you come up with a price for your services?

Here are the steps I recommend:

  1. Research your full-time equivalent,
  2. Calculate your hourly rate (even if you want to charge a flat fee or use value pricing),
  3. Develop a minimum acceptable rate,
  4. Verify it with your peers.

Let’s go through each step in detail.

Step 1. Research your full-time equivalent

Charging the equivalent of a full-time salary is a common freelancing mistake. As a freelancer, your time should be billed at more than an employee working on similar types of projects.

But…

A full-time salary equivalent is a good base to start researching how much your market can bear. You can find out what companies typically pay employees with a similar skillset to yours on sites like:

You can also search Google for potential salaries (i.e. by searching for “annual [job title] salary”) and reviewing job listings. But of course, you should only use these results as guidelines. Often, potential employees manage to negotiate higher salaries or companies deliberately advertise lower wages.

With the average full-time equivalent, work out the hourly rate for an employee working 40 hours a week. Here’s the simplest formula for that:

Your full time salary / 52 weeks / 40 hours

For example, if your full-time equivalent earns $55,000 a year, their hourly rate would be $26.52.

$55,000/52 = $1057 / 40 = $26.42 per hour

Step 2. Calculate your hourly rate

So far you’ve researched how much your full-time equivalent earns per hour. But you need to add additional variables into the equation, because:

It assumes 52 working weeks

A typical employee gets paid for things like holidays and sick days (depending on their contract of course) too but as a freelancer, you are only paid for the time you work on billable projects. You need to deduct time for holidays and days when you could be off work, say 4 weeks in total a year from the work year.

So you need to amend the equation to look like this:

Your full-time salary / 48 weeks / 40 hours

In case of a full-time equivalent of $55,000, the hourly rate then would be:

$55,000/48 = $1145 / 40 = $28.65 per hour

It also includes unbillable hours

We’ve already discussed how at least 30% of your time will go towards unbillable tasks – admin, marketing, keeping up the records, dealing with email, meetings etc.

And thus, your typical work-week will not comprise of 40 but 28 billable hours (unless you intend to work well in excess of a 40-hour work week).

40 *30 / 100 = 12 unbillable hours

To calculate the real hourly rate, you need to use this formula then:

Your full time salary / 48 weeks / 28 hours

$55,000/48 = $1145 / 28 = $40.89 per hour

In other words, to earn $55,000 (providing that you’ll bill for 28 hours a week for 48 weeks each year) you need to charge at least $40.89 per hour.

That’s also assuming:

  • No down time due to illness or other events,
  • No additional time for admin tasks outside the allocated 12 hours a week,
  • Always having projects to work on.

Knowing your hourly rate you can now price your strategies in any of the pricing models we discussed:

  • Set the daily rate,
  • Decide on flat fee per different types of projects (based on the average amount of time each normally takes) etc.
  • Or if you’re experienced at your craft, venture into value pricing.

Step 3. Develop your minimum acceptable rate

Remember the various elements affecting the price I mentioned earlier:

  • Business costs like office supplies, software licenses, subscriptions,
  • Accounting and other professional services, and
  • Tax, among others?

It’s time you now incorporate those into your price to set the minimum hourly rate you’re willing to work for.

Tom from Leaving Work Behind has a simple but effective formula to calculate it:

( (personal expenses + business overheads) / hours worked ) + tax

Let’s imagine your personal expenses (the total cost of living – house payments, food and so on) are $20,000 per year and you predict business expenses at $5,000 per year. Then let’s imagine that you plan to work 28 hours a week, roughly 6 hours a day for 48 weeks (1,440 hours in total per year).

Your minimum acceptable rate (before tax) would be:

$20,000 + $5,000 / 1440 = $17.36

Let’s assume your tax rate is 21%, then your net minimum acceptable rate would be:

$20,000 + $5,000 / 1440 = $17.36 * 21% = $21.01

Therefore, $21 is the lowest rate you should charge if you at least want to break even and have enough money to cover your basic living and business expenses.

Step 4. Verify it with your peers

Don’t calculate these numbers in isolation. You could easily overvalue your skills when researching a full-time equivalent and come up with too high a starting rate versus your real skill, for instance. Or, the opposite could happen. You could start too low and end up with a too low final rate.

Therefore, as a final test, compare your rates with your peers.

Research online how much other freelancers working in your field and having a similar skill set / level of expertise charge.

Google “[industry or job title] rates” or “freelance [industry or job title] rates”. Then check websites of freelancers whose profiles match your expertise.

Talk to your freelancing buddies and post your questions in freelance forums.

If you know other freelancers in your field, run your rates by them. Their feedback could help you find out if you’re too low or too high vs. your skills and the value you offer.

But don’t do this:

Don’t pretend to be a client and ask other freelancers for a quote. Most freelancers will spot this from a mile away and won’t respond anyway. And those who do, might send you fictional prices to set you off course.

Bonus tip: Ask prospects for feedback

I admit, this might be a bit risky but it could work, especially if you’re only starting out. Speak with potential customers and ask them what they would be willing to pay if you were to work on their project.

Not all of them will be willing to reveal their budget or pricing expectations but some might. And their feedback might be an invaluable insight to help you get started by charging a reasonable rate.

Conclusion

Pricing is the most important aspect of your business. Charge too low and it won’t matter how many satisfied customers you have, your business is still going to fail. Bill too high and you’ll deter many potential clients from hiring you.

Hopefully this post has helped set you on a right course to coming up with the best price for your services.

Written by: Calin Yablonski
Calin is a freelancer, local search marketer and founder
of the Freelance Business Guide.

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