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If you’re a freelancer, even an experienced one, I’d bet a nickel that (a) you know that pricing your services correctly is tough, and (b) that every Tom, Dick, and Jane who call themselves “business coaches” or “freelancing coaches” have written a blog or three on how to do it. What you may not realize is that those blogs limit themselves to bottom-up pricing, which is a critical but insufficient step. They may also be at least somewhat inaccurate, incomplete, and/or misleading.
Below I analyze one such formula written up by a freelancing coach, point out where I disagree with it, and what to do instead. I also add some guidance on adding a strategic, top-down assessment to maximize your results.
It All Starts with Your Hourly Rate
Until and unless you become nationally or internationally known as an expert in your field who can pretty much write her own ticket (think $10,000 — $100,000 speaking fees), more likely than not, you’re selling your time. Even if you charge by the project (more on this below), you have to start with your hourly fee.
As a freelancer, you have some unique expenses and taxes compared to employees. You also don’t have any benefits you don’t pay for yourself. That’s why you have to make sure your calculations address all these differences. The following is part of my process for setting my own consulting rates, as well as what I use when guiding my small-business coaching clients.
Here’s a formula provided by one freelancing coach:
FA freelancing coach’s formula for calculating hourly rate, with a few problems
Here’s what I disagree with:
- It doesn’t clearly address your taxes
- It doesn’t address the savings you really have to set aside, such as building an emergency fund and saving for retirement
- It doesn’t address saving for other things, such as a down-payment for a house, buying a car, vacations, etc.
- It assumes you never get sick and never take any vacations
So, what should the formula look like to really be helpful?
To proactively respond to the true criticism that might come my way, saying that it’s far easier to find fault than to offer a solution, here’s my version:
My formula for setting your minimal hourly rate for freelancing or consulting services
To make sure this formula is useful for you, let’s define each element and see what should be in it, so nothing remains hidden.
Monthly Expenses = all your business and household expenses, including, in no particular order:
- Rent or mortgage (home and office if any)
- Utilities (home and office)
- Meals (business and non-business)
- Legal and professional services (e.g., book-keeper, CPA, attorney, etc.)
- Insurance (home, auto, professional, liability, umbrella, life, long-term and short-term disability, long-term care, etc.)
- Subscriptions and dues
- Broadband Internet service (home and office)
- Cable TV
- Phone (mobile and landline if any)
- Maintenance and repairs (home and office)
- Property taxes (home and office)
- Supplies (home and office)
- Travel (business and non-business)
- Auto expenses (gas, maintenance and repairs, parking, tolls, loan payments if any, etc.)
- Merchant card services (if you accept credit card payments)
- Continuing training and education
- Equipment (e.g., your laptop)
- Clothing and shoes
- Miscellaneous personal expenses (e.g., grooming, hobbies, etc.)
- Charitable giving
- Health and dental insurance premiums
- Medical expenses
- Eating out and/or ordering in
- Entertainment (e.g., movies, plays, baseball/football/hockey game tickets, etc.)
You may not have all of these each year (some you may never have). On the other hand, you may have some others that I didn’t list. Just look at your expenses over the past year (you keep track of those, right?) and add/remove categories as fits your situation.
Estimated Annual Taxes = your federal, state, and local income taxes including self-employment taxes, without forgetting to consider all your business deductions. This also considers business taxes such as Business Personal Property Tax return filing fee and taxes (yes, that’s a thing, in Maryland at least)
Required Savings = enough to build (over a few years) an emergency fund, plus at least 15% of income toward retirement. Your emergency cushion is intended to let you keep paying for things that can’t and/or shouldn’t be cut if business slows down, or if you’re too sick to work. This is also where you go to for money to cover emergency expenses (think your car needing a new transmission, major medical issues, etc.). Regarding retirement savings (you have a solo 401(k) or SEP IRA, right?), the 15% may need to increase to 25% or more if you’re no longer in your 20s or 30s and really haven’t set much aside.
Desired Savings = enough to build up a down-payment for a house, some “mad money” so you can go on vacations (see below), money for an expensive gift for your sweetheart, etc. You can also add here some extra if you find that the quality you provide can command a higher rate than you’d get out of the formula without it.
Weekly Billable Hours = the number of hours you realistically can and want to do actual client work, leaving enough time to:
- “Sharpen the saw” (per Stephen Covey’s seventh habit of highly effective people — you’ve read that, right?)
- Market your services, including e.g. posting on social media, blogging on your own site (you have one, right?), building an email list (you have one of those too, right?), and engaging with its members
- Handle the administratrivia required to keep your business running and within the law (e.g., book-keeping, accounting, etc.).
The number of weekly billable hours really depends on the type of work you do and how well you can market your services. If you’ve already been freelancing for a while, you should know how many hours you bill in a typical week, so use that. Most years, my average has been 50+ billable hours per week, but that’s not typical. If you’re a therapist, you’d probably burn out if you tried to maintain a 35–40 sessions/week caseload, so don’t. If you’re just starting out, plug in 20 hours until you have better data.
