Working independently offers many benefits: insulation from unexpected layoffs, portability (you can usually work from any location) and the ability to set your own schedule. A knotty challenge, especially for someone new to the business, is figuring out how much to charge. Although no single correct answer applies in every situation – or even to all freelancers in a particular specialization – these guidelines will help you find a starting point.
How to Set Freelance Rates
Rates are fluid. Consciously or by instinct, smart self-employed people regularly review pricing from six angles.
1. Calculate hard costs.
Do the simple math to figure out a baseline minimum hourly rate. Consider all costs. Your most recent salary (or the average salary for your type of work) is a good starting point, but also factor in costs associated with your job that were shouldered by your former employer. Expenses vary, but here are some common ones:
– Personal (your usual personal budget items):
- Child care
- Debt (student loans, car payments, credit cards, etc.)
- Discretionary spending
– Business (necessary business expenses, including those previously paid by employers):
- Facility and furniture
- Computer equipment (including regular necessary upgrades and replacements)
- Office supplies (pens, paper, ink and so on)
- Business phone and fax
- Insurance (including business liability insurance and the all-important health insurance that may have previously been paid by an employer)
- Business taxes, including Social Security (as an employee, your company paid half; freelancers are responsible for 100% – read Filing Taxes As A Freelancer)
- Business travel
- Marketing and advertising
- Legal fees
- Business licenses
- Professional association memberships
- Uniforms, if appropriate
- Tools and machinery, if necessary
- Vehicle, if necessary
– Personal/Business (expenses that may be split between personal use and business use):
- Cell phone
- Internet service
When you know your expenses for the year, divide the number by 12 to see how much revenue needs to be generated every month. Divide the monthly figure by the number of billable hours you plan to work each month. That is your desired hourly rate.
You may never disclose your hourly rate to a client because project pricing is more common today. But to calculate your project's value, match the hourly rate with an estimation of the time required to complete the job. Project pricing is a skill that will improve over time, in tandem with effective, amicable pre-bid client communication skills.
2. Compare industry rates.
Find out what others in your line of work charge, and what the going pay range is for various tasks under a single umbrella.
- Check industry publications. For writers, several industry reports publish the exact pay for many outlets and types of assignments. "Wooden Horse" and "Writers Market" are two sources for such reports (for a fee). Research your own industry to find out if other, similar reports exist.
- Ask colleagues and mentors in your profession who successfully freelance.
- Talk to contractors hired by your current or former company. They may be willing to share some insight and guidance, even if they choose not to divulge their exact hourly rate.
- Call some competitors and ask for a quote. Find out what they include, specifically, for the price they charge. In any industry, the level of service and value varies from one provider to the next. Requesting detailed quotes from competitors can be especially useful for comparing apples to apples.
3. Factor in your experience and its value.
Pay rates for most professions pivot on expertise, experience and outlet. It is up to you to confidently justify the fees you charge. Some freelancers take the first few jobs for a lower than desired rate in order to build a portfolio. Even professionals who are qualified enough to charge the top rate may not get it without first showing a persuasive collection of samples backed by strong marketing skills.
Consider the risks inherent to the job and service promises made to clients. Are you a programmer setting up a secure patient intake app for a medical clinic? A wedding planner who specializes in destination weddings? Your specialized knowledge, the extent to which you are willing – or expected – to stick with the project after completion to ensure success and the lasting value your knowledge and skills provide should all factor into the price.
4. Consider the client.
Freelancers are often willing to offer a lower price to friends and family, or to charitable organizations. Perhaps winning your first job for a big defense contractor will land you on the preferred vendor list, leading to more work at better rates down the road. Or the client might be particularly prestigious, enabling you to charge more to other clients down the road. Whatever the motivation, think about whether and when the type of client will affect the rate.
