As a newbie freelancer, you might be working around the clock to get your portfolio out into the world—hoping to land even just one client. But even when you do, there’s always another challenge, and another. Out of all of the small business challenges, learning how to charge as a freelancer could be one of the most puzzling parts of being a freelancer.
Let’s break it down.
Figuring how much to charge as a freelancer is not an easy task. When poised with the question “what are your rates?”, most freelancers tend to pause, maybe even stutter a bit before blurting out a rate out of thin air. Not only that, but oftentimes as a freelancer, it takes time to weed out the really bad clients—the ones who ask for free work.
There’s a lot to demystify in the world of freelancing, and pricing is only one of them. The problem with pricing inaccurately translates into frustration and resentment downstream due to being underpaid for doing great work.
Let’s figure out how to avoid that!
Most freelancers begin with an hourly rate
Most freelancers starting out lean towards time tracking tools and estimating work output in the format of time. When first getting started, it’s not a bad way to price. After all, you are compensated for the time that you work.
Setting hourly rates works well for new freelancers for two key reasons:
- It’s a format your clients are already familiar with
- You can begin to learn how long it takes for you to complete X task or X project
Upwork, for example, rounds up the top freelancers offering certain services, which makes investigative work extremely easy. For example, you can easily tap into the rates for web developers on Upwork to get a rough estimate of what other freelancers are charging.
If you personally have access to a network of freelancers, consider asking them about their pricing strategy and rates (if you feel comfortable doing so!) From there, simply set an hourly rate that makes sense for the services you offer (e.g. graphic design) based on the research you’ve done.
Charging what you’re worth gone wrong
There’s nothing fundamentally wrong with hourly rates. The only downside is that it’s limiting.
Imagine this scenario.
Jordan a freelance website developer. He’s just getting started in the world of freelancing—and it’s exciting. After conducting research, he sets an hourly rate of $100.
He acquired a client through Fiverr and they seem to embody traits of a good client. They respond quickly, made a clear scope of work, and provided all of the assets and content upfront.
Jordan gets all the details sorted and begins work one afternoon. He dives right into the asset review and website design, and before he knew it, the website is done.
He checks the clock.
He completed the project 4 hours—record time! And the website looks incredible. In 4 hours, Jordan created a high-quality website for his client at the price of $400.
Here’s the problem with hourly rates. As a freelancer, you get paid for your talent. Over time, you become increasingly better and faster at delivering output. When someone like Jordan charges an hourly rate, he doesn’t factor in his talent or skills—only his time.
There’s got to be a better way, right?
Well, there is—by calculating hourly rates the right way.
Know your costs — calculating hourly rates
A common approach to knowing how much to charge as a freelancer is to divide your desired annual income by the number of hours you plan to work each year. Here’s an example:
Desired annual salary: $80,000
With 52 weeks in a year, multiple 30 by 52 and you reach a total of 1560 hours. Armed with this information, you can now divide $80,000 by 1560—resulting in an hourly rate of $51.
At face-value, it seems like a good method.
But when in reality, it’s not.
You’re not factoring in other elements that are critical to your quality of life.
Here’s how to do it the right way:
- Confirm your desired annual income
- Create a list & calculate annual overhead costs
- Determine profit margin
- Consider billable hours per year
- Decide on your rate for your skillset & expertise
- Consolidate & calculate your hourly rate
- Conduct market research & adjust accordingly
Step 1: Confirm your desired annual income
Figure out the annual income that would allow you to live a life that is sustainable for living—one that matches your needs, wants and long-term financial goals.
Be sure to consider:
- Gross pay as a full-time salaried employee — try to match (or exceed) the same salary you received from your full-time job (if you had one)
- Market rates for freelancers offering similar services
- Any specialized training or certifications you earned
- How much you’d (ideally) like to earn
Step 2: Create a list & calculate annual overhead costs
Overhead costs are what keeps the “lights on” for your consultancy. Not accounting for these costs can be detrimental to your business and overall quality of life.
Begin to list out all overhead expenses and be sure to calculate these into your final hourly rate in Step 6 below.
Expenses to factor in include:
- Licensing fees
- Software subscriptions
- Office supplies
- Phone and internet
- Marketing costs
- Travel expenses
- Website hosting
- Outsourcing costs
- Business insurance
- Hardware equipment
- Legal and accounting fees
- Office equipment and furniture
Freelancer Pro Tip: After a year or more in business as a freelancer, it should become crystal clear what your main overhead expenses are. Using smart accounting software can help you easily categorize and track expenses so that you always know where these numbers stand at any given time.
