HOW TO PRICE YOURSELF AS A FREELANCER

bSolo.com

Field Guide No. 5

STRATEGIES FOR SETTING COMPETITIVE AND PROFITABLE RATES

2How to Price Yourself as a Freelancer

Publisher: bSoloEditor: Grace XieAuthors: bSoloDesigner: Meredith Lambert

This document is intended for informational purposes only and does not constitute, nor should it be relied upon, as business, legal, or tax advice, or as an exhaustive guide to freelancing or starting your own business. bSolo does not provide tax, legal, investment or accounting advice. You should consult your own legal, tax, financial, and business professionals before starting any new freelance or business venture, and should not act upon any such information without first seeking qualified professional assistance relative to your specific situation and circumstances.

The information presented herein is provided “as is” without representation or warranty of any kind -- as to suitability, reliability, applicability, merchantability, fitness, noninfringement, result, outcome or any other matter. bSolo does not represent or warrant that this information is or will be always up-to-date, complete, or accurate. Any representation or warranty that might be otherwise implied is expressly disclaimed.

You agree that bSolo is not liable to you or others, in any way or for any damages of any kind or under any theory, arising from the information presented herein, or your access to or use of or reliance on the same, including but not limited to liability or damages under contract or tort theories or any damages whatsoever, regardless of prior notice to us.

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© 2019 bSolo. All rights reserved

3How to Price Yourself as a Freelancer

This eBook was written to help freelancers set the right price for their services. Content includes figuring out the cost of doing business, pricing strategies, and how to avoid lowballing yourself. The information is a broad overview and is meant to help you get started on thinking of your own pricing strategy. Each freelancer’s pricing may vary.

We always love hearing from freelancers, but bSolo does not provide tax advice. Please consult a tax professional for tax help. For other comments, questions, or if you want to share tactics that have worked for you, drop us a line. We’re on Twitter at @b_Solo, and building smart support for the self-employed at bSolo.com.

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Table of Contents

Introduction 5

Part I: What’s your break-even? 6Supplies, tools and everyday equipment 6Rent 6Outsourcing 6Taxes 7Benefits 7Personal Expenses 8Your emergency fund 8

Part II: Creating your competitive pricing strategy 9How much will you work per month? 9How many clients will you need? 9How to charge your clients: hourly or by the project? 10Tieredpricing:adifferentapproach 10Comparing your product’s value to the market 11Using a third-party platform 11

Part III: How to avoid lowballing yourself 12How lowballing can hurt your freelance business 12How lowballing can hurt other freelancers 12Howtorespondtolowballoffers 13

5How to Price Yourself as a Freelancer

Introduction

If you’ve been working as a W2 employee, you may be used to a fixed income set by your employer. Costs that may seem hidden because they were factored into your pay or paid by your employer include taxes, retirement, insurance, and paid leave. When you become a full-time freelancer, you’ll be faced with those costs. You’ll also be responsible for other business costs, like outsourcing, rent, materials, etc. The good news is, you’re also in charge of how much you make.

Many new freelancers either don’t know what to charge or are afraid they may be charging too much and end up lowballing themselves. Some forget to factor in the costs mentioned above. How you decide to charge for your services can either optimize or hurt your pay. For example, depending on your type of business, it may be better to charge hourly, by project, or break your services into different levels to offer more value to your client. You’ll also want to know if what you’re charging is competitive within your industry.

We’ll cover the topics above, including using a third-party platform to sell your products or services if it applies to you. Some freelancers also knowingly accept lowball offers, not realizing that it may hurt them in the long run. It’s difficult to turn down work, but we’ll go over how to do it gracefully and professionally.

You’ll need to do a few simple calculations for your personal situation to figure out your budget and hourly or project rate but planning ahead will help you immensely when it’s paycheck time. So, grab a notebook, a pen, a calculator, and let’s get down to business.

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Part I: What’s your break-even?

