Table of Contents
- It Costs Money to Make Money
- Time Is Money
- So, How Much Should You Charge?
- A Real-World Example
- Building Up to Your Ideal Rate
- The Profitability of Finding Your Niche
One of the most difficult decisions you'll make as a freelancer is what to charge your clients. You could price according to a number of things, including how close your relationship is to your client, how much money you need to cover your rent, or how many likes your latest sketch earned on Instagram.
There is no perfect pricing formula, but some methods are better than others. Let's look at a pragmatic method for calculating the minimum amount you need to charge to make your freelance business sustainable.
In order to come up with your price tag, we're going to consider how much time and money it takes to run a business day-to-day. Very few freelancers think of themselves as business owners or value the work they do beyond billable hours. Once you have a better idea of what running a freelance business really takes, you'll be way ahead of the curve. And you'll know how much you need to charge to keep your business open in the long run.
It Costs Money to Make Money
As a freelancer, these are the costs your business will eventually have to cover to become sustainable:
- Taxes (state and federal)
- Office Space (somewhere to work that isn't your home)
- Commissions (paying agents a fee to help you find high-quality projects)
- Hiring Contractors (to help take on extra work when you can't handle it all)
- Travel & Transportation (transporting work to conventions, showcases, galleries)
- Hardware & Software (computer, tools of the trade, web services)
- Trade Assets (fonts, icons, stock photos/videos)
- Professional Development (online courses, conferences, meetups)
You may be wondering why things like professional development, hiring contractors, and office space are included. Are these really necessary to running a business?
While some of these aren't strictly necessary, they are all hallmarks of a healthy, adaptable, and growing business. If some of these items aren't among your current expenses, it's probably because you have yet to grow into them.
Here's a rough breakdown of how much revenue a freelance business might, on average, spend in each category:
- 15% for state and federal taxes
- 10% for a coworking space and commissions fees
- 10% for hiring contractors and travel expenses
- 5% for hardware and software purchases
- 5% for trade assets and professional development
So, before you take a salary (that you can use to pay for the essentials like rent, utilities, and food), somewhere around 45% of your revenue will probably be going to pay for these expenses. *And that's if you're doing things right. *
If this percentage seems high—don't worry. You don't need to start out the gate with these expenses. You won't need many of them if you're only taking on a few projects a month. Your expenses will grow along with your business as you take on more clients.
Time Is Money
Expenses aren't the only costs of running a business. As a freelancer with a sustainable business, you'll be spending significant time on key business activities:
- Outreach (advertising, sales, marketing, and market research)
- Web Presence (updating your website and keeping up with social media)
- Dry spells (time spent looking for new projects)
You don't get paid for doing these things (unfortunately), but each of them helps you build relationships with your clients and start making a name for yourself in your industry. If you want to attract the best type of work and work on interesting projects, all of these activities are necessary.
There are so many instances in which a chunk of time spent upfront can save you lots of time and effort down the road. For example, let's say you invest a couple days into creating a page on your website that explains your passion for illustrating children's books. All of a sudden, you look twice as appealing to children's books authors than you did before and you're much more likely to get that type of work.
Here's a rough breakdown of how much time a freelancer like you might spend on these activities:
- 20% reaching out to new clients
- 10% creating and updating your website and social media profiles
- 10% actively looking for, and sometimes not finding, new projects
In the midst of working on projects for clients, you'll also be investing about 40% of your time trying to find the next project to work on and building your brand. All of the time you spend doing this kind of research, business development, and outreach is well spent, even if it only helps you get one or two good clients.
Consider the potential of one good project. The relationship you cultivate with a single client can lead to dozens of referrals. Soon hundreds of people might be talking about you and your work. That time you invested into finding one great client can lead to hundreds of projects.
So, How Much Should You Charge?
Now that you know more about your business expenses and time allocation, you can use a simple formula to figure out the minimum amount you should charge. The key here is to consider the difference between revenue and profit. What you charge is revenue; profit is what you can take home after spending time and money making your business sustainable.
