You’re probably calculating freelance rates all wrong — so follow this strategy instead
How to think in terms of value, not time. Follow this pricing strategy to find your true market rate.
When you first start freelancing it’s very difficult to determine what to charge. You have no previous context, and colleagues are often tight-lipped about their own financials.
I admit I was clueless about pricing when I started. How about you?
Many freelancers make the mistake of using an online rate calculator to set their freelance hourly rate. There are heaps of these calculators online, and they all follow the same pattern:
- You start with your desired annual income.
- You add up the cost of doing business — like office space, internet, hardware and software costs.
- You add up other living costs, such as insurance, self-employment tax.
- You add these things together to get your desired adjusted income.
- Then you calculate your billable hours by starting with your maximum working hours per year, and subtract for things like vacations, national holidays, and sick days. You arrive at a realistic number for the number of hours you could work each year.
- Divide adjusted annual income by billable hours, and that equals your hourly rate.
This seems logical, but it’s completely backwards.
Let’s ignore the fact that there may be better ways to price yourself than hourly rates. When you first start out, value-based pricing isn’t a realistic option. Most of us will come to terms with the fact that we are trading our time for money by charging by the hour, at least for the first few stages of our careers as consultants.
The problem with these popular hourly rate calculators is that they get off on the wrong foot right from the first step. There may be no connection at all between your desired annual salary and your actual value to the market. If you’ve come from being previously employed, it’s easy to think “I’d like to keep making at least as much as I was making at my last job.” But why assume that you’ll retain that same value in the freelance market?
If you haven’t been previously employed in a capacity that provides enough reference for this decision, then you’re literally picking a number out of thin air. The alternative is to spend the time to interview colleagues with a similar skill-set and experience level as you, in order to form a baseline as context for this figure. And that assumes you can find enough of these people that will be open and honest about their pricing!
It’s a big ask. No wonder most people take the easy way out and ask a calculator to figure it out for them.
So you end up with a starting figure that rarely has concrete justification in real life, and all other calculations from that are tainted. The resulting hourly rate isn’t backed up by much of anything, and can be way above your actual value. You struggle to find work and think freelancing is too hard.
This is all a misunderstanding of what rates mean. Let’s look at some pitfalls of the rate calculator system that amplify this confusion.
Pitfalls
Billable hours are never as many as you think
Let’s say you did manage to get some solid context for the determination of your desired annual income. You went through the calculation to come up with an hourly rate. You paid close attention to detail on all the expenses to ensure you didn’t short-change yourself.
You’re still going to land short of your goal, because your billable hours are a fantasy.
When you’re a freelancer, you are also running a business. You are doing everything: admin, marketing, accounting, proposals, quoting, networking. If you used to be an employee, you either didn’t have to do those things, or you got paid to do them.
As a freelancer, you have to wear all those hats and you don’t get paid for most of it. The amount of time you have for actual focused work is 75% or less of the time you’re “working”. That means a standard eight-hour day might only have six billable hours.
If you start with the false assumption that you can bill for 40 productive hours per week, you’ll be quickly disappointed, unless you’re willing to work a lot more daily hours to make up for the admin time. But most of us get into freelancing because we want a more flexible schedule, more time for family, more time for leisure. Working a lot more is not part of the freelance dream.
I run a really efficient freelance business, with admin and marketing time cut down to a bare minimum, and I still average no more than six billable hours per day.
You won’t have work all the time
Don’t forget that you may not have a continuous stream of work to fill all potential billable hours. In fact, if you’re new to freelancing, you’ll almost certainly not have consistent work until you build up a reputation and a larger client base. Even very successful, in-demand freelancers like myself will have bits of downtime — maybe a week or two between projects when schedules can’t align perfectly, or a slow patch around the holidays— that can eat into expected earnings.
Your definition of billable hours needs to account not only for the extra admin tasks required to run a freelance business, but also for the uncertainty of work in your pipeline.
Unrealistic charging rates run rampant
The result of all this faulty rate calculating is that you’re told to charge more than you’re actually worth, if you want to meet you annual earning goals. The reality might be that your current level of value can only earn you half of what you expect. You’re not yet valuable enough to make full-time freelancing work for you. More on this later.
At best, these online rate calculators can be a useful tool to help you learn about your costs of doing business, and to budget a baseline rate you’ll need to make ends meet. That can form a good reference point to fall back on when you determine your rate.
But it should not be mistaken for a real-world rate. Those calculators don’t take into account almost everything that’s really important about determining the right rate for you.
A better way to think about pricing
Time to get back to reality. Forget your preferred salary or even your baseline living wage. Your hourly rate should have very little to do with how much you think you’d like — or need — to earn. What really determines your rate is how much value you offer your clients.
I’m not a gung-ho capitalism lover who thinks “the market” will solve everything. But you can only command a rate that clients are willing to pay. They have to perceive enough value in you to justify that rate, otherwise you’ll get no work. And no work at a high rate is worse than some work at a fair market rate. The amount of money you think you need to make doesn’t enter into that equation.
