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How to Freelance

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Establishing a Baseline Price

4:02 with Pasan Premaratne

Before you can pick a pricing method, you need to understand what goes into a price. A good price should reflect your costs, skill level and desired profit. Let’s go over how we can calculate such a price.

Notes

Formula for calculating your hourly rate:

- Calculate your direct and indirect expenses

Annual expenses = Sum of:

  • Rent
  • Utilities
  • Insurance
  • Employee salaries and benefits
  • Advertising and promotion
  • Outside professional services
  • Equipment
  • Office supplies
  • Business taxes
  • Client services

and any other expenses

- Calculate number of working hours

Working hours = (Number of working days a year - holidays - vacation time) * Number of hours worked per day

- Calculate hourly rate:

Hourly rate = (Annual Expenses + Profit Margin) / Number of working hours

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    [Pasan Premaratne] Regardless of the pricing method you go for, you have to establish a baseline. 0:00
    The price you charge for a project should be enough to cover your expenses, billable work hours, and bring in some profit. 0:04
    Rather than just picking a random starting figure because it's what other people in the industry charge, 0:12
    calculating the best rate for you will allow you to accurately evaluate your financial progress. 0:17
    To calculate an hourly rate, start by totaling all direct and indirect expenses for the year. 0:23
    This includes things like rent, utilities, insurance, employee salaries & benefits, advertising & promotion, 0:30
    outside professional services, equipment, office supplies, business taxes, and client services. 0:37
    Next figure out the number of hours you plan to work in a year. 0:44
    Start by calculating the total number of days you want to work and the number of hours per day. 0:48
    If you're sticking to a 9-5 schedule, 5 days a week, that's roughly 251 working days a year—taking into account holidays and weekends. 0:54
    If you want to work 4 days a week, that's perfectly fine as well. You are in charge of your own schedule. 1:03
    Deduct any planned vacation time or time outside the business from this total, 1:08
    and you have a rough idea of the number of hours you will work during the year. 1:13
    Add to your total expenses a reasonable profit margin—usually anywhere between 10-15%. 1:18
    Divide this figure by the number of hours you plan on working. 1:25
    This resulting hourly rate should cover all the costs of running your own business, including your own salary. 1:29
    Say your annual expenses are around $72,000. You add a 10% profit margin of $7,200.¾ 1:35
    Divide this by the number of hours you work. 1:44
    So let's say I work 241 days at 8 hours per day, which is 1,928 hours. 1:47
    Divide this $79,200—your total expenses plus your profit margin—by the $1,928 to arrive at your approximate hourly rate. 1:55
    For this example, that's $41 per hour. 2:05
    Now when calculating working hours, most professionals don't include time spent on administrative work— 2:09
    things like writing proposals, billing, and self-promotion because that's not strictly client work. 2:15
    Other freelancers use a multiplier that's unique to the project—a creativity coefficient. 2:21
    This number is a multiplier of your base rate to help you match the price you charge 2:27
    with the level of creativity and difficulty of each project. 2:31
    Creativity coefficients can be close to 1 for projects that are dead easy for you and stuff that you do all the time. 2:35
    But as difficulty or uniqueness of the project increases, so does the coefficient. 2:42
    With an hourly rate when you consider a project, you should carefully estimate the number of work hours. 2:46
    You can then multiply this rate by the hours to figure out whether the client's budget at least covers your costs. 2:52
    If it doesn't, you can negotiate with the client for a higher fee, propose a different solution for the project that takes less time, 2:58
    talk about reducing the number of features implemented, or whatever is needed to come to a mutual agreement. 3:05
    Coming up with a per project price involves roughly the same approach, but is more appropriate for freelancers who have experience. 3:11
    Say product landing pages is your specialty and that over the years you've found out that it takes you 2 weeks to do it. 3:18
    You calculated your baseline rate awhile back and found it to be $40 an hour. 3:25
    Given these numbers and some rough calculation, we can say that you should be charging $3,500. 3:31
    After doing it for awhile if another landing page comes in, you know off the top of your head that the minimum fee for this project 3:37
    should be $3,500. 3:44
    Without having to drill down into hours and cost, you can comfortably tell the client 3:47
    that it will cost them around $4,000 for the whole project. 3:51
    Per project pricing is always more attractive to clients but it comes with experience, doing this for awhile, and knowing your numbers. 3:54

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