How to Set An Hourly Freelance Rate
Two months ago, I provided some guidelines for tackling one of the most difficult aspects of working as a freelance writer: setting your rate.
Before I explain how I do that, let me provide a quick recap of the ground I covered in the first post.
In that post, I looked at three common yardsticks for pricing freelance writing:
- Charging per word. You can also think of this as pricing per “unit of text”
- Charging per hour. This is pricing per unit of time.
- Charging per project. This is pricing for a fixed set of deliverables
And I mentioned, in passing, retainers. I kept those for the end because, when you think about it, these are really just recurring project rates.
I explained why clients like project rates (they’re fixed line items on budgets and can thus be planned for). I explained that some freelancers love per-word rates, particularly those that are used to them from journalism (and for freelancers they’re ideal for disguising quick work).
And I explained why the essential thing — to make a stable and satisfactory income from freelancing — is to build all your project quotes around an hourly rate which meets (or exceeds) your target hourly.
This satisfies the client because it provides them with a fixed item for a fixed set of deliverables. And it satisfies you by ensuring that you earn enough money to keep going.
It’s a win-win situation.
Towards the end of that post, I promised to explain how to compute your target hourly rate in a follow-up.
So here that post is.
1: Determine Your Target (Gross) Monthly Income
I live in Israel, where everything — including salaries — tends to be thought of in monthly terms. Of course, in most of the world, salaries are quoted annually. But to make the calculations a little bit easier, let’s stick to figuring things out using that yardstick.
In order to flesh out your own hourly rate quoting table, I suggest you set for yourself two (or even three) target salaries: the salary you need to make in order for freelancing to work financially for you and a stretch goal — say, what you’d love to earn but can’t quite see it happening right now. If you want to pick three, you could add the midpoint between those figures also.
For the purpose of this exercise (and to pick easy numbers) I’m going to set mine as:
Target monthly income (realistic): 15,000 NIS / month (that’s roughly $49,000 in USD at today’s exchange rate).
Target monthly income (stretch): 20,000 NIS / month (that’s roughly $65,000 at today’s rate).
Target monthly income (midpoint): 17,500 NIS / month (that’s roughly $57,230 at today’s rate).
2: Calculate Your Monthly Expenses And Add These ‘Over The Top’
It’s far too easy to charge too little as a freelancer.
And one of the most common stumbling blocks is failing to adequately account for your expenses.
Back in high school, I remember learning in accounting about computing the Cost of Goods Sold (COGS) when putting together a Profit and Loss (P&L) account.
If you run, say, a picture framing shop, it’s easy to remember that when you sell a frame it took the cost of the wood, the labor, and the glass to put it together (as well as the rent on your premises, the cost of your business insurance, etc, etc). In order to remain profitable, at a bare minimum, you need to charge your customer a figure that covers the cost of all those inputs.
As freelance writers — and for most freelancers — we’re instead dealing primarily in intangible expenses.
And “expenses” for this purpose are not synonymous with expenses for taxation and accounting purposes.
So, even if the accounting regulations in your jurisdiction allows you to capture a percentage of your rent as a business expense (assuming you work from home), I do not suggest you work it into this number.
Rather, I instead suggest that you focus on the recurring items that you invest in solely for the purpose of operating your business.
If you pay something annually, like web hosting, simply divide that figure by twelve to get the monthly cost.
An average monthly expense budget for a freelance writer might therefore look something like this:
Example Monthly Expense Budget For A Freelance Writer
CRM — $35/month
Web hosting — $15/month
Hunter.io subscription — $50/month
G Suite subscription - $7/month
Calendly subscription — $10/month
Total — $117
My monthly expenses are quite a bit higher than that, but this is a good representation of the kind of things I spend money on as a freelance writer: Software as a Service (SaaS) overheads and technical subscriptions.
3: Figure Out How Much Vacation You Need
A Word About Supply And Demand
Many freelancers leave stressful nine to five office jobs thinking that freelancing will be a comparative walk in the park.
If only!
Like any marketplace, freelance writing is governed according to the rule of supply and demand (and — coming back to economics — I would add that as a market it is quite elastic!).
In other words, if you charge too little (below your required hourly rate) there’s a good chance you will find yourself inundated with low paying work (pro tip: there’s a correlation between how much people are willing to pay for a service and how much they respect it).
But, because your hourly is too low, you might also need to have to work all the time in order to make a viable income. And you might have the added aggravation of working for clients who really don’t respect or value what you do. Not fun.
If your required hourly rate puts you in the middle or the top of the market then there will be less demand for your services — but, paradoxically, if your hourly is on target you might well find yourself spending less time working on higher paying, higher quality projects.
