Setting your hourly freelance rates. It’s one of the hardest things you’ve got to figure out as you venture into freelancing. Well, apart from finding your first client that is.
But that’s a different post.
Today we’re talking pricing. Specifically, how to set your hourly freelance rates. But getting it right can be a challenge. I freelanced before starting my own agency. And the rates you can charge as a freelancer vary considerably.
- I get paid more for web development than writing out blogs.
- I get paid more for sales copy than building presentations.
- I get paid more from big businesses than I do smaller startups.
- I get paid more when I meet a prospect in person rather than online.
But that’s just me. What you can charge as a freelancer depends on your expertise, your industry, your clients, your area. Oh and perhaps most importantly, your branding and your ability to sell.
Now here’s the kicker. When you’re desperate for work potential clients can almost smell it on you. They’ll use that as leverage to drive your hourly freelance rates down. Just like a desperate guy chasing the girl, and does everything the diva asks him to.
This isn’t a recipe for success. So here’s mine:
How to set your hourly freelance rates
Get your head straight
The first thing you need to sort out is your mindset. Never, ever, quote on a job because you need the money. I’ve broken this rule on a few occasions, and it’s come back to haunt me a thousand-fold.
Of course, a client will use you if you’re the cheapest freelancer in the market. It’s a no-brainer.
But at what cost. You spend hours and hours grinding away on a project, for a client who doesn’t truly value your efforts. Worse, they’re just going to keep pushing you for more and more. To see how much value they can extract before you break. And they will not care about you for a minute.
In the long run, it’s not sustainable, profitable or worth it.
Now I get it. Maybe you need to cover some expenses and it’s just for a couple of weeks. That’s fine. It’s not good, but whatever. Just do it. But remember to pull the plug once you no longer need the cash. Otherwise, you’ll never get your freelancing business off the ground. You’ll create a “job” for yourself, and will be just as stuck, and just as unhappy as you were before.
Figuring out your hourly freelance rates
This is where value-based pricing comes into play. You want to be charging prices that allow you to live comfortably. To work on the projects that excite you, and be in a far better position than if you’ve got a normal 9 to 5. Otherwise, you’d be better off just having a job, right?
The things to consider are:
- Time. You need a rough estimate of how long a project will take.
- Costs. You need to know any specific expenses you’ll incur doing the work.
- Overheads. You need to cover any costs for running your business.
- Competition. You need to understand what other companies are charging for similar work.
- Value. You need to have an idea the returns your work will generate for the client.
But I made it even simpler. Grab a pen and write down:
- How much salary you want this year
- The cost of running your business this year
- How many hours you plan to work a day
- How many days in a year you plan to work
So let’s say you want to make 75k. It costs you a thousand dollars a month to run your business, so you’ve got $12k in annual cost. This includes accounting fees, internet and phone, insurance and everything else. Being based in Asia my operation is rather lean, so just adjust these figures for you.
Now we need to calculate your billable hours. In my experience, I’ve only been billing clients for about half a typical day. The rest goes to administrative tasks, sales and marketing, and the side-projects I’m doing. So I’m working with about 4 hours a day of billable time.
Oh and I like to take about 4 weeks off a year. Working it out there were 261 working days in 2016, take out 20 for my vacation time and that leaves us with 241.
So 241 working days with 4 billable hours a day is 964 billable hours.
Common sense dictates we also want to run a profitable business, so let’s add a 15% profit margin on top of the work. Adding this in is a good practice. It ensures you (the business owner) will still profit if you hire someone to replace you.
Now it’s just a matter of adding your salary and expenses, multiplying by the profit margin, and dividing by the total billable hours.
It looks like this:
[ (Salary + Expenses) x Profit Margin ] / Total hours
In our example:
[ (75,000 + 12000) x 115% ] / 964 = $103.79
So my goal should be a little over $100 an hour. Anyone want to hazard a guess as to what I’m charging my clients? $100 an hour. I like round numbers. We do charge more if it’s rushed or outside office hours, but that’s the starting point we work from.
Now a little more went into it than a quick cocktail-napkin calculation. I did some pretty comprehensive market research before opening my agency. Cold-calling competing businesses, speaking to friends in similar positions, and talking to potential customers. I knew $100 an hour would work here, and put my team squarely in the middle of the market. We’re not cheap, but we’re not the most expensive. This is where we compete. Value.
You’re going to have to find that same sweet spot for your business.
How to charge for freelance work
There’s really only two models for freelance pricing. Hourly or project.
