Let me start this off by saying how much it sucks to be a freelancer or small business owner when everyone else around you seems to be working so-called “normal” jobs.
Gone are the days where your friends and relatives might ask you how things are at work. Now, everyone seems to be concerned with the viability of what you do, planting concerns about how you’re going to find enough clients, whether they’ll pay you enough, and what about health insurance???
You don’t need that kind of pressure. You’re putting enough of it on yourself already.
What you need instead is someone who’s been through it before who will, first of all, support what you do 100%. Secondly, they need to be willing to tell it to you straight. That’s why, today, I want to share with you some tips I’ve learned over the years about how to price your freelance services so that:
- You don’t go broke.
- You don’t have to deal with the feast-or-famine cycle.
How to Price Your Freelance Services
First things first: don’t ask your friends and family for help pricing your services.
“$500? Isn’t that a lot for a website? I saw an ad with Keanu Reeves that makes it look easy.”
To be honest, I don’t know how much help you’ll get from other freelancers or small business owners. You’re either going to hear from the ones who want to help you make six figures straight out the gate (which isn’t realistic) or will tell you to work for pennies until you can build up a solid portfolio of work (which is just wrong).
Rather than listen to what other people think you should charge, I suggest doing the math yourself.
1. Calculate the Time Spent on Projects
If you’ve downloaded my price sheet calculator, then you know already know how important it is to get paid for your time.
And I’m talking about all of the time you spend on a project, whether it’s getting on the phone to talk to the client or actually doing the work.
That said, you should not be billing clients by the hour.
When you charge an hourly rate or a per-word rate, both you and the client will directly correlate the amount of time you spend on something with the value of it. Which isn’t right.
A website doesn’t become more or less valuable because of the time put into building it. The same goes for content that’s written or marketing campaigns that are created. What makes all these things valuable is the knowledge and experience you put into it.
The only reason I’m asking you to start with your time is because it gives you a sense for what you need to make to cover your costs and make a healthy markup on every job you do. So, figure out what your time is “worth” so you can create a good baseline for your pricing. Then, move onto the next points.
2. Factor in the Time Spent on Business Stuff
No one is going to pay you to run your business except yourself. That’s why you can’t solely bill for the hours you spend working on stuff for clients.
Think about it like this:
- You have 6 hours of work booked each day.
- If you were to charge $50 per hour, you’d earn $1,500 every week.
But that’s not really what you’re earning. Here’s why:
- You have 6 hours of work booked each day. For this, you make $1,500 a week.
- You spend 2 hours each day looking for clients, managing invoices, and creating content for your brand, among other things. That time is worth just as much as your billable hours, so you have to subtract $500 (2 hours a day x $50) from your earnings.
- In the end, you really only make $1,000 a week.
When you work for an employer, this kind of thing is factored into your wages. But when you work for yourself, it’s up to you to factor it into your going rate.
This doesn’t mean you need to tell clients that business management costs are factored into their project pricing. In fact, please don’t do that. It just means you need to constantly remind yourself that, without all of this time spent on your business, you wouldn’t be able to provide them with the awesome services they benefit from in the first place.
3. Account for Personal Wellness Costs
If you live in the U.S. like me, then you’re required to purchase your own health insurance as a freelancer. And, let me tell you, it’s not cheap. I’ve lived in states where I’ve payed $200 a month for good health insurance and I’ve lived in states where I’ve payed $500 for crappy insurance.
In the line of work we’re in with the kinds of stressors and odd hours that come with freelancing, it’s not uncommon to deal with burnout or severe illness. So, health insurance is a must if you want to keep medical expenses reasonably low if or when they do arise.
Another way to combat the risk of illness as a freelancer is to actually take time off — on the weekends, over the holidays, or for scheduled vacations. Trust me, I know how hard it is to say, “Sorry, I’m away that week”, when a new client wants you to start working right away.
But if you keep pushing past your limits and don’t stop to take care of your mental and physical wellbeing, the resulting burnout or sickness will cost your business greatly.
So, as you work on pricing your services, account for the cost of keeping yourself well. That could mean planning for a 48-week year instead of a full 52 weeks. That could also mean adding your health insurance and other wellness services costs to your running total of business costs.
Again, if you’re having a hard time with this, simply remind yourself that if you’re not running at your level best, your work will suffer and your clients will pay the price. It’s in everyone’s best interests to price your services with this in mind.
4. Cover Your Payment Processing Fees
Whether you use a payment processor on your website (like Stripe) or you manually issue invoices with a service like PayPal or Bill.com, you’re going to get hit with a fee for each payment you collect.