And Why Vacation Is Important
In light of the above, it’s important to control for a) working hours b) required vacation time and c) business development activity when calculating your target rate. So that you don’t wind up with so much low paying work that all you have time to do is churn out more low paying work. That’s a trap that it’s best to avoid.
So from the outset, it’s important to work out how much vacation time you need to maintain (or obtain) a decent quality of life.
In Israel, salaried workers enjoy a miserly minimum of 12 days paid vacation per year — among the lowest in the world. The majority of the world, and the European Union, has set a minimum of 20 days per year. Because Israel also doesn’t offer an over-abundance of public holidays, I’m going to set my annual vacation allowance as 24 days, or 2 days per calendar month, in order to try ensure that I enjoy what I consider to be reasonable time off.
Your average month has 21 working days, so to reach my target daily rate I’m going to use this formula
As you can see, I’m adding my business expenses over the top; I’ll explain why later.
So let’s come back to our example.
Let’s take the 15,000 NIS/month ($49,000/year) target income. That works out to $4,087/month at today’s rate. So let’s round up to $4,100. And let’s round the average monthly expenses up to $150 to choose a more realistic figure.
So our target day rate comes out to $223/day.
(Note: this isn’t our actual day rate. I’ll explain why later!)
3: Set A Billable:Non-Billable Ratio
If the above number looks like it’s about to cook up an awfully low hourly rate, despite our modest income target and very modest monthly expenses, then you would be right.
If we just divided that number by the average of hours we intend working per day that then that would be assuming that we do nothing but churn out billable work all of the time.
As has done no freelancer. Ever.
In “I’m A Freelance Writer, Here’s How I Spent Today” I tried to give a flavor of how much more there is to do as a freelance writer/graphic designer/developer than write/make graphics/write code.
As freelancers, we’re often sole operators with many responsibilities.
There’s the time we spend working. And then the time we spent working on things that we can’t bill our clients for. Cumulatively, these are our so-called “unbillable hours.”
Think:
- Marketing activities such as writing this Medium post.
- Business development and holding talks with prospective clients.
- Admin work for current clients.
- Accounting and invoicing.
- IT matters and website development.
It’s quite common to forecast for a 75:25 billable:non-billable ratio.
Personally, I think that is too high and think that 50:50 is both more comfortable and realistic.
So to figure out what number to divide our target daily rate by to reach out target hourly by we need to work out the divisor by:
And then:
Or:
So, let’s assume we want to work eight hours per day.
At a 50:50 billable:non-billable ratio our divisor would be four.
And our target hourly, from our target daily rate of $223 would be $55.75/hour.
And how much would we actually need to charge if somebody asked us to work for a day?
It’s easy to forget this, but you need to be covering for your non-billable all of the time — even when you’re fully booked.
Why?
As a freelancer, you always need time for business and pipeline development. A project could take up every moment of your time for months but then dry up. Even if you’re fully engaged, the time you will need to spend on future (unbillable) business development needs to be compensated unless you want to have loss-leading dry patches. (Note: if you do find that you’re consistently filling up a higher percentage of your day with billable hours, and want to offer your client the best possible rate, then by all means adjust the billable:non-billable ratio upwards).
So, in light of the above, I would quote a day rate for an 8 hour workday at 8 x 55.75 = $447.
Want a direct formula for actual day rates that skips working back from the hourly?
Notes
While it might seem obvious, this needs to be pointed out.
You will only make your target annual income from your target hourly rate if:
a) You have enough clients and work to fill up your billable:non-billable ratio. If you’re working off 50:50 then you’ll need to be working on billable work for roughly half your work day every work-week, give or take. If you only have one client, for instance, and bill them for two hours work each day at $50/hour, you will only make $100/day or roughly $21,000/year.
b) You are able to correctly estimate how many hours each project will take you. If projects scope screep, you might find that your target hourly has been eroded. As I pointed out in my earlier post, this is the pitfall of project rates. This is also why I think a 50:50 billable:non-billable ratio is safer. You have some added buffer time to properly scope out projects, quote them appropriately, and get and keep enough clients to ensure that you have enough work to meet a).
This also doesn’t account for:
- Public holidays (I’ve subsumed that into the general vacation allowance);
- Sick days (you might want to add an extra half day per month into the calculation for that).
I’ve tried to work out an hourly rate which should put myself in roughly the same position as a salaried employee.
Salaried employees don’t have business expenses as payslip deductions — so I’ve added those over the top.
But obviously the hourly rate you will end up with will only be enough to get you to the equivalent gross salary — before tax, social security, and any other contributions you might be liable for as a freelancer.
Use the above formula to work out your target hourly rate.
And good luck quoting!
