When it comes to the future of work, an increasing number of Americans face the prospect of going it alone as freelancers or independent contractors. While working for yourself brings benefits like flexible schedules and the ability to work remotely, you also have the same challenges that every business owner deals with, and one of the most vexing issues any entrepreneur has to wrestle with is pricing. Specifically, you need to understand how much you can or should price your products or services for. Since you’re providing both the product and the service, it’s important to set a price that’s fair for both you and your client.
These tips from freelancers and business experts can help guide you in gaining a deeper understanding of what you're worth so you can charge the right price.
1. Research the competition.
Interestingly, the term freelancer isn't popular with all independent workers specifically because it contains the word “free” in it, says Alexia Vernon, a speaking and business coach in Las Vegas and author of Step Into Your Moxie: Amplify Your Voice, Visibility, and Influence in the World. “See what top-tier experts in your space are charging and also explore how newbies are pricing,” says Vernon. “Then, you know the spectrum of pricing and can sculpt your own rates based on your expertise and your confidence in the results you can deliver for your clients.”
Value-based pricing is a guarantee and shows you're an expert.
—Joe Robison, owner, Green Flag Digital
John Shieldsmith, a freelance marketing writer and consultant in Austin, Texas, who also runs the website TheThriftyDad.com, says you can also review online sites like Indeed, FlexJobs, and Craigslist to get a sense for the kinds of rates employers are offering for similar work to what you want to do.
There are also industry Facebook groups you can join where members talk quite transparently about topics like pricing.
2. Conduct a break-even analysis.
Once you establish a baseline for the kinds of pricing your market supports, you also need to understand how much you need to charge in order to turn a profit with your business. The catch is that many freelancers set their rates too low because they leave out expenses like the self-employment tax, administrative costs, health care premiums and even money to set aside for retirement, says Paul Dillon, who runs his own firm, Dillon Consulting, based in Durham, North Carolina and Chicago.
Dillon, who has worked in the professional services industry for 42 years, suggests that freelancers should work through the following exercise to establish his or her pricing baseline:
- Determine the annual salary that you want from your work. For example: $100,000.
- Divide the $100,000 by 2,000—which is the typical number of hours in a working year. So, $100,000 divided by 2,000 = $50 per working hour. “This is your basic hourly rate,” says Dillon.
- Take that basic $50 per hour rate and multiply by three as a way to cover your overhead costs and still earn a profit. So, $50 multiplied by three = $150. But Dillon says it's also important to note that the three-time multiplier might need to be adjusted up or down based on the circumstances of your business. “Irrespective of this formula, it is the market—your clients—who will ultimately determine what your services are worth, and, consequently, your billing rate,” he says.
3. Find a niche and specialize.
When you are expanding your freelance business, you might be forced to fight for any and every new job you hear about. The sooner that you can establish your expertise in a niche, however, the more quickly you can begin to charge higher prices.
Narrowing your market can also better help you create standardized packages and products aimed at your niche, says Anna Laman, an independent messaging advisor based in Asheville, North Carolina, who advises freelance professionals and consultants on how to build up their businesses. “You're not reinventing the wheel for each client,” she says. That includes charging for project proposals or so-called “discovery projects,” says Laman, where you're helping a client figure out exactly what they're looking for or developing an initial strategy that you would implement in a future engagement.
4. Move from hourly to fixed fees.
When you're new to freelancing, setting an hourly rate can make a lot of sense—especially as you gain experience and credibility in your industry. But tenured freelancers may recognize that both they and their clients prefer to work off fixed-price contracts.
“When you price by the hour, the prospect immediately hooks onto that price and has to start calculating in their head how much it will cost,” says Joe Robison, who provides online marketing consulting through his firm, Green Flag Digital, which is based in Birmingham, Alabama. “They'll then get nervous about cost overruns and not being able to afford the project if the hours stack up.”
What Robison has done instead is employ what he calls “value-based pricing,” which is quoting a client a price based on the expected value they will get out of the work you do—which is something that results from establishing a niche. “Value-based pricing is a guarantee and shows you're an expert,” he says. “It puts the burden on you as the consultant to accurately price, estimate and deliver the work within the agreed-upon parameters. But it also shifts the conversation from ‘I don't know if this freelancer is worth $50 an hour’ to ‘This project will cost $3,000 but it will pay back $20,000 over the next year.’”
5. Raise your prices over time.
As you continue to expand your business, you might even want to raise prices—which can be a delicate operation, especially with existing clients. One technique that Laman uses is to run an email marketing campaign where she lets clients know that she will be raising her rates the following month—but clients can sign up for the existing rate for a limited time. “It's a great motivator,” she says, and it sets the expectations with her clients that after that project is completed, her prices will be higher on the next one.
Laman advises that while some of her clients have lost business from time to time when they've raised prices, most of the time they were fine with that loss. “Raising your prices can be a great way to get rid of your worst clients,” she says.