5. Price the project, not the task.
Some tasks have a lower perceived value than others. The architect who designs your house may also be able to paint it, but he is unlikely to get his normal hourly rate for the painting job. Many freelancers find themselves bidding different prices for disparate types of work. Beware! Piecemeal pricing can be a trap. Put the value on yourself, not the task. Your time is always worth your hourly rate. If an isolated task does not warrant your normal hourly rate, perhaps you are not the right person for the job. Train yourself to look at the entire job, not just its components. Resist the urge to undervalue your time when a client wants to bring the price down by assigning lower-level, and presumably lower-priced, tasks for which you are overqualified.
On the flip side, you can present an entire project at a flat rate and include all required tasks, both complicated and uncomplicated. Spelling out job details to the client can shed needed light on the amount of effort involved in the project overall, and help the client understand the sum of the value you provide.
Parsing details of the job doesn’t mean you must offer to do fragments of it for a portion of the price.
An advantage of project pricing is that it inherently rewards efficiency. If an expert can accomplish in one hour a job that takes a novice four hours to complete, the expert in essence can earn four times the hourly rate on the same project, assuming the two freelancers charge the same rate for the job. If the going rate for a particular job leads to a very low hourly rate, the freelancer’s challenge is to improve her skills in order to complete more work in less time and remain competitive.
Hourly pricing has its pros (protects you against scope creep) and cons (you lose the value of your efficiency).
Truly advanced industry experts should also consider a pricing model that takes into account the lasting, ongoing value created by a job well done. For example, a well-executed ecommerce website can pave the way for higher sales and profit. Mike McDerment and Donald Cowper at FreshBooks wrote an excellent book, "Breaking the Time Barrier: How to Unlock Your True Earning Potential" that explains the concept. The book is available for free download on the FreshBooks website.
Negotiation is most effective when you have the necessary research in hand. Know your value, know what your package includes and know what your competition offers and charges. Always present yourself professionally. Have a great, error-free website. Show past work, not just the logos of companies you’ve worked for.
For each prospective job, ask plenty of questions. Start with questions that will help you determine whether the job and client are a good fit for you.
“Ask, ‘What’s your budget?’ before you name a price. Often, the price they have in mind is a lot more than you were going to suggest,” says Carol Tice, founder of the Freelance Writers Den.
Conversely, if the budget is unrealistically low, you can bow out before spending fruitless time developing a bid. But always bow out gracefully. The client may reappear.
Don’t mention a dollar figure until you know all the relevant project details. Clearly define the scope and timeline, as well as any expectations for the final results. Understand the intended audience for your work and what obstacles the company has already encountered. Find out how much support you’ll receive from the client, and so on.
All these details should be captured in a written contract before work begins.
In the process of negotiating, experiment with pricing strategies. For example, some freelancers offer options at graduated prices, with top, mid and bargain packages. This tactic gives the client a feeling of control over the purchase and helps the freelancer illustrate and manage the level of effort for each tier of service. And raise prices when the calendar is full. The basic law of supply and demand indicates that busy freelancers should experiment with higher prices on new inquiries until new jobs are harder to land.
The Bottom Line
Analyze the numbers before you settle on a price, whether it seems high or low. “Go through the process of actually calculating a personal rate, rather than pulling a random number out of the blue,” advises Shel Perkins, veteran graphic designer, author, and former American Institute of Graphic Arts (AIGA) board member. In his book, "Talent is Not Enough: Business Secrets for Designers," Perkins lays out a simple process for determining an hourly billing rate and tips for adjusting it when appropriate.
Following these steps will lead you to a range of rates: your minimum rate, your desired rate, your dream rate, the going rate. That’s fine. As a freelancer, your rate is likely to fluctuate from one client to the next, from one project to another, and as your skills improve. One hopes the fluctuation is on a generally upward trajectory.
For more information on freelancing as a career, read Freelancer or Employee: Identifying Your Next Career Move, Freelance Careers: Look Before You Leap and Be Your Own Boss By Freelancing. Also check out 10 Tax Benefits For The Self-Employed.