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Chapter 3

The definitive guide to going Freelance.

By Kyle Racki and Ross Simmonds

Setting your rates

Chapter 3. Setting your rates
Money and calculator

The first step to figuring out what you should charge is in figuring out what it is that your customers really want. It typically starts with a prospective client asking, “How much would you charge to [insert your service here]?” The next few words that come out of your mouth can make your next month a beautiful one or a complete headache. It can determine how much money you make, your relationship with your client and even the quality of your life. Sound a bit much?

It’s not. It’s the truth.

As an example, I’d like to share with you a story about my friend, she’s a web designer, let’s call her Alicia T; like Mr. T but Alicia. Anyways, Alicia is super talented and was given an opportunity to quote on a website design job.

She was going to make a guesstimate but was afraid she would be too expensive and lose the chance to ever work with them. She desperately wanted the gig so she quoted an extremely low price with the hope that the client would jump on it. She landed the project; delivered the client great work and they were very happy even though she was getting paid peanuts. When the client had a larger project, they didn’t use Alicia because her low rate flagged “amateur”. Ouch.

The lesson? How you price your services can be the difference between working on great projects that pay well and projects that fill your schedule but don’t pay enough – or, in our good friends Alicia’s case, missing out on projects entirely.

...my approach has been charge less than agencies so that I could be attractive to a niche market of small-medium size businesses who are too small to interest agencies or can’t afford them but who still require marketing services. It’s a very untapped market. Also, by charging less, this makes me of value to agencies since they can subcontract me to do work for them but there is still room for them to charge me out at their regular rate and make money off me. That has helped me develop a lot of relationships. I help them make money

Jennifer Faulkner Freelance Copywriter
Long Jacket Communication

The Three Ways To Price Your Services

Before we start talking about how you’re going to start attracting clients and making money, we need to talk about how you price your services. It’s a key aspect of any service business and one aspect that a lot of service providers are unsure of. Pricing shouldn’t be scary, it’s just a part of business.

A few years ago, I was sitting in a meeting with a potential contractor and asked him how he billed. He was someone I was very interested in working with but in one minute he was able to throw all that out the window. It was awkward. He looked me dead in the eye then down at his cup then out the window and said six words that threw me a wrench, he said: “How much do you think is fair?” At that moment, my opinion changed and I knew I could pay less than what I originally thought. I was right. I also realized that this is an issue for a lot of freelancers.

So how can you figure out how to price your services and be confident about it? There are three pricing strategies you can take:

  • Cost Plus

    The most popular approach to pricing in business as a whole is the cost plus pricing strategy. Determine the expense associated with producing a product and add an additional amount to that number to generate profit. Cost-plus pricing is relatively simple, as it only requires the unit cost and desired profit margin for calculation.

    This is probably how most of the freelancers in your industry cost their services. The first thing they do is look at their monthly costs like rent, subscriptions, and meals, then add on top of that how much they want to make in profit. It’s why so many new freelancers charge $30 an hour with the goal of making $50,000 a year or experienced freelancers charging $90 an hour with the hope of making their first six figures.

  • Market Rates

    Leveraging market rates is solely based on the environment in which you’re offering your services, where you look at your location and industry to identify what cost others are charging and make decisions based on that.

    A quick glance at a site like Elance or Odesk will show you how varied prices range across different regions. If you dive into the economics of it, the cost for a nice meal in North America could often feed a family for a week in Southeast Asia or some parts of Europe. As such, the market rates in comparison to international freelancers can be quite alarming.

    That said, recognizing that most clients are looking for services from people in their region, you need to understand the local or national market. It’s here where you may lose a deal based solely on the pricing strategy you’ve taken. If we’re both offering the same services and both of our skills and experience are considered equal, but I charge $100 an hour while you charge $20, there’s no way I’ll win the project.

  • Value Driven

    Value driven pricing is when you base a product or service’s price on how much the target audience believes it is worth. For example, if your client is a company doing hundreds of millions per year in revenue and they want you to redesign their website, the right design, messaging and execution could result in a significant return on investment. As such, you want to ensure that what they pay for the website is commensurate with the value you deliver.

    You can start to offer flat rates for certain services and have additional costs for extra bells and whistles. A standard website costs $5,000 but if you want it to be responsive, that’s another $2,000. By using value driven prices, you avoid leaving money on the table or losing revenue. Customers pay what it’s worth.

