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How To Price Your Freelancing Services

How To Price Your Freelancing Services

Arguably the most difficult thing about freelancing is deciding what to charge for your services. There is definitely a sweet spot and that can be hard to determine sometimes.

You don’t want to charge too much and risk turning clients away but you don’t want to leave money on the table either. You’ve spent a lot of time sharpening your skills so you just want to get paid a fair price. You deserve it!

Freelancers can use many different pricing strategies such as hourly fees, fixed price projects, and my favorite and most lucrative, value-based pricing. To implement value-based pricing, you’ll need a lot of experience to determine how to do this.

As a freelance web developer, I always charged a flat fee. Now, I use a hybrid between per project and a value-based pricing model but the one I started with looked something like this:

I used the methods below to determine what my lowest hourly rate had to be. I’d then take the project and break it into small chunks so I could put time estimates on each section. Then I’d add those up and multiply by my hourly rate to determine the least amount of money I’d have to charge for the project. We will dig more into this shortly.

Take a Look at the Going Rates

The first thing you need to do is look at what the market is paying for services similar to yours. Ask folks in the same field as you what they are charging clients. Take a look at some websites of freelancers in your field. Compare your skills, experience, and portfolios.

This will help you later on when we plug the numbers into the formula and get our base price. We want to make sure we aren’t way off.

HOW MUCH MONEY DO YOU NEED TO SURVIVE?

Now that you have a ballpark figure on what the going rate is, put that to the side and forget about it for now. We need to determine the minimum amount you have to make to survive.

Make a list of all of your bills. This list should include everything – your monthly rent/mortgage, all utilities, groceries, car payments, insurance, and any other bills you have. You should include any costs associated with freelancing as well, such as supplies, any software you use, etc. If you are just starting out, ask some other freelancers in your industry what expenses they have for their freelancing business.

The Cap on Freelancing Income

One of my favorite things about freelancing is there is NO CAP on the amount of money you can make as a freelancer. Your income is solely based on how you run your business and the skills you possess.

Let’s take a web developer as an example. The average salary for a web developer in the US is somewhere around $80,000 with the top web developers earning salaries upwards of $150,000+. As a freelance web developer, you could feasibly make triple that amount! It is all up to you.

Charging by the Hour

A lot of freelancers settle on just charging their hourly rate for projects. This is my least favorite method of pricing as it definitely limits your income. There are only so many hours you are able to work so it caps the amount you can earn as a freelancer.

That being said, if you are brand new, I recommend starting out charging by the hour. This will allow you to gain experience and you’ll be a better judge of the amount of time and effort that will be required for new projects when they come in.

To determine your hourly rate, you need to add up all of the expenses from the step above. Don’t forget to include Uncle Sam’s portion. You will not have an employer holding income tax out for you so you need to account for that yourself.

How To Calculate Income Tax

Always talk to a professional when it comes to this. I am not an accountant and any advice I give here on the subject should not be taken as professional advice. Taxes are a very complex subject. If you have an accountant, ask them the percentage you should hold back for taxes.

You will be paying more in taxes as a freelancer than you grew accustomed to as an employee. You will be taxed as “self-employed”, which is a higher rate. If you don’t have access to an accountant, you’re probably safe with holding back 25% of your earnings for taxes. That always sufficed for me.

Since you work from home you may be able to claim some of your household expenses too. Again, this is something you’ll need to discuss with your accountant but I know from personal experience that I have been able to write off portions of my rent, my utilities, etc.

Filing your taxes becomes much more complicated when you are working from home. You are able to take advantage of a lot of deductions. You don’t want to miss out on any of them so it is always better to have an accountant file your taxes for you.

The couple hundred dollars they will charge you to do so will be well worth it. In fact, it may be cheaper to have them do it than to do it yourself. You’ll probably leave a lot of deductions you aren’t aware of on the table. Those missed deductions will more than likely pay the fees an accountant will charge you!

How Much Can You Work in a Year?

