Once you’ve marched out on your own as a freelancer, one of the hardest parts of establishing yourself is setting your freelance rates. This is difficult for a few reasons:
- Freelancers tend to undervalue their own work (Which we shouldn’t)
- Freelancers are used to setting our rates similarly to what we were paid working our day jobs (Which is a bad idea)
- Freelancers forget that they are also their own bosses–and not just someone offering a service.
This last part is crucial: When you’re a freelancer, you’re more than just someone offering a temporary service to a client–you’re a businessperson who is charging a rate that covers your expenses while also earning a fair profit.
As a freelancer, it’s crucial to keep expenses (and paying for expenses) in mind at all times. Your rate needs to pay for everything from health insurance to bookkeeping software to the Starbucks meals you are buying possible clients. In other words? You have to be able to cover a whole bunch of expenses.
While there isn’t a one-size-fits-all solution for pricing structures for freelancers, there are a few methodologies every freelancer should be aware of.
Cost-Plus Pricing For Freelancers
Cost-plus pricing is the simplest way to figure out a rate as a freelancer. When you charge clients fees based on cost-plus, you’re taking into account overhead costs that include taxes, health insurance, office supplies, and travel.
The easiest way to come up with a cost-plus pricing software is to add up your monthly expenses and then divide them by the number of months you plan to work.
For instance, let’s say your monthly expenses come to $1000 after paying for health insurance through Obamacare, a coworking space, gas for your car/an unlimited mass transit pass, office supplies and shipping, your mobile phone, and one client meal per week. Let’s say you then work 160 hours monthly, 120 of which are billable hours (a very high amount).
Dividing $1000 by the 120 billable hours, you’d have to add $8.33 per hour to your old full- or part-time hourly rate just to meet your expenses as a freelancer. But that doesn’t take into account the unpaid hours you spend seeking out new clients or doing paperwork, or having to save money for retirement
That’s where you add a plus to cost-plus which allows you to compensate for unpaid hours or for lean work periods. So in addition to the $8.33 hour you are tackling on for freelance expenses, you would add an extra $5 or $6 hourly to make a profit and compensate for times when you are not working.
Translation: Cost-plus pricing is the easiest way to bill clients, but won’t pay for much more than bare expenses.
Market-Based Pricing For Freelancers
There’s an alternative, however: Market-based pricing is a system where you charge your clients the market rate for your services. The more services or the more specialized the service you offer your client, the higher your rate. Otherwise, your rate skews to what clients will pay for you.
The biggest downside to market-based pricing, however, comes with globalization. For some industries–SEO work and graphic design immediately come to mind–freelancers frequently work remotely and compete with other freelancers worldwide. The problem with this is that popular marketplaces such as Fiverr, 99designs, and Upwork (which can be helpful for freelancers in other ways, such as commissioning work) have drastically decreased payrates in the United States thanks to competition from offshore talent in Eastern Europe, South Asia, and other areas.
Market-based pricing is simpler to understand. It’s also riskier. This is when you check out what others in your field are charging to find the market price. If you offer more services, charge more than market. If you offer less, your services would be cheaper.
With more people freelancing than ever before, many of whom live in countries with cheaper living expenses, you may find yourself undercut by others if you hew too strictly to market prices. It’s best to use them more as a yardstick than a rule.
Value-Based Pricing For Freelancers
The last potential pricing structure for freelancers is also, in our opinion, the best one. Value-based pricing is a system where you charge clients a fee based on the value of your contributions to clients rather than how much it costs to produce or how much a hypothetical client would pay for it.
Value-based pricing is smart for one very simple reason: It’s the fairest for both the client and the customer. The client is paying a fee that’s proportionate to the benefit they’re deriving from the freelancer’s work. Meanwhile, the freelancer charges a fee that’s appropriate to the benefit their client is deriving from work.
This is why larger companies typically pay higher rates for graphic design projects than a small startup, or why a personal chef to a corporate CEO charges a much more expensive rate than a temporary caterer hired for a college event. The stakes are higher in both jobs.
If a client is working on a product launch, or working on the house of their dreams, it’s absolutely appropriate to charge more for branding advice or interior design than you would for an ongoing campaign or adding a new sofa to a room.
There is a challenge to value-based pricing, however: Unlike market-based or cost-plus pricing, value-based pricing requires a complex give and take between the freelancer and their client. This means negotiating, standing your ground, being prepared to walk away, and finally settling on a price that’s mutually beneficial to both you as a freelancer and your client.
And that’s the best part: At the end, your clients will see the value of your talent and the work you’ve created for them.