This generally isn’t one of those things you think about when you start a business.
“That’s cool that PayPal takes 2.9% + $0.30 of every payment I receive.”
And honestly? It sucks. There’s nothing worse than sending out a big fat invoice, only to see the payment land in your account… much less than the price you’d originally worked out for the job.
As upset as we can be with payment processors for taking part of our hard-earned money, it’s really not their fault. Years ago, you would’ve had to manually process the payment yourself with a credit card machine, by cashing a check, or by making sure the client put the cash in your hand. This is a much better option.
So, what do you do with this information? Well, there’s no getting around the payment processing fee. However, you can account for it when you price your services. Just know that any number you’re thinking about settling on isn’t what will end up in your bank account, so add a 3% buffer.
For example, let’s say you’ve decided to charge $5,000 for a website. You’ll be able to cover your costs easily with that. However, to ensure you keep that profit margin intact, you should add a minimum of $150 (3%) to cover the processing fees.
5. Know How Tax Brackets Will Affect You
I was surprised a couple years ago when my QuickBooks Self-Employed software suddenly informed me that I owed a few thousand dollars more in taxes than I had planned for that year. This happened because I had raised my rates earlier in the year and hadn’t accounted for how the shift in revenue would adjust which tax bracket I landed in. It just wasn’t even on my radar.
While it’s exciting when you get to a point in your business where you can charge more, that tax bill is enough to make many freelancers wish they’d never taken the leap.
So, before you make any major changes to your pricing structure — no matter how new or old your business is — brush up on your federal and local tax brackets. You may need to adjust your pricing even further if you enter a new bracket and owe more money to the government than you previously did.
6. Keep in Mind That Location Matters
I move around a lot. Since I started freelancing eight years ago, I’ve lived in the following states:
- New York
- Rhode Island
I have no plans to stop moving either — which actually makes things really complicated for my business. In the U.S., each state has different ways in which they deal with businesses.
For instance, Florida has no income tax, so the only tax freelancers pay is to the federal government. In this example, a freelancer would take home $41,833 of $50,000.
Delaware, on the other hand, has no sales tax, but a steep income tax for sole proprietors. In this example, the same freelancer making the same amount of money would take home $39,631 at the end of the year.
Then, you have New York which has both income and sales taxes. And, for those who live in New York City’s limits, there’s an additional city tax to pay. This brings the freelancer’s take-home pay to $38,004.
None of this even accounts for the business licenses certain places require you to have in order to do business there. Nor does it show you what happens when you enter higher tax brackets. This is just a taste of how your location can affect how much money ends up in your account.
One of the many benefits of self employment is being able to move about as we please. But even if you prefer to live a more settled life while freelancing, keep in mind that location matters when it comes to setting prices for your business. From the way you’re taxed to the general cost of living, these are the kinds of things you need to think about when you determine how much you need to charge to live comfortably enough to provide a top-notch service or product.
If you live in the U.S., I’d urge you to use the Free Income Tax Calculator to see how much you actually stand to make at the end of the year. For those of you living elsewhere, you should be able to find a comparable tool from your local government’s website.
7. Don’t Forget About the Value of Your Services
Last but not least, let’s talk about why you need to factor in the value of your services. Let me explain:
Let’s say you’re a web designer for an accounting firm. They have a number of services available, but their starting rate is $1,250 for a year’s worth of accounting and tax preparation services. So, you design a brilliant website that’s sure to convert.
Within three months of launch, your accounting firm client gets, on average, one contact form submission a week. And, from those submissions, usually two of every five becomes a paying customer. That means they’re making about $2,500 a month from the website you built and will have their initial investment paid off in just two months time (if you were charging, for instance, $5,500 per website).
So, while it’s important to charge a rate that’s commensurate with your experience and that enables you to provide quality services, it’s also important to consider what the client gets out of this. If the leads and customers start pouring in — even at a low, but consistent rate — and you can do this for client after client, you should be charging more.
There are so many mistakes you’re going to make when you first go into business for yourself (because we all do!). But one of the ones you can’t afford to make is pricing your freelance services the wrong way.
As you can see, it’s not as easy as saying:
“Well, my old employer paid me $1,000 a week, so I’ll aim to make that much from my clients.”
There are just too many hidden and unknown costs that will eat away at that number. So, before you go throwing a number at prospective clients, run through the list above and make sure you’ve accounted for all of those things that may affect how much money you actually make at the end of the day.