When it comes to pricing your services as a freelancer, the most common approaches are to either charge an hourly rate or to charge per project. In this article we’ll review two ways to set your hourly rate.
The survival method (salary to hourly)
The survival method for calculating your hourly rate is based on your salary if you were employed full-time.
As a freelancer you will have expenses that full-time employees don’t have, or expenses that would have been paid by your employer. Make a list of every expenses you have that you wouldn’t have if you were were working for someone else. Make sure to calculate those expenses on a yearly basis.
The next step is to calculate your target salary by adding your current full-time salary to the freelancer-only expenses you listed above. If you’re not working full-time, you can go on glassdoor.com or browse job listings to get an idea of the average salary in your industry.
With your target salary in hand, let’s calculate how much you should be charging per hour.
On average, full time employees will work 2000 hours in a year. If you take your target salary and divide it by 2000, you will get your base hourly rate. This amount will probably seem low to you, that’s because it is.
Because freelancers are not guaranteed full-time work, you have to take into account the time you will have to spend marketing, closing deals, doing paperwork and improving your skills. You can expect to spend 30 to 50 percent of your time on those tasks, therefor you should divide your base hourly rate by 50 to 70 percent to account for this. For example, a base rate of $50 per hour divided by 0.5 is now $100 per hour.
You can check that this amount is inline with market rates by checking what agencies who would hire you are charging their clients for your type of work. Your hourly rate should be in line with what they charge.
The lifestyle design method
A more interesting way to calculate your hourly rate is to calculate the cost of your ideal lifestyle, both in term of expenses and how many hours you’re willing to work on a weekly basis.
I was first introduced this concept by Tim Ferriss in his book The 4-Hour Workweek where he describes the concept of lifestyle design. I will quickly summarize how it works here, but for more details you should read his blog post on the subject.
The first step is to make a detailed list of everything you want and how much it costs on a yearly basis. House, car, travels, etc. Make sure to also account for savings and income tax. This is now your target salary.
The next step is to decide how many hours a week you want to work. You should be realistic based on your ideal lifestyle otherwise it might be difficult to make the numbers work. Take this number and multiply it by 50.
The next steps are the same as the survival method. Take your target salary and divide it by the total hours from the previous step to get your base hourly rate.
To account for time spent on non-billable hours, divide your base hourly rate by 50 to 70 percent. For example, if your base rate is $150 an hour, divided by 0.7 that’s $215 an hour.
This method requires that you’re realistic with your ideal lifestyle, the number hours you want to work as well as your skill level and industry. On the plus side, a lot of things cost a lot less than you’d think.
You should aim to increase your rates
If you’re struggling to close enough deals and land clients at your chosen hourly rate, you should strive to improve your skills and the value you deliver rather than lowering your rate.
It’s easier to manage a handful of clients at a premium rate than hundreds of clients at a bargain rate. Having fewer clients also means you will spend more time working billable hours and less time working on administrative tasks.
It takes the same amount of time to create an invoice for $100 and $10,000. You should always aim for the latter.