The Great Mystery Revealed: What Should I Charge My Clients? Part 4

Posted: May 1st, 2009

This is the third of a four part series where we explain the science of determining your freelance rates. Today’s post will cover ways of measuring your progress so you are reaching your income goals.

By knowing your desired yearly income, hourly rate and billable hours you plan on working in a year, you still are not guaranteed of knowing if you are on track unless you start crunching numbers and evaluate what you are doing. This way you can make adjustments if you are not meeting your income goals (likely) or you know you’re right on track if you are meeting them (not quite as likely).

Tracking time and income

All of the previous steps are useless if you do not take the time to track your time and income. In order to know if you are meeting your income goals, accurate records must be kept. For time tracking you need to keep track of all time spent working which can be broken down as follows:

1. Admin Tasks: Non-blillable tasks related to your business such as emailing, invoicing and customer support.
2. Promotion: Non-billable time you spend promoting your freelance business.
3. Client Searching: Hitting the job boards and sending out estimates that is preferably done on non-billable time you allocate yourself. You generally have to dip into the billable hours here.
4. Your Work: The billable time that generates your income. The time you spend on each project should also be tracked to see if you are on track with your project estimates.

A good web-based software that I highly recommend and use is Paymo Timetracker which is free of charge.

You must also keep track of all the income you receive and every last cent you spend, whether personal or business, so you know if you are in par with your budgeted expenses and your yearly income goal. Although it is recommended you utilize an accountant, this can add additional expense, though it does tend to pay itself back relieving you of this time spent on crunching numbers (and headaches).

If you do decide to go the do-it-yourself route, I recommend Quickbooks which has a free edition available. It does require some learning and getting use to, but it accurately (and least painfully) accomplishes your accounting chores.

Evaluating your results

After a few projects under your belt, a little income in the bank account and your freelance business rolling, an evaluation should be done to determine if you are on track with your income goals. We’ll need to have handy the following:

1. Your hourly rate, calculated from the last post
2. Your calculated billable hours for the year divided by 12 to get billable hours for the month
3. Your income for the current month (do not deduct expenses)

Each month, take the income total and divide it by your monthly billable hours to get your average rate for the month. Compare this result to your hourly rate.

Is the average rate for the month about the same or higher than your hourly rate? If so, congratulations, you are right on par with your business. Keep doing what you are doing.

Is the average rate for the month significantly lower than your hourly rate? Then there is no need to panic. It is common for new freelancers to spend more time searching for clients and bidding on projects. Even for freelance veterans, there will always be some months where this is the case, too. It is important, however, that you make sure you are taking steps to increase your billable hours spent on projects so this doesn’t carry on month to month.

Eventually, with enough projects done, you will notice that repeat work will increase which will enable you to spend much less billable time on searching for new work. This comes with experience.

How about a little feedback?

I know these series of posts has covered quite a lot of info and there may be some questions still lingering, so I encourage you to post your questions or comments below. I’ll answer them and will likely have a new post for you for issues I didn’t cover here.

The Great Mystery Revealed: What Should I Charge My Clients? Part 3

Posted: April 28th, 2009

This is the third of a four part series where we explain the science of determining your freelance rates. Today’s post will cover putting a competitive price on projects and maximizing your earnings.

Alright, now we get down to the nitty gritty on pricing your projects. This will be a little complex but I’ll try to simplify things as best I can in Layman’s terms. Putting a price tag on a project can be broken down into three parts. I’ll explain each one in detail which are as follows:

  1. Research in your market and finding a price for your services
  2. Analyzing your income potential and determining a project price
  3. Optimizing your pricing

Research in your market and finding a price for your services

In the last post, we determined your hourly rate and your break even rate. We’re not ready to start pricing just yet though. One thing I want to remind again, too, is that we want to steer clear of coming up with a project price by multiplying our hourly rate by the time we think it will take to complete it (the reasons are explained in part 1).

What we want to do instead is do some research into what others are charging for the similar services that we are doing THEN calculate if this will be profitable for us by keeping in line with our hourly rate. First, we’ll take on the research.

