When I took on my first client, I had no idea how to set my freelance rate. Asking for too much would make me seem greedy and asking for too little would leave me overworked and underpaid. It has taken a couple of years, but I've finally come up with a system to set a rate that is best for me and my client.
This post originally appeared on Ryan Castillo's blog.
Most Freelancers Fail to See the Big Picture
But first I had to learn the hard way. I'm a web developer, and most freelance web developers base their rate off their current (or last) salary. Our salaries represent our market value so it makes sense to use it as a basis for our rates. Well, as it turns out, thinking this way is wrong.
Most freelancers fail to see the big picture. To figure out what you should charge, you need to understand how your work fits into a client's budget. You may know your client's budget, but not how they came up with their budget. What is the relationship between the budget and what you are working on?
The Acme Corporation Has A Problem
A quick story will help illustrate my point. Lets say Sally, the CTO of the Acme Corporation, just got off the phone with Wile, their biggest customer. He wanted some quick drying cement delivered today, but yesterday's website outage prevented his purchase. Wile is threatening to take his business elsewhere, costing the company thousands of dollars in revenue.
What Wile doesn't understand is that the outage was out of the Acme Corporation's control. Their sales site is hosted on "Jeroku" and when Jeroku started doing maintenance, it took the sales site down. Sally decides to make a tough decision: it's time for them to move off Jeroku.
Sally had seen the warning signs for months: their Jeroku bill is well over $10k/month and outages seem to be happening more and more. She's wanted to move them off, but delayed the decision because they didn't have a dedicated web developer on staff. Sally wants this done right away. This is where the freelancer comes in. They bring in Bill, the freelancer, and ask for a quote. Being new to freelancing, Bill thinks he has to come up with a hourly rate.
At his last job, Bill was compensated as follows:
- $70k salary
- Health insurance
- Three weeks paid vacation plus holidays
To come up with his freelance rate, Bill reverse engineers what he was last compensated:
($70k salary + $20k in health insurance) / (49 working weeks * 40 hours) = ~ $46/hr
Now Bill has an hourly freelance rate.
Based on his experience, Bill estimates it will take two weeks for the migration off Jeroku. He quotes the Acme Corporation at $3.7k (40 hours * $46/hr * 2 weeks). Sally quickly accepts. Bill doesn't realise it, but he's just missed out on a ton of money because he's missing a key insight in his calculation: Companies pay for solutions, not hours.
Sally knew it was costing $10k/month to stick with Jeroku. If the Acme Corporation could migrate off Jeroku by the end of the month they would save $10k next month and every subsequent month afterwards. With this in mind, she set an initial budget for the project to $10k. This is why going for Bill's $3.7k quote was a no-brainer.
Sally was considering the amount of money it was saving her company. Bill on the other hand, only considered the money he thought he should be making. Simply put, Sally was focused on a solution while Bill was focused on hours.
Gather Data For Your Freelance Rate
Let's revisit the Acme Corporation. Now Sally is contacting you for a quote; your first task is to talk to Sally and identify two things:
- What is their problem? The more specific details you find, the better. Try and identify how much money the problem is costing them and therefore, how much money a fix will save or make the company. In our example, the Acme Corporation lose $120k per year staying with Jeroku and significantly more whenever their site goes down.
- What is the budget to solve the problem? Simply ask: "What is your budget?" If they don't have an answer for this, it's a red flag. This client has not put enough thought into their cash flow, which should make you suspicious of if they will be reliable in paying you. You don't need to know the exact budget number, just a ballpark. Jason Fried of 37Signals has an excellent tip on this:
When they tell you they don't have a number say, "Oh, ok. So a $100,000 solution would work for you?" They will quickly come back… "Oh no, probably something more around $30K." BINGO: That's the budget.
Set Your Rate Based On The Budget
Let's assume in this scenario as a web developer that you've already done similar work so you're entirely capable of fixing their problem. Knowing their budget is $10k, you offer to get the work done for $8k. Plus, you guarantee the work will be done on time, thereby assuring their savings of $10k next month.
Compare this to Bill's quote of $3.7k, and you've doubled what he would have made for the same amount of effort. All because you thought about the problem from the client's perspective and inquired about their budget.
Clients only care about solutions. I was Bill for a long time — each client was just someone paying me for the hours I worked. Then I realised clients only care about solutions.
You should keep this in mind whenever working with clients. Understanding your client's thought process will add clarity to the value you are providing and how you bill. Most importantly, it will help build lasting engagements. Give it a shot.
Stop Leaving Money on the Table with Your Freelance Rate [Ryan Castillo]
Ryan Castillo writes about the lessons he's learned while growing a successful freelance business. If you enjoyed this article, join his free newsletter.
Image adapted from Thatsaphon Saengnarongrat (Shutterstock)