Freelancing 101: How to Price Yourself as a Freelancer
As a freelancer, how do you determine how much to charge clients for your services? As you may have guessed, it varies quite a bit. However, there are four different pricing strategies that will help you understand how you can choose to price yourself:
Time-based pricing
Project-based pricing
Competition-based pricing
Value-based pricing
But before you can choose a pricing strategy, you need to determine how much money you need to make annually to support yourself. To calculate this, we need to do some basic math. Keep reading to learn how to determine your minimum acceptable rate (MAR) using a simple formula that will help you set your prices as a freelancer.
How to Calculate Your Freelance Rate in 4 Steps
You may think that being a freelancer allows you to pull a number out of thin air to start charging clients. I see this a lot in the entrepreneurship world. Most freelancers are used to being paid hourly at a previous job, so they give themself a raise and start charging hourly for their services.
However, there’s a catch: when you work for a company, you have no business expenses. When you work for yourself, you have personal expenses and overhead to consider. For instance, if your salary was $60,000 at a previous job, your hourly rate was about $29 (($60,000 x 52 weeks) / 40 hours) = $28.85).
As a freelancer, you might give yourself an ~$20 raise and start charging $50/hour, thinking that will be sufficient. And $50/hour will certainly cover your personal expenses, but what about the cost of owning your own business? Now you have to pay your own taxes, insurance, business licenses, software subscriptions, payment processing fees, etc.
Being a freelancer doesn’t mean you can frivolously choose your rate—you need to be strategic about it. Let’s do some math to help you determine how much to charge clients for your services, so you’re not struggling to stay afloat.
1. Add Up Your Monthly Expenses
Before you can set your freelance rate, you need to add up all of your monthly expenses. Include both personal expenses (e.g., rent, groceries) and professional ones (e.g., software). Grab your credit card statement, a calculator, and a cup of coffee. Start by adding up everything you pay on a monthly basis—and don’t forget the little things!
If you pay for yearly subscriptions like Amazon Prime, divide them by 12 to get the monthly cost.
2. Estimate Your Taxes
Income taxes vary quite a bit from country to country. Personally, I set aside 25% of my income for taxes, making sure I pay them on a quarterly basis to avoid a big tax bill at the end of the year. Instead of manually transferring money to a different account every time I get paid, I use Catch.co.
Catch is a platform built for entrepreneurs. You can set up “autopilot,” which helps you save without lifting a finger. Every time I get paid, Catch transfers 25% of that deposit out of my bank account and into my Catch account for safekeeping. Then, when it’s time to pay my quarterly taxes, I can transfer those savings right to the IRS directly from Catch.
Having a separate account for your taxes prevents you from accidentally spending the money, keeping your freelance finances organized. I highly recommend Catch if you’re a freelancer.
3. Calculate Your Total # of Work Days per Year
Next, you need to calculate how many days of freelance work you can handle per year. There are 365 calendar days in a year and 7 days in a week. Divide 365 by 7 and we get ~52 weeks. Assuming you’re not working weekends, we’ll multiply 2 calendar days (Saturdays and Sundays) by 52 weeks, equaling 104 days you won’t be working.
There are 10 bank holidays in a year, so we’ll add those to our list of non-workable days, too (10 + 104), totaling 114.
Next, we’ll calculate your vacation days. Let’s say you want to take 3 vacations/year. Three 7-day vacations equal 21 days. 21 vacation days + 114 non-workable days/year = 135 days.
Finally, we’ll estimate sick days. Let’s give you 2 weeks of sick days, totaling 14 days/year: 14 + 135 = 149 days you won’t be working per year.
365 calendar days - 149 non-workable days = 216 total work days/year.
4. Estimate Your Minimum Acceptable Rate (MAR)
Remember, we’re adding up billable hours here. Unless you’re working overtime, it’s near impossible to work 40 efficient hours of billable time per week. You’ll need some wiggle room to work on your business, not just in it.
Let’s say you spend approximately 80% of your time on client work and the remaining 20% of your time working on internal tasks. That would total 6.4 hours of billable hours per day. A day’s work (6.4 hours) x 216 work days = 1,382.4 working hours per year.