Now we need to determine how many hours you’ll be able to work in a year. We need to subtract holidays and some time for sick days. There are probably some weekends you are going to be hitting it hard but we don’t want to figure weekend hours into our numbers here. We have to allow ourselves time for rest. We want to just figure out the normal hours we can work in a typical year.

Let’s go over this together. You have 365 available days in a year. If we take weekends, holidays, vacation time, and sick days out of those, we are left with about 220 working days.

A normal working day has 8 hours in it. We need to take time out of that for a few breaks and lunch. That leaves us with about 7 hours. We are business owners though and that requires us to do “administrative” tasks like sending invoices, prospecting, etc. Those aren’t billable hours so we need to subtract them.

Let’s say only 80% of our available working hours are billable hours. That leaves us with around 5.6 hours we can bill for each day. Out of our 220 days, that is a total of 1,232 billable hours in a year.

These numbers are just examples. You can plug your own figures into this formula to get your billable hours.

How To Calculate Your Minimum Acceptable Rate

We know what our expenses are for the year. We don’t want to just “make it by” though. We probably would like to have some money for vacations, office supplies, ordering take out every now and then, going to the movies, or anything you enjoy doing. Don’t forget to add money in for savings as well! We need to add this to our expenses to get the number we need to make each year to live a normal, happy life.

Let’s say my expenses from above totaled $3,000. We need to account for taxes. That brings our number to $3,750 (with 25% for taxes). I want to save some money and have some spending money to do things with my family. Let’s call it $5,000 per month for everything.

There are 12 months in a year. So $5,000 x 12 = $60,000

We know we have 1,232 billable hours each year so to make $60,000 we need to charge a minimum of $49/hour (60,000 / 1,232).

This shows you what your minimum hourly rate is. You must charge this to cover your expenses and live the life you want to live. Now, remember the very first step? The one where we did research on what the “going” rate was for the type of service you provide? How does this number compare? In a perfect world, our number is considerably lower. This allows us to bump it up a little!

Once You Gain Experience

Once you gain experience in the freelancing world, you should change your pricing structure. As I mentioned above, I hate the hourly rate pricing model. I don’t know about you but the reason I got into freelancing is so I could have a very high income compared to being an employee.

Let’s say I’m brand new. I charge a client $500 to do this project which takes me 11 hours to complete. I do this same type of project several times and get really efficient at it. I can now do the project in 5.5 hours. Why should I now get paid $250 for the same project? Pricing by the hour penalizes you for your experience.

This is especially true if you do a recurring project for a client. Every time you do this project you will develop procedures around it that will speed the process up. Now, you are paid less for the same task. It just doesn’t make sense. An hourly fee doesn’t take your years of experience into consideration.

Charging by the Project

This is a much better pricing model, in my opinion. Instead of charging by the hour, you charge a flat fee no matter how long it takes you to complete it. Now, when I moved to this pricing model, I still based it on an hourly rate. I took my previous experience to determine how long something would take, add in some padding in case I missed something, multiply that by my hourly rate, and know that was the minimum I could charge for the project.

With this type of structure, the focus is on the finished project instead of the amount of time it will take you.

Another reason this might be a better way of going about pricing something is if you are brand new. You know you will have to do some research because you haven’t really done this type of thing before. It wouldn’t be fair to the client to charge hourly while you were learning a new skill, now would it? No client wants to pay to send you to school, and it isn’t on them to do so. Do some research on how much similar projects cost and charge somewhere around that.

You will be earning significantly less than your hourly rate by the time you acquire the skills needed to complete the project, but you’ll have gained some experience and a new skill that you can now add to your services.

Some Pros and Cons of Per Project Pricing

An obvious benefit to the per-project pricing structure is that as you gain experience and get quicker at completing it, you are rewarded. Unlike the hourly rate structure where it penalized you.

