“How much should I charge?” This was the question I struggled with the MOST when I started freelancing. And the answer to this question matters—get this wrong and you will constantly struggle to get by. I know I did. At the start I was undercharging so badly that even though I kept getting clients, I still couldn’t make rent.
Figuring out how to price your freelance services is one of the most important things you will do as a business owner. So here’s what I’ve learned since starting my business in 2013.
Top Two Mistakes to Avoid When Deciding How Much You Should Charge
When it comes to pricing your services, here’s what NOT to do:
- DO NOT take your current job’s annual salary and divide it by how many hours you work a year to come up with your freelance hourly rate. Why this doesn’t work: As an employee, you get benefits a freelancer doesn’t (such as health insurance and paid vacation). In addition, as a freelancer, you will have to pay a 15.3% Self-Employment Tax. So your hourly rate as an employee is likely too low for a freelancer.
- DO NOT price solely on how long something takes or how much it costs for you to do it. Your services are not a commodity paid for at cost—they are a valuable asset that your client exchanges money to obtain. It’s all about value, not cost.
To drive this point home, I want to share a story from Chris Guillebeau, author of The $100 Startup. He paid a locksmith $50 to unlock his car quickly in an emergency, and because the locksmith took only a few seconds to do it, Chris felt cheated. He remarks on it below:
”As I drove away, I realized that I secretly wanted him to take longer in getting to me, even though that would have delayed me further. I wanted him to struggle with unlocking my car as part of a major effort, even though that made no sense whatsoever. The locksmith met my need and provided a quick, comprehensive solution to my problem. I was unhappy about our exchange for no good reason.”
Sure, it took the locksmith only a few seconds to unlock his car. But what was the value to Chris to be able to get into his car again? This is how you need to view your own services.
The Surefire Way to Price Your Services so You Don’t Go Broke!
Pricing your services all comes down to knowing how much revenue (or “gross income,” which does not account for expenses and taxes) you need to make each month. And how do you know how much revenue you need to make each month?
- Know your living expenses. This means you need to know how much you’re spending to
- Pay your bills
- Pay your rent/mortgage
- Buy food, groceries, entertainment, etc.
- Save for retirement
- Save for emergencies
- Know your business expenses. If you’re just starting out, you may not know for sure, but it’s simple to estimate. Most remote businesses have very few expenses because you don’t need an office or even a car to run your business. Business expenses could include accounting software, website hosting, and internet. At the start, my own business typically cost me about $100 per month to run—and that’s just for software because I’m a social media manager. Now that I’ve hired a virtual assistant and a WordPress support guy, my business expenses are a tad higher.
- Use my super simplified formula for projecting how much revenue you’ll need to hit each month:
(Personal expenses + business expenses + savings)/.7 = Revenue Goal
The “/.7” part accounts for the fact that you need to set money aside (typically 30% or less) to pay your income taxes since as a self-employed person, you will no longer have taxes automatically taken out of your paycheck for you.
Two Things Most Freelancers Forget to Factor in When Setting Their Prices
- Income taxes! The above formula assumes 30% of your income will go to taxes. That’s an estimate. It could be lower or it could be higher because the U.S. has a progressive tax system, not a flat one. However, most experts will tell you 30% should be enough, and you’ll likely have some money left over (which is better than not having enough!).
- Current job benefits, especially health insurance. When you quit your job, are you going to need to get your own health insurance? If so, be sure to start your health insurance search before your leave your job, and calculate that as an expense when projecting how much your monthly expenses will be.
“What if I don’t know what my monthly expenses are?”
You’re not alone. Most people do not track their monthly income or expenses. If this is you, then the simplest thing to do is log in to your bank’s website and pull previous statements to see your spending.
Another thing to note is if you plan to travel full-time or go on extended trips, you may be going to a country with a different cost of living, so you’ll need to factor in that plus travel costs.
Expenses Differ for Digital Nomads
If you do plan to travel for extended periods of time, your monthly expenses will likely be way different from what they are now. So be sure to research your destinations and factor in those costs accordingly.
Many digital nomads live in countries with extremely low costs of living, so they barely need to make anything to live there. (When I lived in Peru, I was paying only $180USD a month for a one-bedroom apartment—that’s only 11.4 percent of what I used to pay for an apartment HALF that size in San Francisco!).
When Deciding How Much to Charge, Start With the End in Mind
It is essential to know how much you need to make in your freelance business because, as with anything, if you don’t know where you want to be, you will never get there.
So use that formula above. Go on, go ahead and crunch the numbers. I’ll wait.
(Personal expenses + business expenses + savings)/.7 = How much you need to make
You done? Okay, now take that number and work backwards. If you know you need to make $4,000/month, then how many clients can you reasonably handle per month? What kind of services are you offering them? How much time will that take up? Do you want to work 40-hour work weeks or 20-hour ones? What kind of value can you provide your clients?
If you know you want to offer social media services to your clients, and you know it usually takes you about 10 hours/week to manage three accounts for a company, and you want to work 40 hours a week, then you’ll need 4 clients, possibly each paying $1,000.
So now you need to figure out how you can package your services in a way that provides a $1K/month value. And if you’re thinking that’s too high—stop! I had a client who paid me $1K/month to manage their Twitter, Instagram, and Facebook accounts. There are clients out there who would pay more than that. Remember, what matters is value, not how many hours it takes you. Always think about how you can HELP your clients and provide them with services that are worth your prices.
Flat Fees vs Hourly Rates: Which Is Better?
Whenever possible, I charge a flat project fee rather than an hourly one for a few reasons:
- Charging by the hour doesn’t make sense. If you provide your client with amazing work and solve a problem for them—who cares how long it took you?
- Charging by the hour doesn’t incentivize efficient work. As you continue to do a certain task, you will get faster at it and you’ll find ways to do it more efficiently. However, if you’re being paid by the hour, you’re actually being penalized for working efficiently.
- Charging a flat project fee enables your client to view your work as a valuable asset provided to them, rather than viewing your time as a commodity.
EXCEPTIONS: There are TWO circumstances in which I would recommend you charge by the hour:
- If the client is unsure of what they need and can’t give you a detailed project scope. In this case, it’s impossible for you to predict how long something will take you, as the client isn’t even sure.
- If this is a new service for you, and you’re not sure how long it takes you to do things. When you’re just starting out, it may be okay to charge by the hour, as you may not realize how long certain tasks will take you.
The way I’ve outlined above is by no means a perfect science, but it is a very helpful guide I wish I’d had when I started out.
How I Have Steady, Predictable Income Each Month—Even as a Freelancer!
I work with recurring clients, on a monthly retainer. This makes my income much more predictable. So as you determine what services you’ll offer, try to package them in a way that meets a need that a client would have on a monthly recurring basis.
For example, if you’re a web designer/developer, a website is a one-off project. Once your client has their new website, they won’t need your services anymore. BUT what if you started offering website technical maintenance? That’s something a client will need every month because their website will need to continue to run well after it’s designed and built. So you could offer monthly WordPress packages that your clients could subscribe to, thereby creating a meaningful, long-term relationship with your client and giving you more reliable monthly income.
I hope this helped answer the most common freelancer question of “How much should I charge?” Again, this is just one freelancer’s opinion, but it is derived from more than four years of freelance experience. All the best with your business!