Ask LH: How Much Should I Charge For My Freelance Services?

Dear Lifehacker, After years of working as a corporate slave, I've decided to make the jump and strike out on my own as a freelancer. I already have some people interested in my work, but I'm not really sure how much to charge.Do I set my rate based on what other people are charging? Or how do I come up with the best price to charge? Thanks, Bitten by the Freelance Bug

Photo by Galushko Sergey/Shutterstock

Dear Bitten,

Congratulations and welcome to the exciting world of working for yourself. Putting a price on your services is one of the biggest challenges freelancers face. You don't want to set your rate so low that your business won't thrive, and it'll be hard to raise rates later when your business becomes more established, but you also don't want to set them so high you scare off clients. Here's some advice on establishing what to charge. Whip out a pencil and paper, because we're going to be doing some maths.

1. Calculate How Much You'll Need to Cover Operating Costs

Salary: How much do you want to earn (pay yourself)? You might take a look at your current salary or check out a site like MyCareer to find comparative wages. Let's say, for example, you want to take home $45,000 a year. (If you were to hire someone to help you, also add a line for that employee's salary, but for the sake of this example we'll just stick with one staff member -- you.)

Taxes: When you're self-employed, you'll need to cover your own taxes. The ATO has information on self-employment and taxes. As a very rough rule of thumb, though, you can simply add a factor of 15 per cent to your salary to cover tax contributions. In our example, 15 per cent times the $45,000 salary is $6750. Adding these together, our new salary with taxes is $51,750.

Monthly overhead: Overhead costs are those that you'll incur just in running the business. Depending on your situations, these may include:

  • Rent
  • Utilities
  • Office supplies
  • Postage
  • Advertising or marketing
  • Telephone fees
  • Insurance
  • Auto leases

Tally these all up and multiply by 12 to get your yearly overhead. Then add in any yearly costs, such as computer or software purchases. In this example, we're going to say it's $12,000.

2. Figure Out Your Average Billable Hours

Next, find out how many working hours you'll have each year. You could take 40 hours a week and multiply by 52 weeks to get to 2080, but you should also account for public holidays, sick days and annual leave. Cameron S. Foote in The Business Side of Creativity suggests 1920 hours, accounting for 48 working weeks.

Then you need to subtract non-billable time -- time that you'll spend each week doing things like hunting for new clients or filing paperwork that you can't bill to a client. 20 per cent is a good rule of thumb for those non-billable hours, so multiply that by your annual hours above. In our example, the total billable hours is now 1152.

3. Add Operating Costs and Divide by Billable Hours

Now add your salary and overhead costs together. In this example, it's $51,750 salary with taxes plus $12,000 overhead, for a total of $63,750.

Dividing $63,750 by 1152 billable hours gives us an hourly rate of $55.34. But we're not done yet!

4. Factor in a profit margin

You'll also want to add in a profit margin of between 10 per cent and 30 per cent. The profit margin helps you build a reserve for when business slows. You might think you don't need to add in a profit margin because you'll be drawing a salary, but the additional profit is essential for future growth and also for obtaining loans.

Let's say we want a 20 per cent profit; 20 per cent of $55.34 is $11.07, so your new, final hourly rate is $66.41. You can definitely round that out to $66 or $67.

Charging by project: If you don't want to invoice clients with an hourly rate, all you need to do is estimate how much time you'll spend on a project and then multiply by your hourly rate to get a price you can quote your client.

Think the Rate Is Too High?

Keep in mind that calculating your rate precisely this way is really important if you want your freelancing business to be successful, because it's based on your actual costs and needs. While you may see others with lower rates than you (you'll also see much higher ones too, no doubt), avoid the common new freelancer mistake of pricing your services so low that you'll soon be scared back to the old 9 to 5 corporate world.

Other Methods

You can try several other methods for setting your rate, such as marking up your current salary (e.g. if you now make $15 an hour, charging double that, or $30) or just dividing how much you want to earn by how many hours you'll work, but I wouldn't recommend them because they're not realistic; they don't take into account your everyday expenses or account for long-term success.

And success is what we wish you. Good luck with your new endeavour!

Cheers Lifehacker


Comments

    Don't forget to add GST (assuming you earn enough) but also to claim business purchases against.

    You also need to figure in the initial setup costs, split over an appropriate time. Put together a spreadsheet with your projected income and expenditure so you can work out how much money you need in the bank before you get started. Some months your cashflow will be negative so you need money in the kitty.

    Bill early, bill often, follow up outstanding invoices. My payment terms are strictly 7 days and I've been at it for 12 years.

    Welcome to the club; it's tough, but rewarding.

      +1 for that excellent billing advice.

      Also, it's a good idea to charge a late payment fee, just as a disincentive to late payments (remember, you'll have business bill to pay, and those bills come with late fees if you can't pay them).

      Another good idea is to specify a late-notice cancellation of service fee:
      If someone books you to provide a service and you need to, for example, organise catering, book a room, print materials, organise accommodation, etc, and then one day before you are due to begin, they cancel on you; you could be left with a lot of out-of-pocket expenses that won't be covered otherwise. Your late cancellation fee should be enough to at least cover these expenses and any lost wages.

    My advice: be confident in your abilities and charge accordingly. The kind of clients that baulk at the high prices will normally be the same clients that cause you unending stress and sleepless nights as they're never satisfied.

    Normally it's most difficult to turn down work and hold firm on your pricing when you're first starting out, but if you're that desperate for work that early in the game you probably undercapitalised.

    Also, as mentioned above it's good to add an extra percentage to cover the fact you may experience down time (or clients that don't pay) but that buffer can also be a good figure to use when negotiating longer term client commitments or better payment terms. For example you might lower your rate by 20% if the client is prepared to offer a 3 month contract, or is prepared to pay 100% up front.

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