Supplies, tools and everyday equipmentAs a freelancer, you will most likely need your own supplies and equipment (ie: computer) either for everyday or occasional use to produce work for your clients. Even if you already have the equipment, you’ll want to factor in the costs with a plan to replace your equipment every two to three years. If you expect the need to consistently travel for your client, you can factor that in, too.

Rent Some jobs, such as photographers, require a studio for work. Maybe your work doesn’t require as much real estate, but you may want to get out of the house a bit and roam coffee shops or you may find it productive to use a co-working space every now and then. Roughly estimate how much this may cost you per month.

OutsourcingThis might sound counterintuitive, but sometimes delegating tasks, especially busy work, may help you save time and money. You could be busy making real money and paying an assistant, or a professional, to take care of things for you. Services you may find helpful to hire someone instead of doing it yourself may be: marketing, design, branding, website hosting, payment collection, writing, editing, taxes, or contract law representation.

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Taxes An important cost to think about when freelancing are taxes. As a W2 employee, taxes get deducted from each paycheck. As a freelancer, you’re responsible for your quarterly estimated taxes on top of your annual taxes. Generally, you’ll have to file if you expect to owe tax of $1,000 or more1 or if your net earnings from self-employment were $400 or more. If your net earnings from self-employment were less than $400, you still have to file an income tax return if you meet any other filing requirement listed in the Form 1040 instructions2.

Using the worksheet in IRS Form 1040-ES can help you figure out your quarterly estimated taxes. You can also use a tax calculator, like this one from TurboTax. If this is your first year filing quarterly estimated taxes, you may want to consider if it makes sense to use the safe-harbor payment. The safe-harbor payment helps people avoid penalties by providing an estimated tax payment amount based on information from the previous year. If you expect your income this year to be less than last year’s, you can pay 90 percent of previous year’s taxes if you don’t want to pay more. If you expect your income to be more than last year’s, try to pay 100 percent of your current year income tax liability3 . Add up the total of your estimated quarterly taxes and annual taxes and divide by 12 to get an idea of how much your taxes may cost you per month.

Tax requirements also vary by state and individual. It may be best to consult a tax professional to help you get a better idea of how much you may owe.

BenefitsIt’s a given that you’ll charge clients for your time, but what about benefits, like health care, retirement, or paid leave? Your previous employer incurred a significant cost by helping you with those items. Since you’re the employer now, you’ll have to factor them into your prices. You may want to speak

1. https://www.irs.gov/businesses/small-businesses-self-employed/estimated-taxes

2. https://www.irs.gov/businesses/small-businesses-self-employed/self-employment-tax-social-security-and-medicare-taxes

3. https://turbotax.intuit.com/tax-tips/small-business-taxes/estimated-taxes-how-to-determine-what-to-pay-and-when/L3OPIbJNw?priorityCode=5707200000&cid=all_bsolo-ebook_estimatedtaxes_aff_5707200000

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with a financial advisor to figure out how much you should be saving for retirement. If you plan to take a vacation or two this year, figure out how much the total will cost you, then divide by 12 to find how much you should be saving per month for your vacation.

Personal Expenses To realistically get an idea of how much you may have to make as a freelancer, write down every single expense it will cost you to live, including: rent, bills, internet and phone services, groceries, miscellaneous spending, etc. You can also use last year’s expenses to estimate this year’s expenses. Add this to the rest of the expenses you have figured out from above to find out what your target monthly income should be. Add an additional 15-20% of the amount to your target for a little cushion room.

Your emergency fundSince your income will be variable, you’ll have “feast” months but also “famine” months. You’ll want to make sure you have what is commonly called, an “emergency fund”, to get you through those lean times. A good rule of thumb is to have enough after each pay period to cover a month’s worth of living expenses, but each person has their own amount that they’re comfortable with. Consult a financial professional for your individual situation.

