Set and negotiate rates for your freelance services efficiently. Find out how to keep your clients happy and make a comfortable income.
One of the main things people ask before they go freelance is how to work out their freelance consultant rate. Setting your freelance consultant rates is difficult. Set your day rate too low and you have to work longer and harder to make a decent income. Set your day rate too high and you risk putting off potential clients and not seeing you have a full portfolio of work. Setting and negotiating rates can seem like one of the most complicated and intimidating parts of freelancing but it really doesn’t have to be. There are several strategies you can take to find an hourly rate, day rate or project rate that your clients are happy with and enables you to make a comfortable income.
Your Minimum Acceptable Rate (MAR)
The first thing you must do as a freelancer is ascertain the lowest equivalent hourly rate you are willing to work for — your Minimum Acceptable Rate (MAR). If you are already a full-time freelancer (or are planning on being one), your MAR calculation should look something like this:
( (personal overheads + business overheads) / hours worked ) + tax
Let’s look at a practical example. Say your personal overheads (i.e. the total cost of keeping a roof over your head, food on your plate, and so on) are $30,000 p.a., and your business overheads are a projected $5,000 p.a. You plan on doing client work for 6 hours a day for 48 weeks of the year (1,440 hours total). Here’s the calculation for your MAR (gross of tax):
($30,000 + $5,000) / 1,440
Your MAR (gross of tax) is $24.31. Add say 20% for tax, and your MAR (net of tax) is $29.17.
If the above calculation seems a little rough, that’s because it is. Don’t concern yourself with trying to set a precise MAR, because there are far too many variables at play to perfect it anyway. Using the above calculation does the job well enough, as long as you err on the side of conservatism.
Pricing Strategies for Setting your Freelance Consultant Rate
There are several strategies you can take for setting your freelance rate, each with their own benefits and disadvantages.
Time-Based Pricing
Time-based pricing is a rough way to work out your day rate, although it is different for every freelancer depending where they are in their career, their skills, demand for their ability, state of the job market, demand for freelancers, and more. Time-based pricing is also how professional services businesses work, as a lot of the work output is directly proportional to the amount of time that goes into producing it.
This is also the easiest to manage, which is why it’s so appealing for most people who are new to freelancing. You work an hour, you invoice the customer for an hour. The simplest way to work our your day rate using a time-based pricing strategy to add a third to the salary you were receiving before.
The Problem with Time-Based Pricing
If you are charging hourly, then you will always be limited to making only as much as the hours that you can work. You effectively give yourself a price ceiling that can only be raised by working more hours.
If you want to scale your time-based pricing strategy, you need to a) hire employees or b) switch to a product-based business model – both of which bring whole new levels of time, money and experience. IF you work with a team, then the process of tracking hours will become less complicated with zistemo.
Project-Based Pricing
This strategy involves estimating how much time and resources a project will take, then giving the client a project fee based on that estimate. One of the benefits of taking this approach is that the client can have a fixed costs in their mind, which won’t spill over if the scope of the project stays the same. With time-based pricing, any extra time spent on a project will incur extra costs.
You may find that you’ll win more business this way, as you’re working to the client’s budgets. The benefits for freelancers means that you can avoid some admin work (tracking hours, progress and daily reporting) and if you;e efficient enough and give good estimates, you get a much high per hour rate (without the client even knowing).
The Problem with Project-Based Pricing
The main issue with project-based pricing is that you need very accurate estimates of how long a project will take and setting the price appropriately. If you get that wrong, you could put potential clients off from your high prices, or end up working a lot more hours than those you are paid for. You should always expect projects to take longer than the plan and always include a contingency for any changes to the original project brief that the client might ask for.
Value-Based Pricing
There is a more strategic way to set your freelance consultant rate. Looking for the value that the project will bring to your client’s business and charging them and right rate based on that value. Value-based pricing as a strategy is often used where the value to the client is many times the cost of producing the product or service. The perceived value depends on a few factors: the alternatives open to the customer (using competitors’ products or services, adding a manual work around, or simply doing nothing at all. In order to use value-based pricing you have to know your client’s business, their costs, and the alternatives available to them. Using value-based pricing, you can charge at a perceived value, rather than the time it takes to actually complete the project.
The Problem with Value-Based Pricing
The main difficulty in using value-based pricing is that the client will want to pay different prices between agencies or freelancers, between regions or countries, and even for the same freelancer in different scenarios (depending on whether the freelancer is available now or later when others are available), so that a highly accurate value-based price for a project is pretty impossible to get. Despite being difficult to get a value, any sales messages you use should consider the value a product or service brings to the client, which will enable to you to set proportionately higher rates.
Ready to set your freelance consultant rate?
Everyone has a different opinion about what model is best, what works and what doesn’t when setting their pricing strategy. Some people insist that hourly or weekly is the only way to go. Others insist that “value-based” is the only way to go. The best way to figure out your own pricing strategy is to figure out what works for you and go from there. There’s definitely going to be some trial and error while you figure things out. You may under charge for a particular project, but that will give you the experience you to charge more next time. You may overcharge a client and lose out on a new piece of business.
