Freelancers make up over 35% of the American workforce. Modern technologies enable everyone to work from home and get a nice income. However, freelancing is an extremely challenging business model because the competition is tough and even the best experts need to manage their finances properly to make this business profitable.
New freelancers often get stuck when they need to set rates. On the one hand, they are afraid to overcharge because they want to get more projects. On the other hand, they shouldn’t let clients take advantage of them. Moreover, freelancers’ rates can tell clients a lot about them.
For example, if you set a very low price, you may quickly land a project. However, the chances are that this client won’t contact you when having a larger project because your low rate will make them see you as an amateur. As a result, many freelancers often have to choose between working on good projects that pay well and projects that pay less but fill their schedules.
Here are some useful tips that will help you find the balance and set the right rates.
1. Approach your service as a product
Services are a complex concept so it might be easier for a beginner to think of their service as a product. After all, you deliver a certain final result, and your service is a process of creating such a product. Therefore, you can use the cost-plus approach, which is a common strategy in business: calculate how much it costs to create the final product and then add an amount that will enable you to generate profit.
The production costs must include all your expenses, such as rent, meals, etc. The additional cost must be based on the amount of time and effort that you put into the creative process, as well as your financial goals.
2. Set your goals
First, you should figure out how much money you want to make per year. Here’s an example:
- The main goal is to have an annual income of $65,000, before taxes.
- You want to work for eight hours, four days a week.
- You want to take a four-week vacation every year.
- Add two weeks to your vacation for any unforeseen circumstances, such as illness.
In this case, you’ll have 52 - 6 = 46 working weeks in a year, which is 1472 working hours. Divide $65,000 by 1472 hours, and you’ll get your hourly rate of $44. However, you won’t be able to work all the time because you also need to reply to emails, meet with clients, take courses, promote your business, etc. Therefore, you cannot charge your clients for every hour of your work.
We recommend that you set the ratio of billable to non-billable hours as 60% to 40%. In this case, you will only have 883 billable hours per year, so you should divide $65,000 by 883, and your rate will be $74 per hour.
3. Consider market rates
It’s important to know the situation in the market. For example, you may start by checking freelance platforms like UpWork. However, there are thousands of freelancers from all over the world. Keep in mind that the cost of a meal in the U.S. can feed a family for a few days somewhere in Southeast Asia, so many freelancers might have ridiculously low rates. Fortunately, many clients are looking for services from freelancers in their region so we recommend that you focus on the local market.
Another important thing to consider is that you compete not only with individual freelancers but also with professional freelance agencies. As Ann Kenning from the custom writing reviews site Best Writers Online says, “Such agencies usually offer a number of additional benefits for clients but their prices might be higher. We recommend that you set lower rates compared to agencies”.
Such an approach will make you attractive for small and medium-sized businesses that cannot afford agencies. You’ll also have a chance to get hired by an agency because they’ll be able to make some money off you while charging their regular rates. In turn, you’ll be able to develop your network, which is very important for a beginner freelancer.
4. Hourly rates vs. project rates
Some freelancers charge per hour, while others charge per project. Although some freelancers would tell you that you should never charge per hour or vice versa, the truth is that both these approaches have their advantages and disadvantages.
Hourly pricing is a good choice if you’re going to work for agencies because they will ask you about your hourly rate. This method will also help you if completing a project takes longer than expected. However, you may undervalue your work when charging the same hourly rate for projects that bring clients, say, $5,000 and $15,000. Hourly pricing will also motivate you to work slower.
Pricing per project allows you to take into account the value of your work and to work faster. This approach also enables your clients to properly plan their budget. However, you may actually earn a low hourly rate if you underestimate the complexity of a project. You should also make sure that your contract will protect you from changes in the scope of a project.
All the tips above will help you negotiate. You’ve analyzed the market, set your financial goals, and determined how much you want to charge. However, your clients might try to go below the desired rate. Sometimes, you may even accept a lower rate because a project allows you to gain experience or to work with a well-known company and build your reputation.
Nevertheless, we recommend that you always try to stand your ground. It will be easier to do if you know exactly what your service is worth. You should also keep in mind that rates change so we suggest that you keep track of the changes in the market.
6. Start higher
When negotiating, the worst thing you can do is to walk backward from the desired rate. Many clients will reject your initial rate so you must have room for maneuver. We recommend that you always set your rate at least 10% higher than the amount you would agree to.
If your client rejects a 10% higher rate, the chances are that they would reject the target rate, as well. On the other hand, if they agree to the target rate, they will feel like they’ve gained something from the negotiation so you both will be happy with the outcome.
7. Seek mutually beneficial agreements
Good negotiation is about finding a good deal for both parties. You don’t want to force your clients to pay inflated prices because this approach won’t allow you to build long-term relationships. Building a network is especially important for new freelancers so make sure that your clients will want to recommend you to their colleagues.
Setting the right rate can be the most difficult challenge for a new freelancer. However, this task will get easier if you analyze the market, set realistic goals, and take into account our useful tips. Freelancing is a very popular business model, and it’s up to you to make it profitable.
Frank Hamilton has been working as an editor at essay review service Online Writers Rating. He is a professional writing expert in such topics as blogging, digital marketing and self-education. He also loves traveling and speaks Spanish, French, German and English.