Today’s blog post is inspired by a question a newsletter reader sent me recently.
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She (or he) asked: “How do you figure out pricing of freelance work, especially when one doesn’t have numbers from working in management consulting to compare prices and figure out one’s worth?”
Very good question. Also, a question that’s not only important for creative bosses who offer services (like tech editing or consulting), but also for every single maker out there - how do you price your products?
I started writing a blog post covering both services and products, but it quickly got super complicated and so THIS ONE is only about services. There is going to be a second one regarding products, I promise!
So - here’s my framework how to figure out how you should price your freelance work!
1. Figure out how much money you need per month - for your personal stuff.
There’s no denying it - you have to pay rent, you have to eat, you probably want to go on a vacation or two per year, and maybe not think about whether you can afford to take your friend out to coffee or not. The first step to figuring out your pricing is to understand how much money you actually need per month to afford the lifestyle you want to have.
Make yourself a little spreadsheet and enter the following categories:
- Utilities (Internet, cell phone, water, cleaning service, etc.)
- Insurance & Medical
- Entertainment (Netflix, Spotify, what have you)
- Investments & Loans
- Savings (Can be for the next vacation, for a college fund for your kids, or just a little back up money)
Of course, you can add all sorts of other things that make sense for you - especially handy for categories where you know you’re going to be spending money regularly. I have a separate category for Yarn & Fabric, for example, because I know that I’m very likely going to buy some fabric or yarn for my personal use every month.
(Oh, and obviously you can delete any of these categories. I don’t have a “Clothes” one for example as I’m mostly making my clothes myself these days.)
Next step: Enter how much money you spend on these things per month. For some, it’s super easy - you know how much rent you pay from you bank statement, you know how much your Netflix subscription is, and you also know if you need to pay back student loans or not.
For others, just put in estimates.
Pro tip: Start using a budgeting app to refine those estimates over time! I had NO idea how much I was spending on food - and then I started tracking it. Now I know. That’s good. (I’m using HomeBudget, for anyone who’s interested, but there are tons of different apps out there. Find one that works for you.)
Good! Now you know how much money you need for yourself to cover your basic needs.
Next - put in another row with “Misc” and put at least 200 to 500 EUR or USD next to that. There’s always unexpected expenses - the mini vacation you didn’t plan for, the car that broke down, the doctor appointment you need to cover. Rather overestimate here - and then (again) track.
Tracking your expenses is the best thing you can do to figure out how you should price yourself, seriously!
2. Figure out how much money you need per month - for your business.
Wohooo, you’re done with the personal stuff! Now, let’s move on to your business.
Add a couple of rows to your spreadsheet with all the expenses you regularly have for your business, like
- Office rent
- Office utilities
- Tools (Your email provider like MailChimp / Convertkit, your website host like Squarespace / Shopify / Strikingly, etc.)
- Material (Business cards, notebooks, etc.)
- Meals (If you’re taking out clients for lunch, for example)
Again, adjust as much as you like!
Put in all the expenses you have per month - again, estimates are fine, but start tracking!
I also like to put in a buffer (another “Misc” category) here of at least 100 EUR, sometimes even more, because there’s also unexpected things happening in business.
Now you know EXACTLY how much money you need to be making per month to cover both your personal and your business expenses.
Repeat - that’s the amount you need to make per month to not cut into your savings. Or go back to a full time job.
3. Decide how much you want to work.
Okay, now ask yourself - do you want to work fulltime with your freelance work, i.e. 5 days a week? Or do you want to build something else - a company, a product - while working freelance? Or do you want to spend more time with your friends, enjoying the sun, eating chocolate?
I only want to work on client projects 10 days a month. Period. The rest of my time I want to spend writing this blog, making things, scheming new products for awesome creative bosses, building up my online community on Instagram and Snapchat, and general merriment on my balcony.
Ask yourself - how many days do you want to work on your freelance work every month? Put that into the spreadsheet as well.
4. Do the math.
Let’s say you came up with an amount of 3000 EUR per month that you need to cover your personal and business expenses (totally random number, btw).
Let’s also say you want to work 10 days a month.
Time to calculate your heart out.