The reason I put in 48 weeks a year and not 52 is that most people periodically get sick and/or need to take time off to recharge. I don’t account for long weekends because you can easily make up hours lost on the 4th of July, Thanksgiving, etc. by working a few more hours in the weeks leading up to those or immediately following, or you can simply work through them if you’re so inclined (do this if you’re staring at a hard deadline, but I wouldn’t recommend it as a regular practice).
Charging by the Project
Charging by the hour has two big drawbacks. First, it sets you and your client up in such a way that your interests don’t align. As an hourly freelancer, you get paid more if you take more time to get the job done. Your client, on the other hand, prefers that you finish as quickly as possible while providing the quality he wants, since that minimizes his cost. When you charge by the project, your client knows in advance exactly what he’ll have to pay. Anytime you can reduce or remove uncertainty like that, it makes it easier for clients to decide to hire you.
The second drawback to charging by the hour is that it doesn’t reward you for becoming more efficient. As you become more experienced and have more of a portfolio of completed projects to draw inspiration and/or components from, you can complete the same project in fewer hours. Say you charge $500 for a 1000-word article. Completing the project may take you 5 hours when you first start writing on a specific topic, resulting in a $100 hourly rate. However, if you’ve already written a few articles on the same topic, you may now only need two hours, for a $250 hourly rate. That’s a great example of how charging by the project can benefit you without hurting your client.
While, as you can see, in many cases it’s best to charge by the project, you do need to have a pretty good idea of how many hours the project is likely to take you. It also requires that you sign a contract with your client that spells out very clearly (among other things):
- What is/are the deliverable(s)?
- When is each deliverable due?
- What does the client need to provide you so you can get your work done?
- When does the client need to provide you with each input so you’re not delayed?
- What is the total cost to the client?
- How do you want to break down that total cost into payments, and when is each payment due (preferably get some upfront money, milestone payments as you deliver each deliverable, a final payment once the project is completed to the client’s satisfaction, and a kill fee if the client decides she wants to stop in the middle for reasons beyond your control)
- How are changes in client requirements handled (e.g., delaying deadlines and increasing the cost)?
- How many rounds of revisions are included in your price, how long after delivery can the client request revisions, and what is the additional price the client will need to pay for each additional round?
There are some cases where project-based rates are not advisable (if even possible):
- The client needs continued, varied support that cannot be accurately defined in advance in terms other than hours
- The client’s requirements are not well defined and/or are likely to change significantly
- You don’t know how many hours the work will actually take (if you have an estimate, you can still charge by the project, but to be safe, pad your quote by 25% — 50% hours depending on how uncertain you are).
Say you have a type of project you’ve done many times, and it takes you on average 10 hours, simply multiply your hourly rate by 10 to arrive at a reasonable fixed price to quote. If you need to pad it a bit, add the above-mentioned 25% — 50%.
If your client needs a large multiple of a project, say a weekly blog post for 6 months, you can give him a discount informed by the economy of scale it allows you. For example, researching a single article may take you 2 hours, but researching a dozen articles on the same topic may only take you 12 hours (rather than 24 hours = 2 hours each x 12 articles).
If the writing itself takes 2 hours per article, the 12 articles will take 36 hours for an average of 3 hours per article. This is 25% less than the 4 hours needed for researching and writing a single article. In this example, you could offer the client a 15% discount and still come out ahead.
Top-Down Strategic Pricing
The most important thing when pricing your services is that you have to be solving a problem that the client wants solved. Whether it’s providing fresh content so the client can spend her time serving her clients rather than researching and writing (which may not be her forte anyway), coaching a client through an important decision she needs to make but is uncertain about, or anything else, clients only pay for their problems getting solved.
Once you know what problem you’re solving, figure out what would be the cost for the client to not have the problem solved. This gives you an idea of how much the difference you can make will be worth to the client.
One business owner I know is an image consultant who helps women executives make sure their appearance is consistent with the position they want to get promoted to. Let’s say one of her clients is in middle management, earning $100,000 a year. Say also that this client wants to break into the C-Suite so she can earn over $250,000. This means that the difference made by the image consultant would be worth at least $150,000 a year.
In this scenario, figuring out an hourly rate based on my formula above is just the first step that gives her an idea of what her minimum charge has to be. The next step is to research the competition (if any) to see what they charge. Third and last, she needs to position herself as a premium provider with a unique value proposition that sets her apart from the competition, so she can charge her clients $15,000 or more for her services.
This $15,000 price tag may be for a project that takes her only a couple of days, translating to an hourly rate of almost $1000. However, if you were one of her clients, wouldn’t you be willing to pay $15,000 once in order to get a $150,000 more per year each year from that point on?
About the Author
My career has had many unpredictable twists and turns. A MSc in theoretical physics, PhD in experimental high-energy physics, postdoc in particle detector R&D, research position in experimental cosmic-ray physics (including a couple of visits to Antarctica), a brief stint at a small engineering services company supporting NASA, followed by starting my own small consulting practice supporting NASA projects and programs. Along the way, I started other micro businesses and helped my wife start and grow her own Marriage and Family Therapy practice. Now, I use all these experiences to also offer financial strategy services to help independent professionals achieve their personal and business finance goals.
Disclaimer: The information in this article is not intended to encourage any lifestyle changes without careful consideration and consultation with a qualified professional. This article is for reference purposes only, is generic in nature, is not intended as individual advice and is not financial or legal advice.