When you’re a freelancer, few things are more important than getting the pricing of your services right. Lots of people struggle mightily with pricing, and it’s very easy when you’re first starting out to make pricing mistakes.
In fact, having talked about this topic with colleagues over the years, I know of far too many instances where people just pulled a number out of a hat instead of doing the research and calculations required to get this important decision right.
Getting your pricing wrong will obviously hinder your ability to succeed. Ironically, this is the case both if you set prices too low and if you set them too high.
Factors that affect your pricing
Here are five factors that influence the rate you can charge clients for your services:
1. Level of skills – Are you offering clients a skills set that is finely honed, comprehensive and backed with appropriate educational or professional credentials? Or are you taking your career in a new direction and thus applying newly acquired and untested skills? You need a realistic, honest assessment of your skill level to help you decide what’s fair and reasonable to charge.
2. Amount of experience – The same thing goes for experience. If you’ve got plenty of experience, you can justify charging higher rates. But here’s how I know some people ignore this. I formerly used to hire other freelancers to support my public relations business when things got ultra-busy. A number of times people with minimal experience in writing the types of materials my clients needed asked to be paid what I was making with 20 years of experience behind me. Needless to say, these folks didn’t get assignments from me.
3. What competitors with similar skills and experience charge – Whatever rate you set based on your level of skill and experience, you still have to be somewhat in line with the other professionals you’re competing with. You can, of course, justify having higher rates than your competitors if your skills, credentials, and experience outshine theirs, but if all things are more or less equal, this won’t fly with most potential customers.
4. Amount of competition in your field – Obviously, if you are setting up in a profession and in a geographic location where lots of other people who offer the same services you do, your pricing will have to be ultra competitive. But if you have skills that are hard to find and highly sought after, you can charge more.
There is also another side to this, though. If you’re offering something that companies in your region aren’t used to buying, they are going to be more price sensitive than if you’re in an area where the service you’re offering is common. For example, when I moved from the Greater Boston area to Western Massachusetts in 2002, I was surprised by how few freelance public relations consultants there were in Western Mass.
So because companies there weren’t used to buying the services I was offering, I could not charge as much as I had charged in Boston, where there were dozens of PR freelancers plus PR agencies of all sizes. So I lowered my rates by $20/hour for customers in that part of the state. Over time, as I built credibility with these Western Mass. clients, I raised my rates to match what I was charging my clients in the eastern part of the state.
Another lesson here is that you may have to search farther afield to earn what you want to earn. Fortunately, the internet makes it possible for freelancers in some fields to have clients anywhere.
5. Nature of your clients – Will your clients be corporations or nonprofits, or small family owned businesses versus large businesses? This affects that they’re willing and able to pay. This kind of thing isn’t written in stone, of course; my client roster in Boston included some huge nonprofits, like the Boston Children’s Hospital, and they were willing and able to pay the same rates I charged large for-profit businesses. But for smaller nonprofits, I often lowered my rates, as I also often did with family-owned or small businesses.
This is something you need to consider when deciding what types of clients you want to work with. Are you going after the businesses that can afford to pay top rates? If so, you’ll also likely to face more competition, because everyone wants to work with those companies. And what is your motivation? Some people love working with nonprofits because of what these organizations are bringing to the world. And that’s a perfectly valid choice to make. Just make sure you know in advance what the impact of that choice will be on your billing rate.
How do people get pricing wrong?
Here are common ways freelancers err when setting their pricing:
- Over-estimating the number of hours you can actually bill per week
if you’ve come out of an agency, a law or accounting office, a consultancy or some other type of employment where clients were billed for the time you worked on their accounts, you may be used to having a high number of billable hours each week. But somewhere in that business were people who were doing all the things you will now have to do on your own…including networking and prospecting for business, writing proposals, marketing, doing the billing and accounting, buying office supplies…the list of non-billable work can seem endless.
Someone has to be the rainmaker and now that person is you. So be realistic about how many hours you’ll actually be able to bill to clients during the course of a normal week while you also handle all of these non-billable tasks.
Overestimating your billable hours can lead you to charge a lower rate than you actually need to earn the income you desire.
Here’s something else that’s important to remember. When you freelance, you don’t get paid sick days or paid vacation. So when you are calculating how many hours you hope to work a year in order to earn the annual income you desire, you have to allow for these periods when you won’t be earning income at all because you’re taking time off for whatever reason.
- Not doing your homework to understand what your skills and experience are worth in the marketplace
You need to know what your experience and skills are worth as well as what others are charging for similar services, and what the geographic marketplace you’re in will bear. Professional societies can help you find the information you need. Networking can help. I’ve found that people are more open these days about sharing their billing rates, although that may not always be the case. An internet search on this topic can also be useful.
- Not understanding the internet’s impact on rates
Speaking of the internet, you need to be aware that the internet has not necessarily been kind to some of us when it comes to its impact on billing rates. If your business is something that companies can easily outsource via the web, that may mean that some companies you might want to work with will prefer to pay the lower rates they can get from someone overseas or in some part of the country where billing rates are lower than they are where you live.
