What You Should Charge & Why You Should Stick Your Price

It is amazing how long a moonlighter or even full-time freelancer can go on without having to determine what their price is. Sometimes this is because you already know what the project budget is or because you are so unsure what to charge that you take what you feel the client thinks is fair in order to get the work. The is especially true when you are first starting out and are hungry for work, however this is actually probably the worst way to acquire new business. Clients can smell your hunger and some will capitalize on it in order to receive a deal. By setting a firm price you can assure that this does not happen, decrease the amount of time it takes to do a quote, and appear more professional.

By determining your hourly rate you will know exactly what it will take to keep your freelance business running. If you are like me and work on a per project basis, this number can be a little hard to accurately determine. Because of this I have come up with a way to determine how many average size projects I will need in order to break even and then what I need to turn a profit. The methods listed below are more of a practical how-to rather than a formula. If you are looking for a formula in addition to a practical approach I suggest that you look at the Freelance Switch rates calculator.

Step 1: Determine your costs
Start with your fixed costs such as rent, internet costs, and insurance as these are usually the easiest to total. Next add in any variable costs such as long distance phone calls, and travel expenses by giving a fair estimate of your yearly costs. I like to over estimate with these costs in order to make sure that I set an accurate break even point. Finally add in any one time costs such as computer purchases and software upgrades. After completing these steps, you should have a fairly accurate figure of what your costs are for the year. The next step is where I tend to stray for the typical formulas. I like to throw in another $3000 “insurance” figure to account for any unexpected costs that may occur during the year. This could be more or less depending on your needs.

QUICK FORMULA 1:
Fixed Costs + Variable Costs + One Time Costs + What If Costs = Yearly Costs

Step 2: Determine your billable hours
As long as you are honest with yourself, this is actually a fairly simple task. First find the Number of hours you work per week, and then subtract and time you normally spend doing administrative tasks or any other non billable time. Your result is your billable time. Here is where the honesty part comes in. If you know that you spend another 2 hours each day reading blogs, and checking email then take off this time as well.

QUICK FORMULA 2:
Hours Worked – Non Billable Tasks – Honesty Time = Billable Hours

Step 3: Figuring your break even point
Now we know both what our expenses are, and what our realistic amount of billable hours are. If we divide our yearly costs by our billable hours, we receive our break even point.

QUICK FORMULA 3:
Yearly Costs / Billable Hours = Break Even Point

But what does this break even point mean?
Basically if you filled every billable hour you had at this hourly rate your costs would equal your income. However profit is probably something you would like your company to have. This is where other outside factors begin to affect your price.

Factors such as other freelancers going rates, increased education, your desired positioning (i.e. cheap / quick or expensive / high quality) and even planned future investments are taken into account. These factors could easily double your hourly rate, however it is up to you to determine exactly where you would like to be at. This is where knowing what other designers in your area charge can be helpful, however never charge a rate just because your peers do. If you cannot justify your rates in a practical and justified way then you will never stick to them and find yourself “bending” to meet the needs of clients who may not align with you and your business.

But if we bill on a per-project basis, what is this hourly rate for?
How many times have you been asked what a project will cost, but have almost no idea what to charge? Having an hourly rate that is accurate will help you quote in a much faster and consistent manner. While it will take time and experience to learn exactly how long a project takes, having a firm price will make it easier to calculate a safe project price once you do. In the beginning you may find it easier to overestimate a bit, but as time goes on and you gain more experience quoting projects this variance should become smaller. This is where tracking your hours may prove useful.

Why we must stick to our established rates.
By shifting your rates around to meet what you feel is the client’s budget is a bad idea for a number of reasons.

1. It lets the client know that you rate is not really your rate. Every project that they bring to you in the future will be subject to discussion on price. If your price is too high for the client, I would instead suggest discussing removing unnecessary features, or making a 3-color job 2-color instead, or even possibly printing fewer copies up front. By working with them to meet their budgets without compromising on your price you maintain your rates and appear helpful and concerned for their needs at the same time.
2. You will try to skip on either quality or time to make up for the lost money. Not only do you give the client an inferior product, you also do not have work worthy of your portfolio. This is almost like losing twice as much time, because you have nothing to show for your work at the end of the project. Not only this, but the client will still be expecting your finest work, and will most likely not be happy with the result. This usually just leads to a long string of revisions, and a lot of frustration.
3. Any referrals from the client are almost completely worthless. If the client does refer you to another person, chances are that they will tell them the price that they received your services for. This will mean that if you want these new clients you will have to extend this offer to them as well, which just perpetuates the bad behavior.

There are many more reasons than I have listed here, however hopefully these are enough to prove my point. Set your price based on your level of services and your costs, and then stick to your price no matter what. The only exception that I have ever given is when I work as a middle man as an outsourced project for an agency. In this situation since they are handling all of the client interaction, I will take a percentage off my price.

Additional Resources:
Freelance Switch Rates Calculator
Coroflot Design Salary Survey
9 Factors to Consider When Determining Your Price
Hourly vs. Fixed Pricing
7 Tips on Quoting Freelance Projects