The best places to research what other freelancers are charging are the major freelance job boards such as oDesk, Guru and Elance. Instead of searching the projects available, you can actually search for freelancers that work in your field and by keywords of the type of project you are doing (i.e. tech writer, PHP programmer). The really handy part is that these profiles have available the projects that these freelancers have completed along with the amount they charged for each one.

Also don’t just settle on the first project that matches yours and think this is what you should be charging. The point is to keep digging and find up to ten similar projects (from different freelancers) and come up with an average from all of them. Though this may be a little time consuming, you can more accurately gauge your market price this way.

Now we can take this result to the next step…

Continue Reading »

The Great Mystery Revealed: What Should I Charge My Clients? Part 2

Posted: April 24th, 2009

This is the second of a four part series where we explain the science of determining your freelance rates. Today you’ll see the true definitions of the hourly rate and calculate a competitive price for yourself.

Hourly Rates Explained

Coming up with an estimate for a client is simple, right? Just figure out the hours it will take to complete then multiply by your hourly rate. Well, not quite. It is quite a large misconception that project pricing has to be done this way. I’ll explain to you an essential use of an hourly rate calculation along with another important rate calculation, the break-even rate.

Your True Hourly Rate

First, your hourly rate calculation should not be used for pricing a project, but should instead be a guide to determine if you are in fact earning what you want to. Let me explain further with an example:

In the last post we calculated the total billable hours in a year to be 1,800 which averages out to 34.6 hours/week. We’ll round up to 35 hours/week for simplicity. Now let’s say that in one particular week, you worked 20 of those hours on a project and earned $500 (charging your rate of $25/hour) and the other 15 hours were spent on marketing your business and client searching. With a little math you can determine your true hourly rate for this week of work:

$500 earned / 35 billable hours worked for the week = $14.29/hour average for the week.

Now can you see that the hourly rate you charged doesn’t reflect your true rate per hour? In this case the $14.29/hour is a huge difference from the $25/hour you thought you were earning. That’s why the $25/hour you determined as your rate should only be a guide to how much you should be earning rather than an actual rate you set for any given project.

Keep in mind you probably won’t spend such a high percentage of time searching for clients (though a new freelancer will). It’s essential to know the time, however, that is spent on billable tasks and on non-billable work for your freelance business. The goal is to minimize non-billable time and maximize the income per project.

The Break-Even Rate

The break-even rate is simply the minimum you have to earn per billable hour in order for your freelance business to stay afloat. This takes into account all your business and personal expenses including taxes and those beers on Friday. In the above example, if your break-even rate happened to be $15/hour, then you either need to step up your business or cut costs somewhere (lowering your break-even rate) in order to keep on trucking as a freelancer.

Determining Your Rates

The first step in determining your project pricing is to know your desired hourly rate and your break-even rate. Freelance Switch has a great rate calculator to help you find both of these. There is also one other method you can use to figure out a desired hourly rate to compare with the rate calculation:

Go to CBSalary.com and enter your job title to find an average annual salary for the work in your field.

Divide this amount by the 1,800 billable hours estimate to get a rough estimate for a rate to charge.

Keep in mind that this doesn’t reflect the current market in your field and is limited to the U.S. market but it should give you a rough estimate.

Now that we have your hourly rate and break-even rate figured the next step is to figure out how to give an accurate estimate on a project while keeping your earnings consistent with that hourly rate. In the next part of this series, I’ll explain this process without having to do the dreaded guessing.

The Great Mystery Revealed: What Should I Charge My Clients? Part 1

Posted: April 21st, 2009

Image by Steven Depolo (Flickr)

Image by Steven Depolo (Flickr)

One ongoing question freelancers have, that never seems to really be answered fully, is what on earth should I charge for this project? Sure, there are many rate calculators available and, if we do a little research, can get a rough ballpark figure. Regardless, it still seems an inexact science and, truth is, it is to a degree. It is not just figuring out (or guessing) an hourly rate and using that. In fact, it goes way beyond that.

I’ll try to break this mystery once and for all but a general breakdown of the process should be understood first, which I’ll do for this post.

