One of the main things people ask before they go freelance is how to work out their freelance rates.
Setting your freelance consultant rates is difficult. Set your day rate too low and you have to work longer and harder to make a decent income. Set your day rate too high and you risk putting off potential clients and not seeing you have a full portfolio of work.
There are several strategies you can take to find an hourly rate, day rate or project rate that your clients are happy with and enables you to make a comfortable income.
Before You Set Your Freelance Rates
There’s a few things you can do to get a good idea of what to charge as your rate before you start to take on freelance projects:
- Get comfortable talking about your freelance rate: There’ll be situations where you’ll have to negotiate with a client on your fee. You have to get comfortable at discussing this with them and not be afraid to push back on a price to get your true worth from a project. Negotiating with clients on your rate takes confidence, but once you’ve done it a few times you’ll be more comfortable having that discussion with them.
- Ask other freelance consultants what they charge: You’re probably nervous about sharing how much you get paid with other freelancers. What if you’re charging too much? Too little? What if others copy or undercut your rate? Sharing what you make with other freelancers can have a huge impact on your rate. If you’re new to freelancing and try to set your rate without knowing what other similar freelancers have set theirs at, you will probably price at a low rate to play it safe. This pushes rates down and means that you won’t earn as much as you potentially should.
- Ask an HR professional what the going freelance rate are: I’m luck enough to have a friend in Soraya, who is a freelance HR consultant at Love HR. She gives great advice on what others are charging for similar projects, so I can always ask her when I’m not sure what I should set my rate at. Don’t be afraid to ask any friendly HR contacts you have, or get out there and make a friendly HR contact if you don’t have one already.
- Ask the client for a budget: Although you shouldn’t use this as the basis for your rate, you can use the budget set by a client as a figure to get started with. You can either negotiate this figure or use it as a benchmark for future projects.
- Set a benchmark: Read books and articles related to your industry that contain information about pricing. Some freelancers do talk about their rates online and that is a great place to begin. Also check forums and networking sites in your industry, as posting for advice on these sites can lead to you getting lots of helpful advice back on where to set your benchmark.
Pricing Strategies for Setting your Freelance Rate
There are several strategies you can take for setting your freelance rate, each with their own benefits and disadvantages:
- Time-Based Pricing
- Project-Based Pricing
- Value-Based Pricing
How do you work out a daily rate of pay?
Let’s break down the three different ways of calculating your freelance rate.
Time-based pricing is a rough way to work out your day rate, although it is different for every freelancer depending where they are in their career, their skills, demand for their ability, state of the job market, demand for freelancers, and more.
Time-based pricing is also how professional services businesses work, as a lot of the work output is directly proportional to the amount of time that goes into producing it.
This is also the easiest to manage, which is why it’s so appealing for most people who are new to freelancing. You work an hour, you invoice the customer for an hour.
The simplest way to work our your day rate using a time-based pricing strategy is to add a third to the salary you were receiving before. This is to account for the fact that you are covering your own HR, finances, sales, marketing, IT, offices costs, and anything else that is normally taken care of for you in a company.
In England and Wales there are 252 working days in the year, assuming that you work 5 out of 7 days.
Once you have this worked out on an annual basis, take off 20 working days from the total. This equates to a month of work (including weekends) and accounts for time off for holidays, sick days, and a few days where you might not have work on.
Obviously, adjust this amount if you think you might not get that much work in or want to take a few more holidays that year, or if you’re very confident or feel that you are worth more (one of the main reasons that people go freelance!).
So, if you earned £30k in your job, adding a third on equals £40k. Dividing £40k by 222 days equals just over £180. This would be your day rate.
Oh, and make sure you always add-on VAT to this (20% in the UK), so £180 per day excluding VAT, £216 including VAT.
There are a lot of rate calculators out there, with most of them basing their formulas around giving you a steady stream of income that you can live comfortably on.
This is why as someone new to freelancing, hourly rates are the only way to go. This is how I started and still often do price my projects this way.
Other more experienced freelancers may say that there are other ways of charging more, but you need to be comfortable with what you’re earning and charging. Time-based pricing gives you a sure and steady freelance rate to work from.
As you become more efficient, you can raise your rate and so charge clients more money for working similar hours. And as you become a better freelancer, you can eventually start using day rates, and then weekly – or move on to the freelance pricing models described below.
The Problem with Time-Based Pricing
If you are charging hourly, then you will always be limited to making only as much as the hours that you can work.
You effectively give yourself a price ceiling that can only be raised by working more hours.
If you want to scale your time-based pricing strategy, you need to a) hire employees or b) switch to a product-based business model – both of which bring whole new levels of time, money and experience.
This strategy involves estimating how much time and resources a project will take, then giving the client a project fee based on that estimate.
One of the benefits of taking this approach is that the client can have a fixed costs in their mind, which won’t spill over if the scope of the project stays the same. With time-based pricing, any extra time spent on a project will incur extra costs.
You may find that you’ll win more business this way, as you’re working to the client’s budgets.
The benefits for freelancers means that you can avoid some admin work (tracking hours, progress and daily reporting) and if you;e efficient enough and give good estimates, you get a much high per hour rate (without the client even knowing)
A project-based pricing strategy takes experience to set, as there isn’t really a simple recipe and you’ll need examples of other project costs to understand what you should cost new project at.
Once you have built up some experience, you’ll have a ready-made list of old bids and project costs that you can use to compare with news projects come in, to make sure you’re pricing in the right area.
