In Part 2 of our Financial Toolkit for Freelancers and Entrepreneurs, we help you answer the one question everyone always asks. Part 1—which covered contracts, taxes, and cash flow—is available here.
As a freelancer, you may quickly come to dread the inevitable question, “How much do you charge?” Many of us feel lost when it comes to putting an exact price on our goods or services, but it’s essential to have this figured out before you start courting clients. Otherwise, you can be caught off-guard and undersell yourself, or you might ask for what you think is fair only to find you have no way to afford a vacation, insurance, or those quarterly estimated taxes.
This guide covers everything you may be afraid to ask about how much to charge.
How to determine the market rate for your services
Dan Kellermeyer, a financial planner and owner of New Heights Solutions, LLC—a firm specializing in virtual assistants for other advisors—suggests starting with the U.S. Bureau of Labor Statistics database, which lists over 800 different jobs and average hourly rates.
“Keep in mind, you will need to cover expenses like self-employment tax and health insurance, so these rates should only be a starting point,” says Kellermeyer.
From there you can dive into niche resources designed for your industry. For example, Contently has built a Freelance Rates Database, covering audio/video work, design, photography, writing, and more.
If you are still coming up short, don’t be afraid to ask your peers. Grassroots movements like #TalkPay are working to destigmatize sharing how much you earn.
Hourly rates vs. project-based pricing—which one is better?
Pricing your services can mean the difference between a thriving business and returning to a 9-to-5 job. Both hourly and project-based pricing have their pros and cons. Here’s how to know which one works best for you.
By the hour
In some ways, pricing by the hour is simpler. You track each billable hour, multiply those hours by your hourly rate, and send your client an invoice. This method works better for long-term projects without a well-defined scope.
But Kellermeyer warns against charging too little to attract several clients right out of the gate. First, ask yourself: did you get into freelancing for the low-wage hourly work? Didn’t think so. To make matters worse, you could risk losing clients when you try to raise your rates in the future. That’s not to say charging hourly isn’t a good way to go; you need to have some idea of your hourly rate even if you choose to charge a flat fee.
Some clients prefer to cap their expenses by charging a flat rate per project. This could be either good or bad depending on the scope of the assignment and how quickly you work.
The U.S. Small Business Administration (SBA) recommends gathering as much information as you can before committing to your rate. From there, you can estimate how many hours the project will take. Kellermeyer recommends adding a buffer to protect against the project taking longer than you expect.
For example, a freelance writer may factor in time for:
research (2 hours)
interviews (1 hour)
writing (2 hours)
editing (1 hour)
miscellaneous tasks (1 hour)
From here you can multiply your target hourly rate by the number of hours you think the project will take. The good news is, your pay will gradually increase as you get more efficient.
“Working on projects for a flat fee incentivizes you to find faster ways to complete your tasks, even if that means outsourcing certain things,” Kellermeyer points out.
Working backwards to calculate your hourly rate
There are a number of factors when choosing your hourly rate. But it helps to have a starting point. The SBA recommends a quick and dirty calculation:
Start with your full-time salary.
Divide your full-time salary by 52 weeks.
Divide that number by 40 hours.
Increase that number by 25-30% to cover expenses and non-billable hours.
Let’s look at an example:
Annual salary $50,000 / 52 weeks = $961.54 per week
$961.54 per week / 40 hours = $24.03 per hour
$24.03 per hour x .30 (30%) = $7.21
Hourly rate = $31.24
But you shouldn’t stop the calculation there. You need to factor in other expenses, too:
Benefits – health insurance, disability insurance, life insurance, retirement plan costs
Days off – vacation, sick days, holidays
Business expenses – office space, computer, internet, cell phone, software, advertising, accounting, unpaid invoices, and more
Then there’s all the work that you do to get your business going and preserve momentum, like marketing, networking, billing, and so forth. That’s often called non-billable time since it doesn’t pertain to specific projects. While you don’t want to make it a line item on your invoice, you should certainly consider this time when determining your rates.
To avoid undercharging, you can work backwards to arrive at a more comprehensive target hourly rate:
Annual salary $50,000
Plus expenses (including taxes) $12,000
Target salary $62,000
Total hours per year 2,080 (52 weeks x 40 hours per week)
Less vacation 120 (3 weeks x 40 hours per week)
Less holidays 40 (5 days x 8 hours per day)
Workable hours 1,920
Less non-billable 480 (estimated 25% of 1,920)
Billable hours 1,440
$62,000 (Target salary) / 1,440 (Billable hours) = $43.05 per hour
If you don’t like crunching numbers yourself, BeeWits offers a free Freelance Rates Calculator.
Either way, you can see a $11.82 hourly discrepancy between our two calculations.
Lost when it comes to negotiation?
Now comes the anxiety-fueling part: convincing your client to pay you what you now know you’re worth. Conventional wisdom says making the first offer means losing the negotiation. But according to Leigh Thompson of Northwestern University’s Kellogg School of Management, there is no evidence to support this. In fact, a strategy called “anchoring” recommends doing just the opposite. By making the first offer, you are setting the stage for your client’s counteroffer—giving you a leg up.
Thompson suggests going into the negotiation with a slightly higher rate than you hope to land, since your first offer might not be accepted. But she cautions against quoting an unrealistically high number, as that might turn off the client altogether. Instead, do your research and “have confidence your rates are fair for the value you are providing,” says Kellermeyer.
Don’t be afraid to walk away.
In some cases, your prospective client may simply be asking for too much without the compensation to match. This is a common lament among freelancers, so don’t get too flustered if it happens to you. You can try to adjust the scope if you’re still hoping to keep the client, but remember, “if price is the only reason someone wants to work with you, you are just a commodity,” says Kellermeyer.
Take heart that turning down a bad deal may leave room for better-paying opportunities in the future.
How and when to ask for a raise
One of the downsides of freelancing is you generally don’t have an approving boss showering you with bonuses or raises. Most of the time, rate hikes don’t happen unless you ask. Still, as your skills and efficiency progress, so does your value.
“If you know it would take your client 10 hours to do something that takes you a fraction of the time, they may be willing to pay you more for that work,” Kellermeyer says.
Depending on your contract, a renegotiation could happen as early as your next project. But if your relationship is ongoing, Kellermeyer suggests that six months to a year of solid, high-quality work may give you enough leverage to secure a rate increase.
Money isn’t everything
Sometimes a high-paying job isn’t worth the hassle of a rude or flaky client. Or perhaps a low-paying project will add serious cred to your portfolio. Either way, there are other factors to consider beyond dollars and cents.
1. Which clients do you like best?
Some clients are a dream to work with. And others, well, not so much. It could be a matter of wasting too much time—flooding your inbox with last minute requests or keeping you on the phone longer than necessary. Or maybe your communication styles just don’t mesh.
Regardless of the reason, you will quickly learn which clients you like working with enough to make repeat business attractive for both parties. Others you may not pursue once the initial contract has expired, even if the pay is generous (on paper).
2. Which projects best match your long-term goals?
It’s important to evaluate whether a project will move your business forward or just pad your bank account. There is nothing wrong with making money, but it shouldn’t mean forgoing your long-term goals.
When you’re starting out, it can be tempting to accept low-paying work that will significantly enhance your professional reputation. Be very selective about these “opportunities.” If you hope to keep these clients, it will benefit both of you to be upfront about your true rates from the beginning.
Answering the question
Like any other work scenario, if you start out hoping to earn $200,000 a year immediately, you’ll likely be disappointed. But if you know the average annual salary for your field and experience, plus factor in all the benefits you’ll need to pay yourself, you can get to a number that’s fair and easy to understand. And that should make both you and your clients happy.