Knowing What to Charge: How to Discover Your Freelance Rate
Without fail, the most frequent question I receive from freelance designers and developers alike is how to effectively estimate costs, and figure out what their personal hourly rates should be.
No matter how you plan on billing, whether it be hourly, by retainer, or project-based, you must calculate your personal hourly rate in order to give a fair estimate. Naturally, you want to get paid for your time and expenses, and turn a profit so you can save for a rainy day or a much needed exotic vacation.
The problem is, calculating your rate puts you in a bit of a predicament because there are two competing forces battling for supremacy. You want to be competitive in a saturated and ever-changing market, while still being fair to yourself as an entrepreneur. After all, you’re doing all the work.
To achieve your financial goals, we need to develop a basic hourly rate that makes financial sense, and is uniquely individualized to you. We need to best represent everything that you have to offer each one of your clients.
Armed with this information, there is no project you can’t take on; no bid you can’t submit. Developing a basic hourly rate will forever give you an upper hand in negotiations, because you can quantify and justify your rate, down to the penny.
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What do you bring to the table?
When it comes to calculating your rate, there’s no secret sauce. What works for you may not work for another designer or developer. In order to complete the first step of calculating your rate, you’ve got to be really honest with yourself.
Take a good hard look at yourself in the mirror (I mean it; it’s a good exercise!). What is your core competency? If this is the first time you’re exploring this stuff, and you’re unsure, I suggest thinking long and hard about what aspects of a project are typically your favorite.
I have found that what you enjoy most tends to be what comes easiest to you. This is a foolproof way of identifying your strengths, and subsequently, what your clients will ultimately benefit from if they work with you.
Take the time to write all that down on a piece of paper. Now, consider your experience level, your reputation, your schooling, and your availability. Think about how much extra you would pay for a freelancer with your core competency and credentials. The more specialized your skills, the more you can charge.
Think about how much extra you would pay for a freelancer with your core competency and credentials. The more specialized your skills, the more you can charge.
Someone with more than ten years of full-stack development experience should get paid more than someone who’s a beginner. Why? For the simple fact that they can do the same task in less time. So something that might take a junior developer two hours can be done in half an hour by someone more experienced. Shouldn’t their personal rate represent that expertise?
Hopefully, you’ve now got a firm vision of what you have to offer compared to other developers. Let’s dive deeper into the equation for calculating your baseline freelance rate.
Make a life budget
When you’re a freelancer, you not only have to think about the fixed and variable costs of your business, but also the costs associated with living your life. You’ve got to think about what you need day-to-day, month-to-month, and year-to-year. You don’t have an organization paying for your travel expenses and health insurance, or providing paid vacation.
If you’re unsure of your costs, type them out in a spreadsheet. Think about all of your expenses: your rent, how much you dine out, how much you spend on coffee, as well as extraneous expenses (these are just some ideas you can use, as this is a highly subjective activity).
Sum that all up, and you’ll have a rough idea of what you spend in a year. Use that number as a benchmark. From here, we can back into this figure, and calculate what you need to make to cover just the living expenses.
For me, I spend around $4,200 USD a month on rent, living expenses, taxes, insurance, office space, and my low-key coffee addiction. If I multiply that by 12 months, I get around $50,000. So for me to keep my lifestyle the same, I’d need to at least bill out $50,000 a year to cover my monthly costs.
Now, what does that mean in terms of my freelance rate? Well, think of this number as your fixed costs. However, you’ve got to consider that this doesn’t offer you any profit — you would only break even. So what would you want to make on top of your expenses? For the sake of ease here, I’m going to say $25,000.
This figure is subjective, but the generally accepted notion is that you should save 15 per cent a year for retirement to be safe. Don’t forget that you also have to account for the unaccountable, as well as anything that might be coming up in the future (i.e. buying a house, getting engaged, having a child, adopting a puppy, etc.). If you ultimately want to put more into the bank or into your pocket, you can always cut back on your day-to-day spending.
After all of your expenses are paid, you should have some money left over to put away for retirement or to put towards the trip of your dreams. Assuming your experience and specialization allow for client acquisition, we can use that number to see what your hourly rate would need to be.
Let’s say we plan on doing 20 hours of billable work a week (I realize full well you’re going to be doing 40+ hours, but not all of that will be billable — it’s safe to assume anywhere from 25 to 50 per cent of your hours will be billable). We also have to factor in a holiday or two, and a little vacation for yourself — you’re not a machine, after all!
Here’s a simple example of what that breakdown could look like:
- Legal holidays (U.S.): 7 days
- Unpaid vacation: 10 days
- Sick/Personal days: 4 days
- Total: 3 weeks
With all this information, we can set up a very basic equation (less the vacation time we’ve allocated). In this equation, X is equal to your hourly rate.
