Every beginning freelancer asks the same question : how much money should I ask to my customers? Should I bill by the hour or provide a fixed quote on a per-project basis? And what is the right cost for each kind of project?
In this article I want to give some guidelines that come from my own experience as a freelance communications consultant and copywriter.
The short answer is: it depends on the situation . Not much informative and encouraging, I know.
The problem is: sometimes customers ask you for your hourly rate, sometimes they ask upfront for a detailed price list for every service they may need, sometimes they want a quote for a specific project.
You must think of yourself as a business – you are a business, after all!
The rule is: cover costs (direct and overhead), then get profit . The same logic applies to you.
You can ask to other freelancers in your same field and in your same area for their prices. A good pro knows that it’s not by discouraging newcomers that he’ll keep his stream of work, so he’ll help you. Look for freelancers in your same area, because prices can vary a lot from city to city.
Asking is a good start, but prices are really affected by many variables. The costs another freelance is covering may be very different from yours, that’s why you must know your costs .
So, how do you find your costs? Add up all your yearly expenses : bills, retirement founds, savings for specific goals (buying a new computer – yours will break up, backup often!, software, office furniture), stationery, business cards, your website, food.
Remember: working from home your bills will likely go up, but you can shave those costs with food: eating at home is usually cheaper than eating out.
Find every cost you pay for eating, working, be healthy, planning for the future and add them up. Basically, you need to find out how much you spend every year just to keep your standard of life .
Don’t take into account the costs for leisure, holidays, clothes, new furniture for the home and so on yet. Those are not costs, those are the what you spend your profit on.
Now that you have your yearly total expenses, it’s time to find your daily expenses .
Here’s the trick. You can’t simply divide by 365 .
Ask yourself how many billable days are you planning to work every year .
Let’s say you want your week ends off. That is 52 Saturdays and 52 Sundays off. Your 365 days are now 261. Let’s take out a couple of week for summer break and another 4 weeks for other holidays, sick days, the 2 days you’ll spend travelling to see a friend getting married and so on. We are left with around 210 working days. Let’s be conservative and say you have 200 working, billable days per year.
So, divide your yearly expenses for 200 and you have the minimum average money you need to earn every billable day in order to pay for your bills, food etc. and not be losing money.
So the formula is:
- All your yearly costs / yearly billable days = daily costs to be covered
Now, divide the daily expenses for the number of billable hours you plan to work every day .
PR time, formation, networking are all part of the working hours, but are not billable.
- Daily costs / daily billable hours = minimum hourly costs to be covered
(On average, of course)
The number you get is the basis for your prices : every Dollar or Euro you get above this number is profit .
- Hourly costs + profit = hourly rate, before taxes
How much money should you ask on top of what you need to cover your expenses? This is where you take into account the costs for leisure, holidays, clothes, new furniture, other savings and so on.
You can try an approach similar to what you did for costs: add everything up, divide for 200, divide again for the daily number of billable days. Add the hourly cost to the number you get here and you have an hourly rate.
Alas, it’s not so easy: while you must strive to cover your costs, you have less control over profits . You must consider the prices of competitors, the difficulty of each task (1 hour spent writing a brand new article maybe is worth more than 1 hour spent reviewing somebody else’s copy) and so on.
As a guideline – not rule! – you may try to add a markup from 60% to 100% to your costs.
Now it’s time to talk with an accountant . You must have a very precise idea of what your level of taxation will be . Since your rate must cover your costs and generate a profit, you must be sure that you won’t spend all your profit in taxes. A mistake many new freelancers do is not taking taxes into account and then finding themselves paying taxes higher of their income. Income, not profit!
So by all means talk with an accountant and ask him how much you could end paying in taxes with your freelance job.
Rise your hourly rate enough to have enough profit plus coverage of costs after taxes. Sometimes this means doubling your hourly rate!
So your hourly rate will be:
- Hourly costs + profit + extra money for taxes = hourly rate
Having an hourly rate, we can now think about fixed quotes .
The simplest way to have a simple quote is estimate how many hours you need to work on a project and then simply multiply your hourly rate for that number of hours . Only experience can tell you how many hours you will need for every kind of project. When you are requested a quote be sure to ask to the customer every possible detail about the project, in order to better estimate how long it will take to complete it.
After you have done this a few times you’ll have a better grasp on the effort you need for every kind of project and be able to better fine tune your quote.
You can also write a price list using the hourly rate x needed hours formula.
Just be sure to give a measure unit for the services. Be specific in your listings.
Do not write “Copy for 1 article: $10.00 ”.
Do write “Copy for 1 article, 400 words: $10.00 ”.
This will avoid any nasty surprise you and your customer can have when it turns out that that article must be 12 pages long!
Now you have a starting point to calculate a rough hourly rate, per-project quote and price list.
Frome here, your own experience will help you to fine tune your prices .
Remember that the rule is: ask enough to cover costs and have a profit, after paying taxes .