The Problem with Project-Based Pricing
The main issue with project-based pricing is that you need very accurate estimates of how long a project will take and setting the price appropriately.
If you get that wrong, you could put potential clients off from your high prices, or end up working a lot more hours than those you are paid for.
You should always expect projects to take longer than the plan and always include a contingency for any changes to the original project brief that the client might ask for.
If you choose project-based pricing as your model, allow for surprises.
There is a more strategic way to set your freelance consultant rate. Looking for the value that the project will bring to your client’s business and charging them and right rate based on that value.
Value-based pricing as a strategy is often used where the value to the client is many times the cost of producing the product or service.
For example, the cost of producing an e-book is around the same no matter what content is found inside it. But the price of those ebooks differs depending on the perceived value the readers think they will get.
Say a client wants you to build them a mobile version of their site that will bring them in £100,000 in extra sales a year. Charging them £10,000 or even £15,000 would be reasonable charge, given the added value and income it will bring to their business.
“Your job is to help a client improve its current situation by using your skills, knowledge and experience. Your value shouldn’t be judged (and thus costed) on how many hours you are prepared to work but on the outcomes of the work you’re doing.”
The perceived value depends on a few factors: the alternatives open to the customer (using competitors’ products or services, adding a manual work around, or simply doing nothing at all.
Using value-based pricing, you can charge at a perceived value, rather than the time it takes to actually complete the project. However, in order to be successful with this pricing strategy, you have to know your client’s business, their costs, and the alternatives available to them.
The Problem with Value-Based Pricing
The main difficulty in using value-based pricing is that the client will want to pay different prices between agencies or freelancers, between regions or countries, and even for the same freelancer in different scenarios (depending on whether the freelancer is available now or later when others are available), so that a highly accurate value-based price for a project is pretty impossible to get.
Despite being difficult to get a value, any sales messages you use should consider the value a product or service brings to the client, which will enable to you to set proportionately higher rates.
Alan Weiss has written extensively about value-based pricing and gives excellent advice on how you should go about it:
Many consultants fail to understand that perceived value is the basis of the fee, or that they must translate the importance of their advice into long-term gains for the client in the client’s perception. Still others fail to have the courage and the belief system that support the high value delivered to clients, thereby reducing fees to a level commensurate with the consultant’s own low self-esteem. “
Ultimately, Weiss believes that freelancers, not clients, are the main cause of setting their freelance rates too low.
You need a very solid reputation in a niche industry to consistently use a value-based pricing strategy. It takes decades of experience to get there, but once you do, a switch over to value-based pricing is extremely lucrative.
When To Raise Your Freelance Rate
- If you’re at capacity, raise your rate: Your time has become limited, so in order for a client to work with you they have to meet the higher rate. If you keep raising your rate when you’re at capacity, you’ll eventually scale up your rate across all your clients and projects, upping your total freelance income in the process.
- If the client has a short deadline, raise your rate: This is known as a “rush job” and demands a premium in top of your normal rate. You have to drop what you’re doing for other clients or prioritise your work, sometime working evenings and weekends, to deliver the job. The client should pay the price for this.
- If you learn a new skill, raise your rate: You should always raise your rates as you get better. Learning a new skill means you can also expand your offering as a freelancer and clients don’t have to hire two separate freelancers to get the same job done.
- If you’ve freelanced for another year, raise your rate: The experience gained over that year is worth more than you might think – and you can charge accordingly.
- If you don’t like working with a particular client but need the income from the project, raise you’re rate – a lot: This way, the client can pay a premium for your services, which balances out the negative side of working with a client that you’re not fond of.
When To Lower your Freelance Rate or Work For Free
You can always raise or lower your rates depending on the client and project. Here are two good scenarios when it is beneficial to lower your rate – or even work for free.
- Portfolio Pieces: If an instantly recognisable brand comes along that might not have pots of cash available, but do incredible work and would be a delight to work with, you should consider lowering your rates. If they can’t afford your normal rate but you can take this project on at a lower rate, then you should ask to see if you can use this project as a case study for your portfolio. I took this approach when working with LOCOG – the organising body behind the London 2012 Olympic Games. I was approached to work on their website and produce some digital content for a day rate below my normal fee, but the brand name was too big to turn down and has opened the door to many more clients ever since I completed the project
- Charity Work: I do a lot of work with charities and happily work for free or at a reduced rate for them. I often find this kind of work most rewarding, and the clients are usually more appreciative of your efforts compared to for-profit clients. But remember, a lot of charities have a lot of resources resources, so should pay full rate for your service. They’ll often get your best work out of you if they pay your full rate, so don’t be afraid to charge charities as you would any other business.
Tips on Calculating Your Freelance Rates
Here are my top tips for calculating your freelance rate:
- Get comfortable talking about your rate
- Ask other freelance consultants what they charge
- Ask an HR professional what the going rates are
- Ask the client for a budget
- Set a benchmark
Ready to set your freelance rate?
Everyone has a different opinion about what model is best, what works and what doesn’t when setting their pricing strategy. Some people insist that hourly or weekly is the only way to go. Others insist that “value-based” is the only way to go.
The best way to figure out your own pricing strategy is to decide what works for you though experience and go from there.
There’s definitely going to be some trial and error while you figure things out. You may under charge for a particular project or charge too much and lose out on a new piece of business, but that will give you the experience to set the right rate next time.
What other strategies do you use to set your freelance rate? What has worked well? What hasn’t worked and you’d recommend avoiding? Let us know in the comments below.