    Once you’ve taken a closer look at what pricing strategy will work for you, keep in mind the benefits and issues with each approach. When a potential client asks you to bid on a project, most freelancers assume that there are only two ways to quote on a project. Most think that they can either charge by the hour or by the project. While these are definitely the most popular approaches, they aren’t the only approach that you can take for your services.

What Price Structure Is Right For You?

  • Hourly Rates

    This is the most common pricing structure. It’s also known as the “time and materials” approach in most freelance and agency circles. You need to keep track of the hours you work and bill your client based on the time it takes to get a specific job done.

    How do you figure out your rate?

    Figuring out how much you should charge per hour or per project can be a huge undertaking for a first time freelancer. The question of how much you should charge is a question that I’ve been asked time and time again.

    To start, take into consideration how much you would like to make a year to live a good life. Think about how much you would make if you were working a traditional 9 to 5 and then consider how much you would like to make now that you’re the boss.

    As an independent freelancer, you must pay all your overhead, health benefits, vacation pay, retirement savings and taxes. Take all of the expenses you have on a monthly basis and determine your run rate as it relates to ongoing expenses. From there, use that as a benchmark to identify what rate you would have to charge and how many hours you would have to work to cover those ongoing costs.

    You will never have a week with 40 billable hours, so you have to plan for only part of your time being billable, and dedicating the rest of your time to non-billable tasks like blogging, sales, invoicing, personal projects, reading and learning new skills. With that in mind, estimate how many billable hours you can realistically work per week. If the answer is 20 hours per week, take some time off for vacation and holidays which gives you 900 hours per year or 75 hours per month.

Typically I have my hourly rate that I factor several things into: 1. Client size - I can’t possibly expect startups and smaller clients to pay me the same as Fortune 500 companies. It’s just simple math. But if I can make things happen, i.e. in a shorter timeframe to reduce costs? Then win for all. 2. Time spent - If the project is going to last several months, I have to account for that. There may be a lot of back and forth and you need to accommodate. 3. Time allotted - Things may be a rush and you only get 2 days to work within. You might have to work for 40 of those 48 hours).

Rina Miele Freelance Designer
Honey Design
  • Let’s say with rent, gas, groceries, car bills, power, internet, insurance, subscriptions, debt repayment and miscellaneous costs, you pay out $3,000 in expenses each month. That means the minimum you could charge as an hourly rate is $40. Any less and you’re losing money. I’m assuming you want to actually make profit, so charge a healthy margin (20%-50%) well above your break even.

    The downside of charging hourly.

    On the surface, most freelancers think that charging by the hour is the simplest and most preferred approach. In fact, that’s not the case and charging by the hour can be more headache than it’s worth. Here are a few reasons why charging hourly can cause issues:

    Diminishing returns: If you’re working with a client and are tasked with writing 8 different press releases, the eighth release is going to be easier to write than the first. It’s also likely to be the best of the batch as you will have learned so much more about the client. It will also probably take you less time and if you’re being paid by the hour, it will be the least profitable release you write.

    Timesheets Suck: What if you had to run out for 10 minutes to pick up your kids during the hour you were working on your clients project? Do you have to reduce that from your time? What if you come up with a bright idea while in the shower? Does that count as time? Timesheets are a hassle and keeping track of when you’re on and when you’re off can be a burden.

    Limited Income: You can only work so many hours in a day. If your rate is $50 an hour and you spend 20 hours per week on client projects—remember you still need time for non-billable work—your income will be about $52,000 a year. I know, that’s not bad but that’s as good as things are going to get taking this approach at that rate.

  • Daily/Weekly Rates

    A lot of agencies and organizations are shifting from offering their clients an hourly price structure. This approach makes it much easier to manage from a time perspective and gives clients the benefit of knowing that for an entire day or week, you’ll be committed to their work. On your end, it also makes it easier to keep track of your time as it’s pretty black and white when allocating work to longer periods of time.

  • Per Project (Fixed Rate)

    A project that uses a fix rate is when you express clearly to a client that the scope of work will be completed for a set price. Most clients enjoy a fixed rate project because there’s no risk in scope creep and projects going over and above their budget. It’s easier for the client to budget for the project itself and is also easy to understand as they’ll pay $X to receive Y.

    For you, it’s important to know how much time will go into a project and to make accurate estimates so you’re not being overworked. It’s also important that you set up a clear understanding with your clients that if there are additional features, changes or requests that come in beyond the scope, you’ll have to bill accordingly.