($50,000 + $25,000) = X * (20 hours x 49 weeks)
If we divide by X, we get $77 dollars (rounded up to the nearest dollar) an hour. So if we bill 20 hours a week, at $77 per hour, we’ll end up with what we want to earn yearly — including some much needed profit.
Pro Tip: I’m assuming your experience and expertise warrants you a healthy hourly rate. We must be honest with ourselves from the get-go, and not just plug numbers into the model based on a ‘desired’ lifestyle.
Let’s reflect back...
Congratulations: you’ve got a baseline rate for what you need to survive. Now’s a good time to put your new rate into the universe. You may or may not receive a bit of push back from the market, and like real estate, the market will ultimately dictate your worth. (Do clients return? Do they refer you to others? Or, do they ultimately go with a different provider?)
Let’s think back on your self-reflection.
Does this hourly rate represent all of your skills? For example, if you offer something a similarly-qualified developer does not (e.g. you can offer an SEO package, marketing assistance, social media consultation/coordination, or additional graphic design), you’re likely in higher demand. You should probably bump up your hourly rate to account for that — you’ve earned it.
After doing this exercise, be aware that your rates are ultimately going to change. You may find that your rates are too high and you’re not competitive, or just the opposite. My biggest piece of advice for new freelancers is to try and be as competitive as you can from the beginning. You’ll inevitably happen upon a sweet spot, where you’re getting paid an appropriate amount, and your clients find it reasonable for your skill set. This is by no means a perfect science, but the sky’s the limit when you build a stellar reputation.
Be a part of the community
Two years ago, I went to a local event and spoke to a fellow developer who was building out the copywriting aspect of their business. While we were speaking, they mentioned their project rate, and to my surprise it was exactly the same rate I was charging to do a full ecommerce web build, with some copywriting included. Right then and there, I realized I needed to double my rates. I had spent way too long as a lone wolf. Without the guidance of a community, I wasn’t doing a check-in with my fellow developers, and my bottom line had suffered as a result.
Pro Tip: Most people are open to help if you’re honest and you start with a compliment. “I really respect your business and I’d like to craft my own firm in your image, but I have no guidance. Would you mind giving me some advice on my pricing strategy?”
I’m lucky enough to be in New York City where there is a thriving design and development community. I can’t stress how much important information I’ve gleaned about myself from these meetups and conferences. More people are offering up their knowledge than you’d think — it’s up to you to gather it and make it usable for your business.
There are other ways to get involved with the community if you live far from a big city, and aren’t presented with many opportunities for face-to-face interaction. There are Slack channels like eCommTalk, Shopify’s Web Design and Development Blog, or even podcasts like Businessology by Dan Mall and Jason Blumer.
Be strong and stick to your rates
Once you’ve done the analysis of what you need your rate to be, and you’ve got a firm grasp of your place in the freelance marketplace, it’s time to secure clients.
In my experience, the best way to deal with fee structure is to be completely upfront. I lay everything out in the job proposal for clients to see, and then go over each of the points. It’s a good way of managing expectations and justifying your cost, and helps prevent bargaining, negotiation, or push-back. You’ve got to remember that there are going to be clients who have never worked with someone hourly before, and you have to put them at ease, right off the bat.
The number one thing clients are looking for when you’re bidding on a job is that you’re trustworthy. If you can establish trust (with your experience and your transparency), it will set a positive tone for the working relationship that ensues.
The number one thing clients are looking for when you’re bidding on a job is that you’re trustworthy.
If, after going through all of this with your client, they still have a problem with your rate, then you’ve got two options: you can either change the scope of the project to be a little less than you initially discussed, or come to some kind of compromise on price. As you’ll inevitably learn, the problem with the latter option is that it sets a bad precedent.
You don’t want your clients thinking that every time they push back, they can get more for their money. You’re a business and you’ve got an established rate that you’ve earned. Resist the temptation to give in. Stay strong, and stick to your rates.
I realize that this may mean walking away from deals that you’ve put blood, sweat, and tears into — and that can be extremely tough — but sometimes walking away from a client who’s the wrong fit is the best solution.
In my unique experience, after explaining all that I have to offer and justifying my costs, the clients who push back often end up being the most demanding. I prefer to work with clients who appreciate my transparency and expertise, and respect me upfront.
All hail the hustle
Being a freelancer is a roller coaster ride of amazing experiences that are both exciting and petrifying. If you feel like you’re being overworked and underpaid, you probably are!
Performing regular self-reflection and check-ins along the way are just as important as the very first reflection I mentioned. You are your own moral compass; your instincts are important. Remember that it’s okay to walk away from clients who don’t want to pay your rates. You now know what you’re worth.
Remember that you’re not in this by yourself, and although you’re a freelancer, you’re also in the business of starting businesses — so act like it. The more self-assured you are, the more at ease your clients will be, and that will ultimately translate to winning more jobs.
About the author
Mark Perini is a freelance web developer, social media consultant, and founder of ICEE Social based in New York City.