Pricing your freelance services isn’t just about the money you want to make, it’s about the quality of life you want for yourself and/or your team.
Whether you use hourly pricing, flat-rate pricing, or value-based pricing for your freelance services, to calculate the total price for a specific scope of work, you need to know your minimum hourly rate. But where do you start, what do you need to consider when setting your pricing, and how do you calculate an effective hourly rate?
A common approach to figuring out an hourly rate is to divide the salary you want by the number of hours worked each year:
- 40 hours/week × 52 weeks/year = 2,080 hours
- $100,000 desired salary ÷ 2,080 hours = roughly $50 per hour
The math makes sense, but the thinking behind it is all wrong. If your goal is to make $100,000 per year and you only charge $50/hour, you’ll soon find yourself in a lot of trouble. Even if you marked it up an extra 20% to cover expenses, making your rate roughly $60/hour, you’d still run into financial problems.
This miscalculation is why we see so many online experts claiming to have made six figures, yet only actually earning an income of $65,000 and struggling to make ends meet in secret. Hitting $100,000 in total earned income (gross) is quite a bit different than keeping $100,000 in personal income (net) after paying all of your expenses.
Pricing Your Freelance Services
Pricing your services isn’t just about the money you want to make, it’s about the quality of life you want for yourself and/or your team.
When setting a freelance hourly rate you need to think about total annual company earnings (gross) and total annual income (net), as well as total company profit.
Look at your total overhead freelance expenses:
- Rent, telephone, internet, and utilities
- Office equipment, office supplies, and furniture
- Software and service subscriptions
- Travel expenses
- Salary, workers comp, insurance/benefits
- Advertising and marketing costs
- Business insurance, business license fees
- Legal and accounting fees
- Professional memberships
Look at the total number of billable hours:
- How many hours are worked each week?
- How many billable hours are expected each week? Remember, not every hour “at work” will be a billable hour.
- What about vacation time and holidays?
- What about sick days?
- Will there be business travel?
And, look at your desired freelance profit margin. Salary is not profit, it’s a business expense. Profit is what is left over after the salary has been paid — it is the money available to you to reinvest in and grow your freelance business.
How to Calculate a Minimum Hourly Rate
Using the desired income of $100,000 and full time 40 hour/week employment as the example, let’s look at how to calculate a freelance hourly rate that covers your expenses, creates profit, and supports the quality of life you want.
STEP 1: Calculate Expenses
Add up all of your expenses: including website hosting, software subscriptions and fees, internet, telephone, rent, utilities, office equipment, computers, furniture, office supplies, professional tools, professional memberships, certifications, travel expenses, advertising and marketing costs, legal and accounting fees, vehicle mileage, taxes, workers comp, salary, insurance/benefits, business cards and stationery.
- Overhead expenses: $20,000
- Salary: $100,000
- Benefits/insurance: $12,000
The total annual expenses: $132,000
If you’re new to freelancing, business ownership, or agency ownership and you don’t know what some of the expenses are going to be yet, reach out to industry contacts and ask for ballpark figures for planning purposes.
STEP 2: Calculate Total Cost Of Doing Business
As I mentioned, you also need to calculate the profit margin you want to see in your freelance business. A common profit margin for client services is 10-20%. For this example, we’ll play it safe with a 10% profit margin.
- $132,000 × 1.10 = $145,200
STEP 3: Calculate Number Of Hours Worked
I’m pretty sure you’re not a robot, which means you won’t be billing 40 hours per week for all 52 weeks of the year. You’ll not only need to take breaks, eat lunch, respond to email, participate in phone calls, attend meetings, and take care of administrative tasks, you’ll also need to take sick days, vacation, and holidays.
- Holidays: 10 (New Year’s Day, Presidents Day, Martin Luther King Day, Memorial Day, Independence Day, Labor Day, Veterans Day, Thanksgiving Day, Friday after Thanksgiving, Christmas Day)
- Vacation: 14
- Sick Days: 8
- Business Travel Days: 5
The total number of holidays, vacation days, sick days, and business travel days equal 37 days or 296 hours.
If you take a one hour lunch and spend only 90 minutes on administrative work, phone calls, email, and meetings each day, that means you’re working 5.5 billable hours a day or 27.5 billable hours each week.
Let’s do the math:
- 27.5 hours/week × 52 weeks/year = 1,430 hours
- 1,430 hours – 296 hours = 1,134 hours
So, instead of working 2,080 hours each year, you’re only working 1,134 hours each year.
STEP 4: Calculate Your Hourly Rate
Now that you know your total cost of doing business is $145,200 and the total number of billable hours you will work per year is 1,134, you can calculate your minimum hourly rate:
- $145,200 ÷ 1,134 = $128 per hour
As you can see the minimum hourly rate needed to achieve a freelance income of $100,000 in this example is almost triple the original calculation of $50 per hour. The problem with the first approach to setting an hourly rate is that it failed to account for all of the expenses, days not worked, and profits.
Other Items To Consider When Setting Your Freelance Hourly Rate
When figuring out how to price your freelance services and set an effective hourly rate, it’s important that you not operate in a vacuum or isolate yourself from what is happening in your industry both locally and globally.
You need to do some investigative work to uncover the rates competitors are charging and what other service providers are charging for similar work with similar clients. This will help ensure your hourly rate is based on reality and in alignment with what your potential clients are willing to pay.
You can find this information through:
- Industry trade organizations
- Asking others in your industry
- “Shopping” your competitors
- Asking potential clients or customers or people you know who have recently completed a project like the ones you want to offer
- Researching average salary information
The Pricing Bottom Line
No one who has started a business, whether they’re freelancing or running an agency, did so to work for free, be underpaid, and exist as a slave to their business.
You deserve to earn a fair fee for a job well done and to charge your worth and get it, and as long you price your services appropriately — taking expenses, profits, and quality of life into account — you’ll be able to do just that.
This article was originally written for and published at Liquid Web.