Now it’s time to figure out your minimum acceptable rate (MAR). Your MAR is the absolute lowest hourly rate you’re willing to work for. How do you calculate your MAR?
(Living Costs + Business Expenses + Salary + Taxes) / (Total billable hours per year) = MAR
Here’s an example:
Living Costs: $5,000 x 12 months = $60,000/year
Business Expenses: $1,000 x 12 months = $12,000/year
Salary: $100,000/year
Taxes: $100,000 x 25% = $25,000/year
Total billable hours/year: 1,382 hours
(($60,000 + $12,000 + $100,000 + $25,000)) / (1,382) = $142.50/hour
This equation helps you estimate your minimum hourly rate. Whether you charge hourly or not, use this number to help you price your services accordingly.
Now, let’s consider the four different pricing strategies you can use to price your services as an entrepreneur once you know your MAR.
4 Different Pricing Strategies You Need to Know About
1. Time-based Pricing
Time-based pricing is when a service provider charges an hourly rate for a project.
Time-based pricing tends to be a more common pricing model used by freelancers. They’re usually fresh out of college – or hated corporate America – and think charging hourly is a standard (when it’s not) because that’s how they’re used to being paid.
For reference, Squarespace website designers charge anywhere from $50-150/hour, depending on their level of experience using the platform. According to Freelancer Map, the average hourly rate of freelancers in 2021 was $105. Meaning, the range for an hourly project greatly varies depending on who designs your site.
However, time-based pricing is a rare pricing model used by expert Squarespace web designers because they know it’s risky. An hourly project means the service provider will work until the job is done, but the client has no idea what their final bill will be. Charging hourly is a risky business, and remember: clients will always take the least risky option.
2. Project-based Pricing
A project-based pricing strategy estimates how long it will take to produce all of the deliverables, resulting in one sum that’s usually split up into multiple payments.
I would say that this pricing model is the most common one used in web design.
Veteran designers usually know how long a typical site takes them to build based on previous projects. From there, they multiply the total time a basic web project will take them by their hourly rate to get the project-based price. For instance, using our hourly rate above, we’ll multiply $142.50 by 40 hours, totaling $5,700 per web project. That’s the least amount of money a web designer who can build a site in 40 hours should charge.
Web designers who used project-based pricing usually have tiered packages (i.e., Basic, Standard, and Premium), giving business owners a few options to choose from, which is ideal. Using the base price we estimated above, a freelance web designer can simply add time to the equation for more involved designs to get the rates for standard and premium website packages.
3. Competition-based Pricing
Implementing a competitive pricing strategy means you set the price of your services in relation to what your competitors are charging.
Unfortunately, most business owners make their investment decisions based on this pricing model. Everyone is looking for a “good deal;” not necessarily a great experience. Having said that, clients tend to “price shop,” scheduling calls with various freelancers to compare and contrast deliverables, risk, and level of investment.
It’s important to stay competitively priced, especially in competitive markets. However, I don’t believe it’s best practice to sneak a peek at your competitors and price yourself relative to their rates.
Word to the wise: price your services at the rate YOU need to support yourself and your business using your MAR as a reference point. Don’t worry about everyone else. As long as you feel appropriately compensated for the work you’re producing for clients, that’s all that matters.
4. Value-based Pricing
Value-based pricing means you set the project rate based on the benefits it provides to the customer.
This pricing strategy is the art of identifying a problem and charging clients the most they’re willing to pay to solve it.
Pitching a lead using value-based pricing (also known as “customer-based pricing”) is ideally how you want to be charging for your services. A client’s perception is what you’re banking on (literally) here. The key to using value-based pricing is ensuring that clients see the value your services will bring to their business (and life, potentially).
Communicating the value you bring to a project means painting a picture of how your services will take customers from where they are to where they want to be. And perceived value isn’t always monetary; it could be (and usually is) increased confidence, efficiency, differentiation, happiness, status...etc.
Hopefully this blog helps you accurately set your rates to support yourself as an entrepreneur. Keep up the good work, fellow freelancer!
