Pricing your services as a freelancer is critically essential. When you make the right pricing decision, you can reduce risk and increase your profits. On the other hand, choosing an inappropriate pricing method can frustrate clients and make it more challenging to get paid.
The Two Most Common Freelance Pricing Methods
In the freelance business industry, there are two widely used pricing methods: hourly and fixed price. Hourly pricing is commonly used when the client request is open-ended. That is why many lawyers use an hourly rate method because it is difficult to know in advance how long a legal matter will take. In other situations, the client has a clear, well-defined project need. In those situations, offering a fixed project price may be a better choice.
Once you have an idea of which pricing method to use, you probably wonder how much to charge. Coming up with a reasonable price for your freelance services takes careful thought. Use the following questions to come to some conclusions.
8 Questions To Ask To Determine Your Freelance Price
The prices you charge for your freelance services should reflect your personal needs, business expenses, and market demand. Use prompts to review your freelance prices quarterly or annually.
1) How much money do I need to make to support my lifestyle?
At a minimum, your personal income goals should cover current needs and contributions toward future goals. Your current lifestyle needs will probably include needs (e.g., housing, groceries, transportation) and wants (e.g., entertainment, travel, and restaurants). Remember that inflation in 2021 has been driving up prices for many goods and services in 2021. According to recent news reports, inflation in the United States in 2021 is at a multi-decade high. Therefore, your income needs may need to be increased to maintain your standard of living.
Government statistics can also give you how much income is needed to live in a specific area. For example, the median household income in Chicago as of 2019 is $58,247. Therefore, a freelancer in Chicago might set $60,000 as an absolute minimum income goal.
2) How much money do I want to make as a goal?
Running a business comes with risks, so you might want to aim higher than achieving your basic needs. Take a few minutes to dream about how much money you would like to have. For example, you might be interested in early retirement and want to contribute $20,000 a year to retirement investment accounts. In addition, you might have children and want to pay for a private school, tutors or college. Finally, you might want to use the money to reduce your stress by paying for a cleaning service, laundry service, or a personal assistant.
To continue the previous example, a Chicago freelancer might decide to set a revised income goal of $100,000 to cover more of their desires. But wait, there is still more to consider.
3) What business expenses and taxes will I have to pay?
As a freelance business owner, you have additional business and tax expenses that salaried employees do not have to manage. Let’s say that you run a web design business. In that case, you may have the following expenses.
- Health Insurance. A recent estimate for Texas found that self-employed workers in Texas will pay between $200 to $400 per month for health insurance (source: ValuePenguin). Your health insurance costs may be higher depending on your location and family situation.
- Rent. If you work from your home, you may not have additional rent expenses. However, you may find it easier to focus on your work by paying for space at a coworking space. The average cost for a coworking space ranges between $200 to $400 in the US.
- Software. As a freelance web designer, you will probably need access to professional-level software. For example, you might pay for a ClickFunnels platinum account for $297. Please find out more about additional software tools you may need in our freelancer’s toolkit guide.
- Advertising and Marketing. Spending time and money on marketing is essential if you want to gain clients. Some standard marketing and advertising expenses for freelancers include the following.
- Local Events. At the minimum, you may spend some money joining an association or attending local business events for a few hundred dollars per year.
- Website and Email. In addition, your marketing costs may include setting up a website and a professional email account. This may cost $10 to $100 per month, depending on the services you need.
- Digital Marketing Campaigns. You may decide to spend money on digital marketing campaigns like Google Ads, Facebook Ads, and LinkedIn campaigns.
- Personal Time and Effort. If you spend no money on advertising and marketing, there is an alternative: your time and effort to contact prospects. As a business owner, your time is valuable.
- Taxes. As a freelancer, you will have to pay a variety of taxes, including payroll taxes. Estimating the taxes you need to pay is complex. Use the self-employment tax calculator to estimate your taxes as a freelancer. According to this tool, a business with a net income of $100,000 would pay $11,451 and $2678 in Medicare taxes. Additional taxes may apply, like sales tax and income tax. Check with an accountant in your area for further insights.
Here are sample expenses you may need to run a freelance business annually.