Hourly freelance rates are rather simple. You charge for the time spent working on a project, so it’s a good protection against scope creep. Some clients are wary using this approach because there’s no fixed cost. Usually, you’ll have to give an estimate of the total hours anyway, so be ready to give them a breakdown.
Project-based pricing gets a little more tricky. You quote based on a client’s needs, but at a fixed total. It’s great if you work fast, but you do need to understand what you’re getting yourself into. You’re agreeing to a price, and you’ve got to stick to it. If you underestimate the time needed, and you’ll need to chalk that up as a loss. Oh, and telling a client their endless change requests are coming to an end is never a fun conversation. The trick here is to use clear contracts, with specific deliverables.
Using project-based pricing you can also bundle a variety of services into a single package. It makes them super easy to promote. As an example, we’ve got a basic website offer. For $2k you get a standard business website setup with your images, branding and content. If you’re wondering, it’s about 20 hours work (that’s how we landed on the $2k price). Bundles like these make for a good conversation starter with a client.
It also helps you gauge a client’s budget. They know your prices from the start, eliminating time-wasters and low-ballers. Because discussing budgets are probably the thing I hate most about agency work.
- The freelancer is angling to make as much money as possible.
- The client is angling to get good work done for as cheap as possible.
So they both dance around. Umm-ing and ahh-ing and all the while forgetting one of the most important questions.
How much have you got to spend?
You need an idea of your clients budget. Otherwise, your quotes are going to be all over the place. For us, a $2k website covers about twenty hours of work. Obviously, they’re not getting a custom website at this rate. Based on the time needed to design and code a site from scratch, it’d be more like a few hundred hours of work, and will cost tens of thousands of dollars.
So let’s use this in practice. I meet a small restaurant owner. He needs a website but refuses to tell me the budget. So I send him a quote. $35k for a beautiful custom website, with all the trimmings. He’s probably going to fall out of his chair. Or maybe not. You never know. But there’s a risk I waste a whole bunch of time on the proposal, and it doesn’t meet what he needs.
That’s why the budget is so important.
My advice is to ask. Push for it. Do whatever you can to get a number out of your prospect, before you spend too much time with a prospect. It’ll help you qualify your leads faster.
I usually say something like this if they’ve been skirting the issue:
“I understand a budget is the last thing you want to talk about. But I do need to get a sense for which of our products are going to best fit your needs. Do you have a ball-park figure you’d like to see this project completed within?”
Sometimes this is enough. But you will come across clients who have read a book or two on negotiation and take pride in not answering. They tell you to quote what YOU believe it’s going to be worth.
Hint: This is a pretty big red flag the client is going to be trouble. #justsayin
So now we’re back to the restaurant problem. Without a budget you’ll either vastly underestimate the scope. Or vastly overestimate it. There’s only a slim chance you’ll hit the nail on the head. That means you’re going to waste time. Redoing proposals. Shocking your clients. Working for peanuts. No one is happy.
It’s not good. I know. I’ve been there. When I was just starting out and figuring out this whole freelancing thing I got it wrong a number of times. It’s probably also why my billable hours were so low in those first few months. I was doing busy-work. Not client work.
I almost word-for-word use something like this now:
“I get your hesitancy, and that’s fine. But we’ve got websites that start from $2k and go all the way into tens of thousands of dollars for custom designs. Before we get too far along, I need a rough idea of where you guys are at so I can put the right quote together.”
This has two outcomes.
- The prospect disappears as their budget was less than what you’d spend on a week’s groceries.
- The prospect gives you a ball-park figure you can use to start putting a proper quote together.
Maybe I’m too forward. Maybe I’m a little too pushy. But I value my time. And I hate wasting it drawing up proposals only to hear my hourly freelance rate is too expensive. Or it needs to be redone because they have a bunch of custom requirements. You’re never getting those lost hours back.
Lastly, don’t forget your contract
So you figured out your hourly freelance rate. Found a client. Got their budget and made a pitch.
Success! They want to hire you. That’s frikken awesome. But before agreeing to any work as a freelancer you need a contract. It’s to cover you, just in case.
Your contract should cover the deliverables of the project, any major milestones to be met, along with payment terms and some typical clauses that outlines how you both are going to work together. It gets you and the client on the same page from the get-go. It also helps as a bit of a protection should there be any disputes in the future. My advice is to get a lawyer to draft up a contract for you. If you can’t afford that you could always find a template on a site like Docracy and hire a lawyer from LawTrades to check it over.
Better safe than sorry.
Wow. So you figured out what you’re worth. Set your hourly freelance rates. Priced the project. Made a pitch. Got the contract. Now all that’s left is to get to work. What are you waiting for?
What are you waiting for?
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