As a freelancer, you likely enjoy the autonomy and flexibility your position affords you. But if you’re just breaking into the freelancing world, you might have unanswered questions about how to set your prices.
Hourly rates, service rates and contract rates can all be estimated fairly accurately, but you’ll need to ask yourself some basic questions and do a little bit of math. Take your time and, above all, be honest with yourself — a misstep at this early stage could provide some unfortunate surprises later on.
How to Set Your Hourly Rates
Let’s get one thing clear before we move on: there’s a difference between your “salary” and your “rates.”
Your rates are what your customers pay you for the work you do. Meanwhile, your salary, in the grand scheme of things, is merely another business expense. It’s what you have for yourself after the materials are bought, the licenses and fees are paid, the work is done and you’ve settled up with your client.
In other words, your take-home pay is substantially different from the hourly rates you’ve listed on your website.
So — what does that mean? It means you need to choose your salary before you do anything else. That’s right — you get to name your salary! If you’re experienced, you probably know a ballpark figure already. But if you’re new to freelancing, make sure it’s a number that meets your basic living expenses, plus a bit of extra “walking around” money.
All of these are questions you’ll need to answer as you’re determining how to set your rates. Thankfully, there are some resources available to you. BeeWits created a powerful calculator for freelancers to help them dial in their rates for hourly work. The calculator walks you through the process by prompting you for information about your desired annual salary, your billable hours per year and how much of your week you actually spend working.
Hourly rates are a difficult thing to estimate with any amount of precision, but this tool should get you in the ballpark — as long as you’ve been honest about how much money you want to take home and what your overhead really is.
How to Set Your Rates for a Service
Like rates for hourly work, setting your rates for your services can be difficult. If you’ve been in the game for a while, you probably have a good sense of what your time is worth. You probably have a healthy number of comparisons from friends, rivals and fellow practitioners. But if you’re relatively new, there’s still help available. Keep these two main points in mind:
- Know your expenses inside and out. If you don’t know what performing a particular job will cost you, none of your other estimates or rate prices can possibly be accurate. The price you ask for your service needs to cover your expenses, allow some wiggle room and ultimately allow you to turn a profit when the dust has settled.
- Know how much your competitors charge for similar services. It’s expected that your prices won’t be precisely the same as a fellow contractor who operates across town. If you’re asking more, make sure there’s a reason for it, such as superior materials or more years of experience. Many customers will pay more if they have some assurance they’re getting a superior product.
Setting rates for services will feel a little bit different from naming hourly prices, but they share some fundamentals. Your rates need to be commensurate not only with the effort involved in getting the work done but also with your experience level. Master artisans, for example, rightly demand a premium on their work because they’re much likelier to turn in a high-quality product than somebody who just started yesterday.
It also makes sense to make your pricing as granular as possible — that is, apply your pricing model to the smallest quantity of products or services as you can. For example, freelance writers often charge per word, while translators and transcription writers charge per character or per line.
Do your homework. Check out pricing in your local economy. If you need to, make some calls so you have the whole picture.
How to Set Your Rates for a Contract
Finally, the third type of rate you’ll need to price out involves contracts. Contract work won’t be substantially different from hourly or service-based rates, but they do have expectations on completion time.
When it comes to pricing, keep these factors in mind:
- Business fees and licensing expenses. Depending on your line of work, you might need to pay a one-time fee or even a recurring fee to secure the appropriate licensing. An independent public accountant, for example, needs ongoing learning credits to stay qualified and relevant in an industry that changes frequently. This is an additional expense.
- Overhead at your location/recurring expenses. How much you charge for a contract will also depend in large part on your overhead, just as choosing an hourly rate depends upon the cost of your materials. We’re talking things like utilities and property upkeep, taxes on inventory and anything else that requires a weekly, monthly or otherwise ongoing expense.
- Taxes. When it comes to taxes, things get a bit complicated for freelancers and independent contractors. As a general rule of thumb, you’ll need to set aside about 12.4% of your earnings for Social Security taxes alone if you work for yourself and you make less than $118,500 per year.
Got all that? As you can see, figuring out your pricing paradigm involves making sense of many moving parts. Make things easy for yourself by doing comparative research, leaving plenty of wiggle room for incidentals and being honest with yourself about your living expenses and how much you need to make each month to get by.