Freelancers, Here's How To Set Your Rates

This is the first story in a two-part series. Read the second article here.

Freelancers often wonder how much they should charge. It’s a thorny dilemma: Quote too high a price, and the potential client may decide to hire someone else. Go with a lower number, and you may end up earning less than you could have.

That’s why you’ll see freelancer forums and discussion boards peppered with questions about how much the poster should quote for a potential gig.

But they’re going about it all wrong. While, yes, it helps to know the general price range for certain types of work, the reality is that the range can be quite wide.

For instance, writers for content mills may earn as little as $15 a post, writers for esteemed magazines could earn $20,000 for a lengthy story, and some authors can receive millions for a book advance. Even for articles of the same length — say, 1,000 words — some outlets pay as little as $100 and others pay as much as $2,000 (or more).

So, to determine what to charge, don’t look for the answer from others: Figure it out from your own numbers.

Three factors will affect how much you can or should charge: Your budget, how good you are at what you do/the price you can fetch, and how much time you have.

Of these, time is the most fixed variable: you can always drastically cut your costs or improve your skills and so earn more, but increasing the amount of time you can devote to work isn’t easy unless you are already limiting your work time due to easily changed outside factors.

That means that how you “spend” your precious time every month will largely determine how much money you earn: Squander the time on low-paying gigs, and you won’t earn a lot. Alternatively, assuming you’re good enough, you can devote it to lucrative ventures to rake in the dough. The only thing you have to make sure to do is hit your basic budget number so you’re not falling into the red. Once you do that, you can choose to expend the leftover time on passion projects that fulfill your soul, professional activities such as conferences that may not give an immediately financial payout, or on cash cows that, say, will pay for your upcoming trip to Chile. The choice is yours.

Drawing from a presentation I gave recently on financially successful freelancing (though it was aimed at writers, the principles apply to freelancers of all sorts), I’ll outline various strategies that you can use to determine your rate (or the minimum rate you’re willing to accept). In the companion piece, I show how you can also negotiate raises with clients. Before we proceed, a quick note that all the numbers in these examples are completely fictional. Hopefully, however, they are somewhat plausible.

1. Create two budgets: Your bare-bones budget and your desired budget.

This example, shows a single person with $1,000 in rent, $100 in transportation (public), etc. I’ve shown that even with their bare bones monthly budget, they should max out their Roth or traditional IRA to hit the $5,500 a year limit ($6,500 for those 50 and older). If they’re really clamped down on expenses, maybe they can get away with spending only $150 a week on all other expenses.

In the desired monthly budget, their essentials haven’t changed, but if they earned more, they would put more money toward their emergency fund, another retirement account, plus save for something fun like travel or buying a house. Also, their weekly “allowance” would be a more relaxed $300 per week.

For more details on how to calculate your budget on a freelance salary, check out this article. (Be sure you also know how to do your taxes as a freelancer, how to figure out a retirement plan and how to insure and structure your business.)

2. Compare the rates you can charge clients against your budget.

If your expenses are more than the amount you can fetch in a month given your experience, then you may want to get more experience, take some classes or otherwise improve your skills so you can charge more. Or, see if you can cut the expenses of your bare-bones budget even more. If you live alone, getting a roommate will cut the costs of what is likely to be your largest expense — housing.

This chart shows four scenarios — one in which you’re only able to charge an amount that, when multiplied by the number of hours per month, will net you less than your minimum expenses, and then three others at varying levels of comfort. In the first scenario, however, this person would be losing about $700 per month, which, over the course of a year, would amount to $8,400 worth of debt. His or her course is unsustainable. But using the next techniques, he or she could potentially turn things around and end up with one of the other outcomes.

3. Create a business plan.

I picked up this tip about business plans from freelance journalist extraordinaire Virginia Sole-Smith. The two main goals you want to outline here are your professional and financial goals for the year. For example, as a journalist, I might say my professional goals are to 1. write for three new publications, 2. write that essay burning a hole in my heart, and 3. break into one of any five dream publications.

For my financial goals, I might look at what I made over the previous year and decide I’d like to earn at least 10% more. Or, maybe I’m just beginning freelancing, and I decide my goal is to earn what I made at my previous full-time job (though because I’d be paying my own health insurance and self-employment taxes, my take-home would be smaller). I might also decide I want to raise my rate with one particular client or two.

4. Project your annual earnings.

Based on the current clients I have and the work I did over the previous year, I may be able to project how much I can earn. Here’s a scenario for someone whose goal is to earn $50,000, roughly 10% more than what he can be fairly confident he’ll earn based on last year’s revenue. He has one regular client paying $1,500 a month, two clients he can usually count on for $250 and $500 per month, and he re-sells articles for an average of $150 a month. When he looks back at the previous year, he sees that he earns roughly $1,500 a month in irregular assignments from a slew of other clients.