Step 3: Determine profit margin
Profit margin is a widely used explanation across finance for determine the cash that’s left after paying yourself as a freelancer and overhead expenses. It’s money leftover to grow your business with.
So, you might be wondering: what’s a good profit margin for my small business?
As of January 2022, the average profit margin across different industries is 9.82%. Meanwhile, 10% is considered a healthy profit margin, and 20% upwards is already a high-profit margin.
Step 4: Consider billable hours per year
This step is where you determine how many hours you intend to work per year. If you plan to work 30 hours per week, then you’d multiple that by 52 weeks (in a year) to get 1560 hours/year to work!
But, don’t forget that those hours don’t fully account for billable hours. As a freelancer, it means you run your own business. With that comes added responsibilities like social media, administration, accounting and bookkeeping, writing newsletters, and more.
Factoring all of those activities in, it’s obvious that you can’t actually work 1560 hours per year.
Consider these non-billable hours when calculating your general hourly rate:
- Sick/mental health days — 10 (80 hours)
- Emergencies — 3 (24 hours)
- Vacation — 21 days (168 hours)
- Holidays — 10 (80 hours)
- Admin days — 5 hours per week (260 hours)
- Education days — 5 days (40 hours)
Step 5: Decide on your rate for your skillset & expertise
Don’t forget to account for your total years of experience. According to Stephen Warley from Life Skills That Matter, he uses a broad market rate of 1% boost per year of experience you’ve gained in your niche. That means if you have two years of experience under your belt, you should add 2% to your freelance hourly rate.
Step 6: Consolidate & calculate your hourly rate
This is the step that consolidates all of your hard work in the preceding steps. We can begin to calculate a theoretical freelance hourly rate using the information gathered.
Let’s go back to the example of Jordan, the freelance web developer mentioned at the beginning of this article.
Assuming Jordan was earning $70,000/year and aspires to achieve an annual income of $80,000/year in his freelance gig. After calculating all of his overhead expenses such as licensing fees, childcare, website hosting, etc., he finds out his expenses sit at $2,000 per month. This means that annual overhead costs are $24,000 per year ($2,000 x 12 months).
As a freelance web developer, Jordan sets a goal of achieving 15% profit. After setting his sights on working 30 hours per week due to having to tend to childcare and subtracting non-billable hours in Step 4, he aims to work about 908 hours per year. He has two years of experience.
Here’s how Jordan would find out how much to charge as a freelancer (web developer) in this scenario:
- Calculate desired salary and overhead costs
$80,000/year (desired salary) + $24,000 (overhead costs) = $104,000
- Add profit margin to total amount of overhead costs and desired salary
15% of $104,000 = $15,600 (profit)
$104,000 + $15,600 = $119,600
- Get baseline hourly rate by dividing the number of billable hours per year to the total amount of desired salary, overhead costs, and desired profit
$104,000/908 hours = $115 per hour
- Add 2% for every year of experience to baseline hourly rate
Since he has two years of experience, the next step is to add 2% to $115.
The calculation looks like this:
$115 x 2% = $2.3
$2.3 + $115 = $117. The hourly rate that factors in all of Jordan’s previous calculations is $117—which is the hourly rate that he should price at.
Pretty different what would have been his hourly rate of $51, right?
Though it seems like it ends here, there is one last step—Step 7.
Step 7: Conduct market research & adjust accordingly
The last but often overlooked step is to conduct market research. This should be baked into your process every year so that you’re armed with the right insights to continue “tweaking” your hourly rate to match industry standards.
It can be as simple as reaching out to other freelancers or existing customers or as creative as creating a polling on Facebook groups or Twitter to source information. You can also look online for salary information from websites such as Indeed, Glassdoor, and more.
Understanding your value (how it applies to your work)
Figuring out how much to charge as a freelancer is a bit of an art and science. There are key steps you have to consider before getting to a number that can help you achieve your life goals. One critical thing to remember is to never lose sight of the value you provide as a freelancer. Businesses—large and small—have chosen to outsource a niche service to you. That means you are chosen and being paid to bring your opinion, expertise, and results. Don’t be afraid to negotiate for higher pay, even if you feel a little uncomfortable at first. Being confident in how much to charge as a freelancer is to remind yourself of the continuous value you bring to any organization, large or small.