A downside is if you really dropped the ball on estimating the amount of effort the project will take, you are working for much less. Trust me! I know from a lot of experience with working for under $10/hour on projects. That is not fun at all. After a couple projects like this though, you learn real quick to do a much more thorough job of estimating the effort required and to pad the hours a little to account for unforeseen situations that will eat up time.

Contracts Become Much More Important

Another word of caution on the by-project structure is that you must have a solid contract when taking on these jobs. You have to prevent scope creep. Let’s say you did your research, know pretty close to the amount of time it will require to complete a project, and decide you can do it for $3,000. The client signs the proposal and you begin work. Then halfway through the project, they start talking about some feature and it’s the first time you are hearing about it. Then they change something about the project totally and this is going to require even more time to fix.

You can see how this profitable project can turn unprofitable very quickly. When pricing by the project, it is important to spell this out in your contract. Be very detailed with the “deliverable” in the contract and let them know you are ok with changes but it will require an additional contract spelling those changes out and an additional charge for the time and effort to make said changes.

I remember being a little skittish when thinking about having a client sign a contract when I was first starting out. Don’t be. It can save your ass! Plus, most clients understand and expect it. You’ll appear even more professional by doing so. There are many tools out there to help you build your contract/proposal. They vary in pricing. GroLancer has this feature included in our platform. Create your free account and take a look at it.

The Most Lucrative Pricing Model For Freelancers

This brings me to my favorite pricing model – value-based pricing. This is my favorite because it is the most profitable. I kind of use a hybrid of per-project and value-based pricing when it comes to pricing out most of my freelance web development projects.

I go through the whole process of breaking the project down into small, bite-sized chunks so I can better determine the amount of time it will take me to complete the project. I then add in the padding (usually 15-30%) and multiply by my hourly rate. I know this is the absolute minimum I can do the project for and remain profitable.

I then step back and look at the bigger picture. What is this doing for the client? What will they gain from it? I then adjust my pricing accordingly. Let’s look at an example project where I used value-based pricing.

An Example of a Value-Based Priced Project I Completed

I was approached by a company to build out a section on their website that dealt with advertising available jobs and taking applications online. Their current process was very manual. They would post the available jobs on their website, the interested job seeker would email HR about their interest. HR would then email them a pdf version of their application. The job seeker would download the pdf, print it off, fill it out, scan it, attach it to an email, and send it back to HR.

HR would then download the completed application, look it over, make any notes they needed to make, then file it away on their computer, wherever they kept the applications. Then, when they needed it, they would have to search for it among thousands of other applications. It had slowly become a nightmare for them.

The system I was proposing to them would allow everything to be done online. It was a much better experience for the job seeker but a completely different world for HR. HR could now see the application in real-time, sort applications by many different criteria, tag applications with different statuses, and instantly pull up any application they needed to see.

Show the Value in the Proposal

I calculated the amount of time this would save over the course of a year. I looked up the average salary for an HR officer and did the math. Having this application would save the company $x amount of dollars just in the first year of having it! I then priced the project accordingly, still allowing them to have a great ROI.

It was an easy sell and a very profitable project for me.

As you gain experience, you can start pricing projects this way too. For this to work, you need to have a client that views you as a trusted partner instead of just a hired hand, and this can take time to develop.

Share Your Experience

How have you priced some of your projects?  Do you use one of the methods above or have you developed a different pricing model? Not all the methods work for every industry. Some are better than others in certain fields. Share your favorite pricing model in the comments below.

About The Author

JD Simpkins

JD Simpkins is the creator and founder of GroLancer, The Freelancer's Growth Platform. As a web developer, he fell in love with freelancing back in 2005. He has mentored many up-and-coming freelancers over the years and developed a passion for helping others work towards their dreams. He used a lot of tools to run his freelancing business and remembers how expensive this became. That's when he decided to build GroLancer, not only to share information with aspiring and established freelancers but wanted to offer all of the tools a freelancer needs to run their business and make it affordable to everyone, no matter what level they are at in their career!

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