5. Bake in overhead.

You will not be working 8 hours a day directly on projects. Since you are now running a business, you will likely end up spending time on work-related things that aren’t necessarily for any particular client but are important for your business. This amounts to about 30% of my time and is the same for some other freelancers I know. For me, that 30% encompasses activities ranging from bookkeeping, email, phone chats with clients, giving interviews, doing webinars and Twitter chats, and more. Figure out what this number is for you, though 30% is a a good start.

Using an indispensable calculation created by my friend and fellow freelancer Katherine Reynolds Lewis, you can see how much you need to earn per hour in order to hit certain salary goals. Assuming you take four weeks of vacation and allocate 30% of your time for essential work activities that aren’t necessarily spent working for a client on a specific project, you’ll need to earn these per-hour amounts to hit these salaries:

6. Based on that, set quarterly, monthly or even weekly goals.

For simplicity’s sake, let’s say you want to earn $100,000 a year. That’s $25,000 per quarter, in the ballpark of $8,000 per month, and about $2,000 a week. Assuming 28 hours per week, that’s $71 per hour (or, if you calculate it exactly, it’s $74.40).

7. Set your floor and your goal.

Going back to the bare-bones budget from the beginning of this article, that person would need to earn $55,000 a year to pay for her bare-bones expenses. Assuming 1,344 work hours per year (40 hours a week x 48 workweeks minus 30%), she would have to earn, on average, $41 per hour. But to hit her ideal budget, which is to earn $92,700, she needs to earn an average of $69 per hour.

She can then make $41-per-hour the minimum rate she’s willing to accept. (If you’re in a business that actually does charge per hour, you will want to make it a round number.) If you can, it’s always best to charge a flat fee. If you charge hourly, you have to spend that precious time to earn more money, and you'll actually make less money, the more efficiently you work. It's better to project roughly how long a given project will take you and set your rate from there. (More on projecting how long any given assignment will take in the related article.)

$69 per hour, on the other hand, becomes her target average rate. That means she’ll have to seek out projects that pay her more, such as $100 per hour, to balance out any that pay her a rate closer to her $41/hour minimum.

As you begin, you may find that your target is too high — that either you are not fast or good enough at your work, your expenses are too high, or you haven’t yet met a client high-paying enough for you to actually reach your target. If so, you may instead decide to aim for a $60/hour average and lower your minimum to something like $30 per hour, and then work your way up to your actual goals (I explain how in the companion piece).

8. Block out time required for each project so you can “spend” your time wisely in order to hit your financial targets.

Now that you know your floor and your target rates as well as your overall budget numbers, you can block out the time required for various projects and see how much of your time -- that precious commodity that's so hard to increase -- they consume.

In this case, this person does 10 projects in a month and has a goal of earning $10,000 that month. By mid-month, he has his first nine assignments and projects he will have three days left at the end of the month. If a client calls with a project that he calculates will take three days but it only pays $500, then he knows if he takes it, he will miss his goal by $1,000. He can decide at that point if this assignment offers something unique that would make the tradeoff worth it. If not, then he should hope for or try to sell another project that will earn him at least $1,500 and can be completed in three days.

But, as you can see, whether or not he will hit his goal for the month really comes down to the wire. This next person has a much more comfortable setup:

Because she has a lower goal, she may hit it midway through the month and then find that she has time for passion projects — or she can choose to keep earning more money, even beyond her ideal budget, and splurge or save the money.

9. Use regular clients to make it easier to hit your goals.

Let’s say someone has three main clients — maybe two are formal deals of a certain amount of work every month and maybe one is so dependable, it usually functions that way. That person could then enter every month already knowing that they’ll either hit or be very close to hitting it. It also saves time -- instead of having to convince each client to hire you that month, you can spend the time just working, earning money.

10. Beware the potential for regular clients to drag your rate down.

While the dependable accounts provide a certain amount of security, if they persist too long at the same rate, they could actually suppress your true earning potential. For instance, let’s say that this person has one big client that consumes about two weeks of his month. To make the point really obvious, let’s say this regular, dependable income is for $3/hour.

If that relationship ends, the freelancer may find himself initially scared about not having two weeks of every work month accounted for. But he may be surprised to find that the projects that fill it are for two, three or four times the rate of the previous gig.

So, now that you know your rates, how do you use this knowledge to negotiate for raises with clients? Read the related story to find out.

Check out the other stories in this series:

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Freelancers, Here's How To Set Your Rates