Figuring out what to charge is one of the very first questions that a freelancer must tackle. There’s a wide range of what constitutes a fair hourly rate depending on your particular industry. Photographers, developers, and mechanics all have different median rates. When thinking about how to competitively price your services against other professionals in your industry, you need to take into account what phase of growth you’re currently at.
The entry phase is your initial state getting into the market. It’s characterized by not having a proper portfolio or references. At this phase you represent the greatest risk to your potential clients because it’s difficult to prove that you can provide value to a project. In an effort to make yourself more competitive, it’s necessary to charge reduced rates or possibly to volunteer for exposure. This is a controversial stance, but it’s what worked for me and several other freelancers when we were starting out. The greatest challenge is just getting in to the market and establishing a reputation.
After you’ve built up a portfolio and you have some references under your belt, you can start to increase those rates in the subsistence phase. Here, the big difference is it’s easier for you to prove that you can provide value since you have established a track record. As the name implies, this is the phase where you start ‘making your living’ freelancing and by now you may have started doing it full-time or are beginning the transition to full-time.
After a while in the subsistence phase, you’ll have amassed a stellar portfolio and references. You’ll have honed your craft and gained experience working with clients. In the growth phase you’ll want to charge more and look past charging what you need to pay your bills and focus instead on earning what you need to grow your business. Now is when you want to start focusing on your margins and how to grow them and to start dabbling in delegating non-critical tasks and building a scalable business model.
To figure out what you need to charge at each of these different phases, you need to know what your base rate should be. There are several different methods to figuring out what this base rate should be. Rather than using just one, I recommend using multiple methods and cross-referencing them to ensure that you find a rate that is both competitive and high enough to provide the quality of life you desire.
One of the easiest methods is to see what everyone else is charging. On sites like Freelancer.com and Upwork.com, you can see what other individuals are charging that are in your field. Additionally, you can check the BLS website for an idea of what professionals in your area as a whole (not just freelancers) are making.
What Were You Paid at Your Old Job
Another common technique is to take your old hourly rate (or effective hourly rate if you were paid a salary) and double it. This will get you close to taking home a similar rate of pay as you made at your old job. Doubling the rate of pay helps offset the cost of self-employment taxes, having to pay for your own insurance, and possibly some business expenses you may incur. This isn’t a very accurate method, but it can be a good way to quickly estimate a ball-park figure of what you should be charging and can be used to check other methods.
Crunching the numbers
The most accurate way to determine what you need to charge is to use a formula. In the first step calculate all of the money going out. This includes health insurance, cellphone bill, your mortgage or rent, utilities, auto loan payments, IRA contributions, … include both expenses and savings goals in this “money out” figure. This will give you the total dollar amount that you need for the year. For the sake of this example we’re going to assume that we ran the numbers and came up with $35,000 as our necessary income.
Once you have this number, divide it by 0.7. Dividing by 0.7 factors in an estimated 30% state and federal tax income tax, Social Security and Medicare, and possibly some miscellaneous small business expenses (the larger business expenses should be factored in to the money out number). Depending on your marginal tax rate and the state you live in, you may want to bump this down to accommodate a larger percentage, for example dividing by .6 would get you the number necessary if you’re assuming 40% state and federal tax. This gives you your desired gross revenue. Going back to the $35,0000 example that means we need $50,000 in gross revenue.
Next we need to figure out how many weeks you’re wanting to work. There are roughly 52 weeks in a year. If you want to take 2 weeks of vacation, that comes out to 50 working weeks in a year. For our example, this means we need to make $1,000 per working week if our goal is to have 2 weeks of vacation per year.
Lastly, you’ll need to take this number and divide it by the realistic number of billable hours per week. If you’re only working 40 hours per week, you’ll likely have less than that in weekly billable hours. There will be a percentage of your time that needs to be spent doing non-billable things such as maintaining your books, driving to meetings, research, and so on. For our example we’ll assume 35 hours per week are actually billable. That brings us to $28.57 for a necessary hourly rate, which we can round up to $30/hr to make it look prettier.
Once you have this number it’s good to do a check and see where that number falls among what other people are charging. If this number is significantly higher than your competition, you may need to readjust your money-out or the number of working weeks, etc. However, ordinarily when you do the calculation you’ll come out with a number that’s still pretty competitive, especially when compared to larger companies. As a freelancer you won’t have all of the additional administrative fees and other expenses that larger companies will have to charge.
Using this Base Rate
Performing the calculations gives us our base rate. In the entry phase you’ll likely want to charge less than the base rate to grow your portfolio quicker. During the subsistence phase you’ll want to charge your base rate so you can cover your expenses. During the growth phase you’ll charge some multiple of this base rate as you hire help and start to focus on scaling your services.
Maneuvering Around the Rates
Now that we know what to charge, the next step is to know how to maneuver around with these rates. A common strategy is to use your existing client base as leverage to snag better paying clients. For example, once you’re in the subsistence phase and you have enough clients that you’re able to maintain your desired quality of life, there’s less pressure to get additional clients so you can afford to try to ask for higher rates. If the potential client doesn’t want to pay the higher rate that you’re proposing, you already have a healthy base of clients so it’s not that big of a deal if they say no.
As you continue this pattern, you’ll notice that with each new client you’re commanding a better rate. You don’t want to maintain your original rates with your old clients forever, so it’s important that as you start “cycling up” you make sure to renegotiate your old hourly rates with your older clients. Before you do this make sure that you have a good relationship with the client and you will be able to deal with the possibility of them moving on and finding a new freelancer. Ordinarily, if you’ve established a relationship and they’re pleased with your work, they will rather stay with you than take the risk of finding another freelancer, but there is the possibility they may move on so be prepared.
When approaching the issue, don’t make it sound like a shake down. Simply explain to the client that due to increased demand for your services and a greater volume of work, you need to charge higher prices.
Looking Past Hourly Rates
Lastly, focusing on an hourly rate makes things easier in the beginning, but it’s important to be thinking past hourly rates. There’s an excellent e-book on the topic called “Breaking the Time Barrier”. It does a really good job highlighting the relationship between the freelancer and the client and how focusing on hourly rates rather than value-added can create an adversarial relationship.
Rather than trying to maximize the number of hours to make more money, transitioning to fixed-rate billing and charging a percent of the value added is best for both the freelancer trying to maximize their dollars per hour-worked and the client who is already focused on value. However, even if you’re in the fixed-rate mindset, it’s important to be aware of whether or not you’re meeting your necessary minimum hourly rate, otherwise you aren’t achieving your maximum potential.