The Billable Hours

Your billable hours for the year can be simply broken down with the following:

Working a 40 hour week, 52 X 40 = 2080 total hours.

Minus two weeks of vacation, 2080 – 80 = 2000 remaining hours.

Minus 10% of time spent on administrative tasks (emailing, billing, estimates, etc), 2000 – 200 = 1800 remaining hours.

Your billable hours may vary but we’ll use the 1800 hour total as a rough estimate.

The Myth

It is a common misunderstanding that you need to figure out an hourly rate and multiply it by those 1800 hours to come up with a yearly income you desire. For instance, if you decide to charge $25/hour:

$25 X 1800 = $45,000 yearly income

There are two issues with this, though. The first is that you are not likely to work and bill those entire 1800 hours. A good chunk of that time will be spent searching for clients and promoting your freelance business, especially if you are new to freelancing.

The second issue is that due to that time spent searching for clients, you’ll never reach your yearly income goal unless you charge more per hour. By charging more per hour, you then run the risk of appearing too expensive and find it harder to obtain projects. So what is a freelancer to do?

Well, there is a way to counter these issues and earn the income you desire… something usually you have to learn the hard way as a freelancer. Understanding the proper method can go a long way in helping make your freelance career profitable.

The Technique

The secret of earning your desired income does not lie in your hourly rate. It is throwing your hourly rate out the door when coming up with an estimate for any client. The idea is to provide a competitive price on a project which is profitable for you, but something you can eventually improve upon and do in less time. Let me explain:

Let’s say you give an estimate on Project X at $500 and you win it. Also, we’ll say you estimated 20 hours to complete it. Isn’t it reasonable to say that the next time you win a similar project for $500, it will take maybe 15 or less hours to complete it since your gain experience and can possibly reuse parts of the first project?

How about the next similar project after that? Maybe it takes 10 hours. You see, the profitability lies in concentrating your services around those skills you are good at or are continually improving upon. As in the example, the fee you charge for the project may not rise, however, the time required for you to complete it decreases and your per hour income increases. This applies to you whether you are a writer, designer or programmer. The better you get at something, the faster you do it.

In a nutshell, this amounts to doing work you really know how to do well (or learn to do well) as much as you can.

This doesn’t mean that determining your hourly rate is not important. This is used in a way you probably haven’t thought of though. It is also true you may be required to provide an hourly rate in some job boards so I’ll touch upon that in the next post. In the next part of this series, I’ll explain the importance of the hourly rate and how it should be used.

The $100/Hour Freelancer, Revisted

Posted: March 3rd, 2009

Last week I wrote a post commenting on an article by Peter Bowman, What Makes a $125-an-Hour Writer?

He kindly replied back the same day with the following:

Thanks for the pingback on the piece I wrote for The Wealthy Freelancer. Good piece here, but you’re overlooking one crucial thing. You’re talking about raising your rates, but why does a client even need to KNOW your rates. These days, if someone asks me my rate, I say, “Well, I could tell you my hourly rate, but it wouldn’t mean much to you without the context of a particular job. It’d be far better for both of us if I gave you a quote on a particular job.”

If I told prospects I charged $125 an hour (my current rate), many would head for the hills (though most wouldn’t because I come referred to them and they know roughly what to expect). But if they ask, How much for Project X with these parameters?” and I say $1000 because that’s a fair price for such a project and that’s about what they were thinking, we’re in business. If I said $125, they might be thinking – “Geez, times WHAT? 15-20, 25?” But if I can get that project done in 8 hours when it might take another writer 12-15, I’m doing OK.

It gets even more fun when you’re doing repeat projects of the same kind for a client, You may have charged say $1000 before b.c it took you 8 hours, but maybe now, since you’ve done so many, it only takes you 5. Your true hourly rate just jumped to $200.

And none of that is possible if you tell your prospect/client your hourly rate. You want to start crafting your professional persona as that of someone who charges for their expertise, not by the hour. One sounds infinitely more professional than the other, no? And then you effectively sidestep the “price game” that too many freelancers get into and which can only ever end badly. Why? Because there will always be someone willing to do it for less.