Just to give one example of how this works, when I once mentioned on Twitter that I was looking for a web designer here in the Research Triangle area, I received messages from people in numerous foreign countries who were willing to work for incredibly low rates. I ended up hiring someone in Wake Forest because I believe in buying local. Did I pay more than I have paid someone in Romania or India? Yes, but I was willing to do that. But not everyone is interested in buying local or in paying what something in their town or region is really worth.
Now, this is not to say that the internet isn’t your friend. It enabled me to write for clients who were located in other parts of the country and even in other parts of the world. But you have to be aware that especially in some fields, a lot of potential customers are bottom feeding on websites that act as freelance marketplaces. In my experience, people who are looking for the lowest possible cost often end up being difficult customers who are never satisfied. And they also usually are not interested in building a long-term relationship with a vendor.
Getting pricing right
So how do you avoid these mistakes? Here’s what to focus on:
- Don’t count on billing 40 hours week in and week out
Yes, I’ve already said this but I am repeating this advice because I’ve seen so many people get this wrong. If you assume you’ll be billing 40 (or more) billable hours a week and set your billing rate accordingly, you’re ignoring all the unbillable work you’ll have to do to make your business a success over the long term. So if you actually do bill 40 bill hours a week, and you also do all those unbillable tasks, you’ll end up working night and day and soon be burned out.
Now, we all know we have to make hay when the sun shines, and so you might have weeks when you do bill a lot of hours and neglect those unbillable tasks. But that can’t be the norm because if you neglect, for example, new business development, the sun might stop shining down the road and you’ll find your billable hours falling short.
- Do the research that allows you to project confidence when discussing your billing rate
If you do this homework thoroughly, then, you can project assurance when you tell a prospect about your rates. This confident attitude will help convince that person that the rate is reasonable and justified. If, on the other hand, you’re not confident about the rate you’re proposing, that insecurity will also come across and undermine your position. So don’t skimp on your research or on rehearsing how to sound confident when you talk about your rates. The worst thing that can happen in a new business meeting is for you to fumble and mumble when talking about your pricing.
- Be prepared to respond when potential or existing clients push back
Given the impact of the Internet, it is inevitable that someone will push back on your proposed rate by quoting a lower rate they’ve received from someone halfway around the world. Fortunately, you have a load of good arguments to make when this occurs.
First, the time difference alone adds an unnecessary level of difficulty in working with someone overseas and definitely slows things down. Also, unless the person being hired overseas is a US expat, there may be language and cultural differences that will impede a client’s ability to communicate exactly what they mean or want. Yes, the overseas freelancer may speak English, but do they really understand all the American idioms that the client is apt to use or will the client constantly have to figure out new ways to explain things?
Always be ready to talk about what backs up your proposed rate: your depth of experience and breadth of skills.
This goes not just for when someone says they can find someone overseas to do the work at half your rate, but also when anyone questions why you’re charging what you’re charging.
- Never ever “buy the job”
Low-balling your hourly rate on a job to get your foot in the door with a new client is very tempting, especially when you’re starting out. The theory is that setting a low hourly rate is the way to bring in business fast. But if this hourly rate is not enough to pay your bills, this strategy will quickly backfire. You’ll have to work an unsustainable number of hours to make up for the low hourly rate.
Recognize that once you’ve set a rate with a client, it is something you’re going to have to live with for a while.
Yes, you can go up a bit each year or every two years, but if you really lowballed the rate to begin with—say, for example, charging 30 percent less than you should be charging to stay afloat—it will take years before you can get up to the rate you really need to survive.
Don’t expect to be able to just raise your rates by leaps and bounds with existing clients; they won’t like it much and may go in search of someone else who is willing to give them the same kind of bargain rate you foolishly offered them previously.
- Be careful how you communicate price increase
Sooner or later, you’re going to need to raise your rates, even if it’s just to keep up with inflation. Be smart about how you do this. When communicating fee hikes, the best route is to be as formal as possible. I’ve generally implemented rate hikes at the start of a new year by sending out letters in late November. Note that I said letters, not e-mails. For me, e-mails are not for major news. And besides, they sort of invite immediate comments from the recipients, whereas letters don’t (although, of course, in your letter you definitely should ask clients to call you if they have concerns about the increase).
- Gradually either cull low-paying clients from your roster or get them up to the rate that is closer to what you really need to earn
You’ll find that some clients just can’t afford to pay higher rates. Wish them well and bid them a fond adieu. If you happen to know someone else who is just starting out and who may be charging a lower rate than you are based on their having less experience, then, by all means, refer the business to them. Both parties will thank you.
If you really enjoy working with a low-paying client and believe they could afford to pay closer to what your other clients are paying, have a serious chat with them about this. You don’t have to make up the difference in rates in one fell swoop, but if you can gradually move them in the right direction, it’s worth a try before you write them off as clients.
All of this may seem like a lot to digest. But few things affect your chances of freelance success more than getting your billing rate right. So take the time needed to do the research and get it right from the start of your freelance life.