- Health Insurance. $4800
- Rent (Coworking). $4800
- Software: $3600
- Advertising and Marketing: $500
- Taxes. $14,129
Total estimated business expenses: $27,793
4) Estimate your billable hours per year Reverse engineering your pricing based on your financial goals
Let’s keep the numbers simple to continue estimating your pricing.
- Annual Business Expenses: $28,000
- Personal Income Needs: $82,000
Based on the above, your business needs to generate $110,000 in revenue per year. Based on this number, you can estimate your pricing.
- Hourly Rate $75: 1,467 Billable Hours Per Year
- Hourly Rate $100: 1,100 Billable Hours Per Year
- Hourly Rate $150: 733 Hours Per Year
In the USA, there are 261 working days per year. Therefore, you would need to bill 5.6 to 2.8 billable hours per business day to achieve these goals. Remember that some business activities like marketing, learning to use new software, and sending invoices are not billable.
The alternative way to bill your projects is to sell projects on a fixed price basis. The following calculations illustrate how many projects you would need to sell per year to generate $110,000 in revenue.
- Average Project ($5,000): 22 Client Projects Required To Generate $110,000 Revenue
- Average Project ($10,000): 11 Client Projects Required To Generate $110,000 Revenue
Even if you use project-based prices, it is still wise to keep track of your working hours. Otherwise, you may end up burning out by committing to working too many hours for client projects.
5) What do other freelancers charge for similar services?
Based on the figures above, you might be interested in charging $150 per hour or more. It is great to aim high! Before pricing your services, it is worth taking a few minutes to validate what other freelancers are charging for that service.
The following resources give you some idea of standard hourly rates:
- Freelancer Map: $74 to $117 per hour (younger freelancers usually have lower rates). This estimate applies to all freelancers. Some industries, like consulting and management, tend to have higher hourly rates.
- Average Web Designer Hourly Rate. According to FreshBooks, the average web designer charges $75 per hour. However, the average business website costs between $5,000 to $10,000 to set up.
Keep in mind that your skills may be worth even more!
6) How much money would you make as a full-time employee?
Another way to look at your pricing is to estimate how much you could earn as a full-time employee. Use the following salary research tools to come up with approximate salary figures.
- Salary.com – According to Salary.com, the median annual salary for a “Designer 1– Web” is $66,990.
- Indeed Salaries
- Robert Half Salary Guide
Divide the annual salary by 2000 to get an approximate hourly rate. Regard these figures as an absolute bare minimum to consider. Full-time employees do not have to pay for expenses like rent, business software, advertising, and taxes like freelance business owners.
7) Are my skills in demand?
Your ability to charge high prices as a freelancer is also impacted by demand. Some skills are in high demand, and freelancers with those skills can charge higher prices. To find out if your skills are in demand, use the following resources.
- Upwork Top In-Demand Skills. Upwork, a freelance platform, periodically releases reports on the most in-demand skills. In November 2020, the top 15 skills included technical skills such as website development, PHP, and WordPress.
- Clutch. This directory of B2B service firms covers many kinds of agencies and freelancers, including technology, marketing, and business services. If you see a category dedicated to your skillset, there is a good bet that there is significant demand for your services.
8) How much value are you bringing to the client?
The value you bring to your client’s business is the last and ultimately most significant factor in your business. If you can solve expensive problems, you can charge higher prices. For example, few people would object to paying high fees to an excellent lawyer if you faced legal challenges. Determining the value you are bringing to the client takes time and experience.
Ask the following questions better to understand the value of your services to potential clients.
- What would happen to your business if this problem was not solved? (Example: failing to pay an accountant for tax advice might lead to overpaying your taxes)
- What would you do if you could free up 5, 10, or 100 hours of your time? (Example: a client pays a marketing expert to create their website and frees up more time to work on other projects).
- How much would your business grow if you invested in this project? (Example: Investing in this marketing campaign
Learning how to price your services based on value is one of the best ways to increase your freelancing income. Learn more about this process by reading “Value-Based Fees: How to Charge – and Get – What You’re Worth,” by best-selling author and consultant Alan Weiss.
Make It Easy For Clients To Pay You
Once you choose your freelance price, you need to have a simple and easy way to send invoices and pay your clients. Use PeachPay to send unlimited invoices to your clients around the world. You can receive payments directly into your bank account. That’s not all – you can also use PeachPay to send recurring invoices for retainer clients. Click here to sign up on PeachPay.