And guess what? Another light bulb went off in my head. I realize that for some of my clients, I follow this principle (without really realizing it) while for others, I stick to a strict dollars-per-hour charge. The problem with having your client know your rate is that they expect you’ve worked the hours you say you did.

In order to increase your income as your experience increases, you either have to pad your hours, which is unethical, or increase your rate which clients could view as a rip-off and cause you to lose them. The solution is therefore to charge by the job and keep your rate in the dark as Peter says.

Sticking to the dollars-per-hour method can also limit your business growth as described in Wendy Piersall’s article in Sparkpluggin.com. Here’s a bit of it that should hit home for you:

… until you can get out of the “Dollars for Hours” mindset, your business is not scalable, is completely vulnerable to the economy and outside forces, and cannot grow beyond the 2,080 units you have to sell. [2,080 refers to the number of working hours per year or 40 hours a week X 52 weeks]

Well, lesson learned, as a typical freelancer’s life should be about.

Many thanks to Peter Bowman for his insight and contribution.

Hands Up If You Charge More Than $100/Hour

Posted: February 26th, 2009

When setting your freelance rates, it is hard to overlook the fact that there are others in your field charging $100+ an hour while you ponder setting yours at a fraction of that. So what gives? How do they manage to get away with charging so much and probably earning an income well into 6 figures while you are still figuring this all out?

Personally, I’m not one of these lucky bastards but that light bulb went off in my head after reading Peter Bowerman’s article on What Makes a $125-an-hour Writer. He mentions talent and marketing are key components, which goes without saying. After all, you do need to be the best at what you do to be earning these rates. You also have to actively search out those clients and convince them you are worth the high cost. This takes some skill in selling yourself as well.

Another of his points is that you need to be highly specialized in what you do. The specialist can do a few things quickly and very well as opposed to the jack-of-all-trades who has talent in many things but is not an expert in any one of them.

What drew my attention the most, however, was his last attribute mentioned: speed. It is a no-brainer that freelance experts work faster, but when you combine faster work with higher rates, then you have the secret of the $100/hour freelancer AND you have your marketing tool for attracting new clients.

Say, for example, if you work twice as fast as a freelancer charging half your rate, then to a potential client, there is no difference in the price of the work. You become the more attractive option, however, due to your speed and perceived expertise. I say perceived here because you still have to convince the client you are the expert you say you are.

Here is where we go back to marketing yourself. Peter says:

Developing that marketing sense – which just isn’t that difficult – simply requires the ability to think strategically about a business. Translation? Being able to intelligently discuss with clients issues like strategic objectives; audience and that audience’s hot buttons; features and benefits; and USP (Unique Selling Proposition) [see my post on the USP] – what sets your product/service apart in the marketplace.

The important thing to note, though, is that as we become more knowledgeable and work faster in our profession, our rates need to increase as well, It is very likely we are still working at the same rate as in the past when we were much slower in our work (I was guilty here). The irony in this case is that we are losing money as we become faster in our work, quoting fewer hours as a result but keeping our same rate.

Let’s take for example a project you may have once charged $25/hour for 4 hours netted you $100 in the past. If it now only takes you two hours and you charge the same rate, it nets you only $50 thereby losing $50 in the process. Now, we can’t just set our rates at $100+ an hour and start looking for clients, but rather evaluate our skill level and the speed at which we work THEN raise our rates accordingly.

One simple method is to find a project in the past, calculate the time it took to complete it then divide this result by the time it would take you to complete it today. Take this result and multiply it by your hourly rate to find the increased rate you should be charging. To illustrate:

Time to complete project in past  – 20 hours
(Divided by)
Time to complete same project today – 10 hours
Result: 2
If your current rate is $25/hour, multiply by result which equals $50/hour

Set your rates in accordance to your expertise and focus on that expertise and speed when marketing yourself to clients and you have your winning formula for achieving the goal of being a $100/hour freelancer. You may not be quite there yet, but at each stage you quicken your work pace, your rate can increase accordingly.

I know I’m practicing this as we speak.