    Most freelancers and clients consider charging by the project as the best approach. If you’re a graphic designer and are looking to send a prospect a quote for a concert poster, your quote would read something like this:

    To design, illustrate and deliver a concert post for XXXX Film Festival is $1500. This fee includes two rounds of design revisions along with the final artwork files in proper format for printing.

    If you win the job, the client won’t know how many hours you spent on the project and will likely not care because you’re telling them exactly what they’ll get. If you can get the job done in 5 hours, great, if it takes you 20 hours, that’s fine too. You don’t have to worry about timesheets and if you’re working with this client on a regular basis, you’ll likely become quicker at turning around the projects and still charge the same rate.

    The downside to fixed rates is that if you’re not careful about clearly identifying the scope up-front (which on large projects can take a lot of un-billable time itself that you must factor into the price), you will get to a point where your client expects you to keep working on it until s/he feels it’s “done” - and both of you have completely different opinions of what “done” actually means.

  • Equity For Work

    It’s not the best form of payment and it’s not one that I would encourage you even consider. It’s a tactic used by clients who don’t have money for your services and they want you to work for free. The idea is that working with them will help your brand, it will give you experience and you could even have a percentage of their great big idea when it becomes the next Twitter.

    Avoid these engagements like the plague. The only way that I would consider taking this approach would be if my landlord started expressing that I could pay for my rent using the equity I’m getting from these clients. We both know that’s not going to happen.

    The one approach that can work for equity is when you’re getting paid as well. Some companies are willing to agree to a financial contract but also include equity in the deal. In these situations, the risk is once again linked directly to you offering your services in hopes that the equity will become something more but it’s not a guarantee.

    PRO TIP: Ok, so I know what some of you are probably thinking. What if you have no idea what the actual scope of work is for your client? Let’s say you’re a copywriter and they want you to put together content for their website but you don’t know how many pages are required? Well, in that case it really only makes sense to bill by the hour. One approach is to charge by the hour until you identify a clear scope of work.

Think About Your Service As A Product

Services are tough to imagine. Unlike a product, you don’t touch it, take it out of a box or hang on to it for later. A service is an intangible act that requires time and effort to deliver a final product. As such, it’s a challenge to think of how you can easily differentiate yourself from the competition.

The solution is to think of your service as a product. How can you communicate your price structure around your services the same way a product company would for their product?. Strive to make the intangible tangible.

One of the best ways to do this is to sell the process behind your product. For example, if you’re very good at designing websites and that’s what you want to focus on, think about the steps you take to get to the end result. Do you start with a deep dive into your clients wants and create a mood board to understand what they like? If so, let’s call that step Visual Discovery.

For the next step do you put together a wireframe for where the priority pieces of content will go? If so, let’s call that step Wireframing. Once the structure is complete do you then create two visual concepts that are slightly different? If so, let’s call that step Concept Proofs. And finally, when the concepts are approved you probably deliver the website design to your client. Let’s call those Final Designs. As a result, you’ve built the following process:

Now that you have your process, it’s easier to sell it as a product. You can call it the four-step design process (or something more creative), but either way, this is your product. Think about the amount of time and effort that goes into each of those steps and build an estimate around these efforts. In doing this, you’re setting yourself up for a Fixed Rate approach but could also use one of the other pricing structures with the process being the backbone of what you’re actually selling.

Owning a process makes it easier to pitch and puts you in control of your price structure. If you’re clear about what you’re selling, customers will be more likely to understand what they’re getting in return and be more willing to buy your product. Remember, your product is the unique process you use to actually deliver a solution to your clients. Now that you’ve figured out exactly how to price and position your offering – It’s time to figure out how to sell it.

When I was first getting started, I charged what I thought people would pay (which was too little). But as I gained experience and developed a track-record of success, I upped my prices to rival the big guys. I knew I could deliver similar or better results, so why cheapen my brand by undercharging?

Katelyn Bourgoin Marketer
Red Riot Communication

QUICK RECAP

  • Understand strategies behind pricing and you’ll be more strategic when putting together your rates and developing a pricing strategy for your business.
  • Fixed rates are often better than the other price structures because they can be more lucrative over time as you’re likely to learn how to do certain tasks faster with more experience.
  • Your process can be a selling point that differentiates your approach from the competition. Identify the process you use and sell your process as what will give your clients a competitive advantage.
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