First up: Taxes. 3000 EUR is the NET AMOUNT you need to be making. Figure out how much taxes you need to pay on top of that, and add that, and you know how much money you need to make GROSS:
Example: 50% tax rate = 3000 EUR * 2 = 6.000 EUR (that I need to be making every month).
Okay. We know how much we need to make before taxes. Good.
Next calculation step: How much do you need to charge per day?
Example: 6.000 EUR / 10 = 600 EUR.
Easy, right? Now you know how much you need to be charging per day in order to cover your expenses. You can break that down to hours if you want to as well - assuming an 8 hour work day, the example would get us to 75 EUR per hour.
5. Sanity check.
Up until this point, this is an exercise that’s totally doable without any knowledge whatsoever of the market or what other freelancers are charging. And that’s exactly the point.
First order of business when you figure out your freelance pricing is just to find out what you need to be making to cover all your expenses.
Still - you can’t ignore the market, i.e. what your potential clients are willing to pay and what other freelancers who do similar things are charging.
This is where the sanity check comes in. It serves the purpose of checking whether the hourly or day rate you calculated above is realistic in your market, and whether you could maybe even charge more!
There are three ways I’ve found that help me check how my rates compare to the market:
1. Talk to other freelancers.
I started reaching out to friends of mine who are also freelancing and simply asked them what they charge. Until now I haven’t had any weird reactions - usually people are super happy that someone FINALLY starts talking about money because no one ever seems to do that.
Hearing their rates and their stories about negotiations with potential customers gives you a good first overview of how much freelancers are able to charge in your city, industry or for the services you’re offering.
I’m even comparing myself to people who do things that are not very similar to what I do, but who work with the same target group. In my experience, it usually gives you a good feeling how much your potential clients are willing to pay and how they value certain skills!
2. What would someone with a similar expertise cost for a full-time job?
If you’ve had a full-time job before you went freelance (or you’re freelancing on the side) and you’re selling the expertise you acquired in that job, you know how much someone with the expertise you’re offering would get if your client hired her full-time.
I’m not comparing my rates to what I got as a management consultant, but to what I got (including all benefits) in my job as COO. Why? Because that is what my clients would need to pay if they hired me full-time.
What does that mean for you? Do a bit of research to understand how much hiring a person full-time for the services you provide would cost the company. Calculate a fictional “day rate” for that full-time employee and compare it to yours. (Remember, in Germany you need to add 22% on top of the salary of the full-time position to arrive at full cost as that’s what the company has to pay for social benefits to the government.)
If you’re cheaper - great! Either you can bump up your prices or you can use that as a selling point.
If you’re the same - great! See above.
If you’re more expensive - think about whether it’s justified or not that people pay more for you than for a full-time employee.
Hiring freelancers actually comes with a couple of benefits that justify charging a bit more than a comparable “day rate” of a full-time employee. Benefits are for example that companies don’t need to pay health insurance for freelancers and that we freelancers offer lots of flexibility, i.e. you can start and stop projects on super short notice. That’s worth something - i.e. you can most definitely also charge a mark-up on the “day rate” of a full-time employee.
If you’re DAMN more expensive - well. Look at your expenses. Think about whether you really need that second Lamborghini and whether going freelance is the right path to get there.
3. Get out there and write proposals.
Putting yourself out there and going into price discussions with potential clients is a great way to check your pricing - and especially how you feel about negotiating in the first place.
Why am I saying that? You need to figure out if you’re willing to negotiate on your price point or not.
My take on price negotiations is:
- When people don’t negotiate on price, I’ve hit either a good spot or I’m cheap - from their point of view. I’m fine with being cheap from their point of view because I don’t need to be making more money than the day rate that I charge. I’m not charging more “just because I could”.
- When people do negotiate and it’s more than a charming “Hey, is there maybe something that we could do about the price?” I don’t work with them. I’m worth more than I’m charging, and I know that. If people don’t see that, it’s usually a sign that they’re not valuing what I offer, and then I’m better off working for a client who appreciates my work and they are better off hiring someone who’s cheaper.
You need to develop your own take on price negotiations and the best way to do that is to get out, write proposals and talk to clients about projects and pricing. You’re going to develop a feeling of what feels good and right for you in terms of pricing, and then you can take a stance in the next proposal and walk away from it if you’re client is not paying what you charge.