Freelance Pricing Part 1 – Set Your Rate!

To determine how much to charge for your services is often one of the biggest challenges for a new freelancer. If you charge too much you’ll have trouble landing a job, but if you charge too little you’ll starve.

If you’re a new freelancer, you’ve probably scoured the Internet in search of the average rates of professionals in your field. Don’t even bother. I’ll let you in on a secret… now that the Internet is here, there aren’t any "average" rates, because the demographics are too widespread. Furthermore, in the United States, it’s now illegal for competitors to discuss rates amongst each other in light of antitrust laws, which explains the absence of rate survey information online. Instead I’ll show you how to figure out what rates you should charge by using a formula.

How much do you want to earn?

To begin, figure out what you want your annual salary to be. You might want to pay yourself what you earned as an employee, or take a look at salary.com to find out what the average salary is for your profession.

Next, you’ll need to figure out what your overhead is. Overhead is an expense that can’t be found billable to a client — it’s simply a cost incurred in running a business. Fill out the following form to work out your overhead. If you aren’t sure of the figures, simply look back on last year’s bills and bank statements.

Monthly Overhead

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Nonproductive Time

There are duties that must be completed for each client that are not productive towards completion of the project. Figure out the actual work hours that you spend on the following duties. You’ll need this total later, so keep the number handy.

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Profit

Next you’ll need to figure out how much profit you wish to make. Profit is the amount that you make after expenses. I’d suggest that around 20% is an acceptable profit margin. Profit is necessary for a successful business, so make sure to factor it into your formula.

Variables

There are always variables that you will need to take into consideration when you’re figuring out what you’ll charge. You might consider:

  1. What does your competition charge?
  2. What’s your niche?
  3. How many years’ experience do you have under your belt?
  4. What skills do you have?
  5. What types of clients do you want to attract?
  6. Are you working online or local?

The Five Formulae

There are five formulae you can use to ascertain your hourly rate.

Formula 1 – The Basic Method

Follow these steps to figure out what your hourly rate should be.

  1. Subtract nonproductive time from Annual Hours to get Billable Hours.
  2. Add Salary and Overhead Together
  3. Multiply Total By Profit Margin (10% – 20%)
  4. Add Total (1) and Total (2) Together
  5. Divide Total (3) by Billable Hours (the amount from #1)

For example, if the following is true:

  • Salary = $30,000
  • Annual Hours = 2,080
  • NonProductive Time = 500 hours
  • Profit Margin = 20%
  • Overhead = $15,000

Then this is how you figure out the hourly rate:

  1. 2,080 – 500 = 1,580
  2. $30,000 + $15,000 = $45,000
  3. $45,000 X 20% = $9,000
  4. $45,000 + $9,000 = $54,000
  5. $54,000 / 1,580 = $34 / hour

Formula 2 – The Easy Method

This formula is the easiest of them all. However, I don’t recommend this formula unless you are a well-established professional. This isn’t the way to start out your freelance business — only very skilled freelancers can get away with this.

Ask yourself the following questions:

  1. How much money do you want to make on this project?
  2. How many hours do you want to work?

Now all you need to do is divide 1 by 2. It’s that simple! You now have your hourly rate.

Formula 3 – Annual Costs and Annual Hours

Use this formula if you need to set the rates for your entire business.

Add up all the costs you incur through your business on an annual basis (and don’t forget to factor into these your profit percentage), and divide this by the annual hours you work. This will give to you your pay rate.

  1. Salaries + Overhead = Annual Costs
  2. Divide Annual Costs by Annual Hours Worked

So for example, if the following is true:

  • Salaries = $60,000
  • Overhead = $50,000
  • Annual Hours = 2,080

Then this is how you figure out the hourly rate:

200,000 / 2,080 = $52 per hour

Formula 4 – Pricing By Order Form

To price by order form, you’ll need to use an order form to add up the cost of each ingredient in a project. I don’t recommend using this method unless you’re only designing simple sites that all have the same basic ingredients, otherwise, there can be too many variables in the project, which can prevent you using an order form. Here is an example of an order form you might use:

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Formula 5 – Estimation By Project

Most clients are going to want to hear how much the entire project is going to cost. Even if you have an hourly rate, this alone is probably not going to be acceptable to your future clients — you’ll need to justify the number of hours you plan to spend on their job. It takes practice, but you’ll need to learn how to break projects into individual tasks, in order to estimate how long the project is going to take (in hourly terms), and then charge accordingly. Be sure to find out what the client expects you to take care of — if they expect you to do everything, take this into account in your quote. Whatever the case, break the project into the following phases:

670byproject.gif

Now visualize how many hours you feel each stage of the project is going to take, and total these hours to get a final figure.

Multiply your hourly rate (figured out from one of the above formulas) by the total estimated number of hours for project. The resulting amount forms your bid for the project.

So for example, if the following is true:

  • Hourly Rate = $30
  • Total Estimated Project Hours = 50

Then this is how you figure out how much to bid on a project:

$30 x 50 = $1,500

Make sure that your client is very clear about the scope of the project. You should write a clear contract to make sure that the outline of the project is mutually understood, otherwise the client may take advantage of you (or feel that you are trying to take advantage of them!).

The Bottom Line

The bottom line is that you want to make a decent living. If your hourly rate seems too low then raise your rate until you feel comfortable with it. If several clients are too eager to hire you as a freelancer, you might want to rethink your hourly rate. On the other hand, if clients are very interested in you at first and then stop communicating with you after they hear what your hourly rate is, then you need to lower your rates. In other words, feel customers out to see whether your fees are appropriate or not.

If you have determined that your fees are too high, you might need to lower your overhead in order to lower your fees. Try cutting some of your unnecessary expenses in order to make ends meet. When you make enter the world of freelancing, sometimes there’s a little suffering at first. Don’t worry — it doesn’t usually last long if you know how to save when times are good.

Check back next week for Freelance Pricing Part 2 – Quoting to Win! where we look at applying your freelance rate in a pitch or proposal.

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