Putting on the price tag
Freelancers have many difficult decisions to make when it comes time to set a price on their work: Should I price myself low and hope to win over more clients, or should I price myself high to attract good quality clients? Should I charge by the hour, or some other way?
There are a million questions you may have, and there may be a million different answers to them. Sara Horowitz, founder of Freelancer’s Union, shares some practical steps to setting yourself up for pricing success:
- Track how you use your time. Is it all work and no play, or the other way around?
- Know your rock bottom. Leave room for negotiation, but still maintain a bottom line.
- Do your homework. Know the standard rates for your industry.
- Educate your clients. It’s not their job to know your value. Communicate to them what you are worth.
- Don’t fear fluctuation. Projects will fall on a spectrum of prices. Be a flexible negotiator.
However, before you begin setting a price on your services, you’ll need to calculate the expenses that your freelance work will need to cover. An article from Envato Tuts+ says, “A budget is a forward-looking document, making projections into the future and helping you estimate how much you’ll make next month or three months from now.” Draw up a budget for monthly personal and business expenses. Personal expenses will include things like rent, car payments, and groceries, while business expenses will include both the one-time expenses and the ongoing expenses needed to maintain your career. Because of the variability of freelance income, you may want to apportion your profits to specific savings as well, such as emergency savings, retirement savings, and estimated taxes.
Mint provides a handy resource for building a budget here.
However, budgeting isn’t a one-time calculation. You’ll need to keep an eye on the income and expenses as they occur daily. Below are some tips from Horowitz’s The Freelancer’s Bible about keeping documentation on your finances:
- Separate business and personal accounts.
- Keep a business log of all your appointments and project deadlines, as well as business cards, website, and more to use as proof to the IRS that you are an operational business.
- Keep careful record of all business expenses, including receipts. This will help itemize business-related tax deductions.
- Make sure your home office meets the IRS rules for deducting business expenses.
Now that you know how much money you’ll need to make to keep up with your expenses, it’s time to put on the price tag. Horowitz suggests a basic formula for calculating your hourly rate:
(annual salary + annual expenses + annual profit) / annual billable work hours = basic hourly rate
Here, annual salary refers to how much you would like to make, annual expenses are all the items found in your budget, annual profit is anything charged over the baseline expenses in your budget, and annual billable work hours refers to the time you spend on all tasks related to completing projects for your clients. Billable time can include the time it takes to place phone calls, write emails, market yourself, and more, which is why it’s important to keep track of how you use your time.
But should you charge an hourly rate? There are many ways to price your work. Besides the hourly rate, there are two others worth mentioning here. Jake Jorgovan’s article from Career Foundry compares hourly, project-based, and value-based rates:
- Hourly: While simplest to calculate, hourly rates punish you for getting a job done fast. Hourly rates also don’t take into account the quality of your work, the client’s budget, or how demanding the project might be. Oftentimes, freelancers shortchange themselves by charging an hourly rate.
- Project-based: Project-based pricing solves some of the problems of hourly rates. Rather than placing emphasis on how many hours you work, project-based pricing allows you to factor in the scope and specifications of the job itself. Is it demanding? Is the client difficult to work with? Or will it be a pleasant and creatively stimulating project?
- Value-based: This method of pricing can allow you to make a lot of money even from a small or quick project. You price your work based on how valuable it will be to your client. Are you solving a persistent issue your client has struggled with? Does your work potentially cause your client’s sales to increase? Knowing the value you’re providing will often allow you to put a bigger price tag on a project that might have paid far less at an hourly or even a project-based rate. Jorgovan writes, “Shifting the focus of my freelancing away from the time I worked and toward the value I delivered changed everything.”
Remember, there isn’t an exact science to pricing yourself. It may take time to figure out which pricing structure works best for you, both in terms of your budget and in terms of the quality of work you deliver. The most important thing is to set a fair price, both for your client and for yourself.