Change your frame of mind towards value, not time
We need to stop thinking about this backwards. Stop framing the decision about rates around what you need to earn and how much time you can work. Instead, start thinking in terms of value on offer. Your rate is a reflection of your value to your clients — compared to the value of your competitors — and nothing else.
With this frame of mind, we can see that rate calculators — based on expected earnings divided by time — don’t account for the value you provide your clients. The only assumption is that more time equals more value.
But we know from experience that this is rarely the case.
If you have five more years and experience and heaps of new skills along the way, but your cost of living has stayed the same, should your rate be higher? A rate calculator would say no. But of course the answer is yes. Rate calculators don’t take into account skill, experience, professionalism, or effort, when in fact those things are the largest contributors to the rate you can command.
If you’ve learned new techniques that allow you to do the same work twice as fast as you could before, you want to be compensated for that by doubling your rates. Rate calculators don’t take into account the speed at which you work or the quality of work performed.
Think of rates in terms of abilities such as experience, speed, skill-set, location, project management capacity, communication skills, and reliability. These are the metrics you should be judging yourself by.
How do you increase your rates?
Simply increase your value. Gain more experience. Learn new skills. Refine your soft skills. Beat everyone on effort. Be ultra-professional.
Do you work faster or offer better quality work than a competitor? Charge more than they do.
Are you more professional and reliable than your colleague. Charge more than they do.
Do your extra years of experience allow you to come up with the right solutions more economically? Raise your rates — because your experience is directly contributing to a better outcome for your clients, and your efficiency is saving them money.
Your value determines the right time to go freelance
If you’re not yet valuable enough to earn a living at the freelance rate your market dictates, it could mean full-time freelancing isn’t right for you yet.
Consider getting employed for a few years to up-skill and increase the value of your craft, while freelancing in evenings and weekends to practice the skills of running a business. Then when you have the experience and confidence to command a higher rate, ease into full-time freelancing.
You learn faster where you have collaboration and mentoring. Freelancers who don’t have the same resources are disadvantaged. I went straight into freelancing after I graduated university. Looking back I would have been better off finding employment at a design agency for a few years or, at the very least, a business/design mentor to learn those early lessons twice as fast, and increase my market value quicker. Then I could have transitioned into freelancing at a point when the value I offered better correlated with the amount of money I hoped to earn.
I was fortunate enough to have a low cost of living at the time, which allowed me to gradually build up full-time work and respectable rates over a transition period of 6–12 months. But not everyone has that luxury.
If you need to make full-time freelancing pay the bills from day one, don’t make the leap until your market value/rate is adequate to support your earning goals. Until then, find a career path that emphasizes increasing your value over all else.
A gateway to value-based pricing
The added benefit of basing your rate on value — rather than expected earnings divided by time — is that it’s easier to start thinking about value-based pricing methods and transitioning away from trading time for money.
Value-based pricing requires a huge shift in mind-set. Even if you’re thinking about your hourly rate as a reflection of value, it’s still tied to time. Decoupling your earning entirely from time spent on the job is another massive mental hurdle. To be perfectly honest, after 17 years of freelancing I’m still coming to terms with it and wrapping my head around the unique challenges of value-based pricing.
This is a huge shift for your clients as well. They need to buy into the concept of value-based pricing as much as you do, because it requires complete transparency and trust to help you define a project’s true value.
Try weekly, instead of hourly, billing
One way to ease this transition is to start pricing your time in larger, more abstract chunks. I often price based on a weekly retainer system, where my work is charged by the week, instead of by the hour or day. I still define minimum and maximum numbers of hours that will be worked during each week. But it’s perceived by clients as a weekly fee, rather than an hourly rate. If the scope changes and we need to extend the project, no problem. Simply add on an extra week.
It’s a pricing system that retains most of the flexibility of hourly billing, and all the same ease of understanding and fairness. Yet, because the unit of time measurement is larger, the perception is that my rate is less connected to the number of hours I work. That forces clients into thinking more about the value I’ll be supplying during that week, rather than just how many hours.
It’s a subtle difference. But that could be all it takes to tip the balance towards value-based pricing. If you get clients comfortable with a week-based pricing arrangement, they’re one step closer to embracing the abstraction of true value-based pricing.
Hourly pricing is here to stay
Whether we like it or not! It remains the default method of pricing creative work. So — like many of us — if you’re stuck with hourly pricing, the least you can do is do it right.
Do everything you can to make sure your rate is in context of your industry and location, and is justified by your skills and experience.
Shift the way you present your pricing to clients so that you’re perceived as being more about value and less about time.
When you do so, you’ll find you never get questioned about your rate. You never get called too expensive or too risky. Because your clients fall in love with the value you’ll offer them, and finding the right person to trust is invaluable.
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This story can also be found on solowork.co