Let's begin with what we already know.
- You're only going to take home about half of what you bring in (about 55%)
- You're only going to work on projects that pay the bills for about half of your available time (about 60%)
That means, in order to make $20/hour and cover your business expenses, you'll need to charge $40/hour.
And then, in order to actually make $20/hour during the time you've allotted to working on your business (including the stuff you don't get paid for), you need to double your rate again, to $80/hour.
In order to bring in $20/hour in profit from your business, your business needs to charge clients $80/hour. Gives you a different perspective on your 'overpriced' peers, doesn't it?
A Real-World Example
These blocks represent two workweeks (10 days):
(Let's pretend, as a freelancer, that you won't be working on weekends—ha!)
If you were working full-time for an employer—and you make $20/hour—you'd take home roughly $110 per day (after taxes).
= $1,100 every 2 weeks
Now, as a freelancer, you don't spend all your time working on projects you get paid for. The following blocks show (with a green highlight) how much time per week you'll actually spend making money:
That means, in order to make an average of $110/day, you need to charge twice that.
= $110/day on average
However, you still need to cover your business expenses! Every day, your expenses take up roughly 50% of your revenue. That means, you'll only be taking home about half of what you make.
So, again, you need to double how much you're charging, just in order to bring home the same amount you'd be making working full time for an employer full-time:
= $1,100 every two weeks, after expenses.
Start off with an idea of how much you need to take home every day—to pay rent and live comfortably—then quadruple that number. That's the number you need to charge clients for one full day of work.
Building Up to Your Ideal Rate
Now you know what you should be charging. But where does that knowledge leave you?
Most freelancers can't get away with charging a lot when they first start out—even though this is when you need extra financing the most. Additionally, most of your existing clients probably won't be okay with you doubling your rate overnight.
So, during the first few years of running a new freelance business—because you'll be so focused on establishing your unique place in the wider market—you'll end up making less of a profit than you hoped, and you'll end up spending more nights and weekends working than you expected. Guaranteed.
But here's the good news. If you stick to these fundamentals, you'll grow a sustainable, profitable business:
- Keep investing in yourself and your business
- Set aside brainstorming time and money to figure out your brand
- Get to know what types of projects you like doing
- Gear your business towards a few niche markets
- Always be recruiting new and better clients in the background
- Always deliver on your promises to your clients
By focusing on the essentials, you'll be able to build a reputation and, as you take on more quality clients and projects, you can start charging a premium for your services.
The Profitability of Finding Your Niche
It's hard building a business from scratch (mind-numbingly hard!). But with every new project and client you take on, you'll get a better idea of what you're good at, learn new skills, and figure out what you really want to focus on.
After you settle into your business by investing lots of time into things that don't pay off right away, you'll be able to take a step back and consider the clients you've worked with. Using all of your experience as a base, you'll have a pretty good idea of the type of message you can craft to attract the types of projects you're passionate about and really want to work on!
A marketing message can unify your business, lead to higher-quality projects from more discerning clients, and make the work a client has to do in order to decide to work with you a lot easier.
When you start working with clients you love on projects you love working on, everything changes. This is a gradual process that happens over years. In time, your services will demand a premium because of how much work you're doing and because it's of such a high caliber. Before long, you'll find yourself in a position where you have to turn down projects and clients will be getting in line to work with you.
With a strong marketing message and solid pricing strategy, you'll have transitioned into being an affordable expert in your field! And that's when you can start charging even more for your services and hiring people to fill the roles you can't handle on your own.
If you're a freelancer who's just starting out, I highly recommend reading this information-packed ebook: Full-time Freelancer: Revenue & Expenses as a Freelance Designer. It's a free download and it was a huge inspiration for this post.
If you're looking for a fascinating and thorough examination of pricing your services as a freelancer, I'd strongly recommend How Much Should You Charge For Design Work? In this post, Jessica Hische convincingly argues against charging an hourly rate and advocates for setting your price based on how many rights you're giving away.