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Part II: Creating your competitive pricing strategy

How much will you work per month? Now that you have an idea of how much you may need per month, the next step is to figure out how many hours you’ll work per month. A standard full-time 40-hours a week comes out to 160 hours per month but understand that you won’t get paid for every single hour you work (ie: driving to and from client meetings). A good rule of thumb is to assume you’ll get paid for 70 percent of the amount of time you put in each month (112 hours, in this case). We’ll call this “actual time paid”. To get your hourly rate, divide your actual time paid by your total monthly expenses. For example, if you expect your total monthly expenses to be $8,000 and your actual time paid is 112 hours, your hourly rate would be approximately $70.

How many clients will you need? To find the number of clients you’ll need, figure out how many hours it will take you to service one client each month. We’ll call this “monthly client allocation”. Each client can have different needs, so your numbers may change once you have specific information. For our example, we’ll say that each client roughly needs about 25 hours per month.

Next, divide your actual time paid by your monthly client allocation. This will give you the number of clients you’ll need each month to reach your total monthly expenses (and ultimately live the freelance lifestyle you desire).

Here’s how the example from above looks:

• Total monthly expenses: $8,000• Hourly rate: $70 • Actual time paid: 112 hours per month• Monthly client allocation: 25 hours • Number of clients needed: 112/25 = roughly 5 clients per month

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How to charge your clients: hourly or by the project? Depending on the type of business you operate, this can help you determine whether to charge your clients hourly or by the project. Generally, you’ll want to charge hourly if your services are ongoing. You can consider offering additional perks for repeat business. If clients are committing to a guaranteed number of hours per month, you may want to consider giving them a deal for repeat business. If you expect to provide a one-time and done type of deal, such as a painting or knitting a sweater, it may make more sense to charge a flat rate per project, especially if your customers are making one-time purchases.

If you decide to charge per project, estimate how many hours each project will roughly take and divide that number by your expenses to get a similar idea of how much you would be charging per hour. Or, if you already know your hourly rate, ie: $70 from the example above, and you have a 10-hour project, you’ll know that you can charge $700 for the project.

Tieredpricing:adifferentapproachAn alternative pricing method is splitting your pricing into tiers, or levels. You can break them up into different categories such as offering a basic, standard, or premium option. This approach may make clients feel like they’re getting more value. If you work as a graphic designer, for example, you could offer three options for rebranding projects. With the basic option, you create a new logo. The standard option would offer a new brand identity, including alternative logos and a business card. The premium level would include all of the other deliverables with a website redesign, as well.

In this model, you give potential clients more options while converting additional leads to sales. If your client only has your portfolio and your hourly rate to go off of, this may make it difficult for them to gauge value and how that stacks up against your competition.

If you can’t offer different levels of service, you can package products together for increased value. A freelance dog walker could offer a package of five, ten or twenty dog walks, with five dog walks costing $100, ten dog walks costing $175 and twenty dog walks costing $450. The bigger the commitment the client makes, the more value they receive from their investment.

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A study cited by Bidsketch revealed that by taking this approach, you encourage people to choose a higher level of service. In this scenario, the majority of people choose the middle option, with a perception buffer from the higher and lower options helping to guide purchasing decisions. Some will always choose the highest price point, bringing in extra revenue; to increase revenue, a freelancer should shift their highest price point to the standard (or middle) payment and offer an even higher option with greater value for the client.

There are tangible benefits of tiered pricing if you’re willing to implement a new way of charging clients. Rather than customize each proposal for clients, make a template in advance that you can tailor each time an opportunity arises.

Comparing your product’s value to the market Research pricing in your industry to find out what other freelancers are charging for similar services. While it may vary depending on the person and their experience, talking to a variety of people in your field to see how much they charge will give you a better idea of what a client may find to be a good or bad value. It will also give you a good excuse to network and make connections.

No numbers are carved in stone. You can always offer lower introductory specials to build a consumer base, then revise your rates as your business takes off. Always remember, this is your business. Choose a price that appropriately compensates you for both your talents and offerings.

Using a third-party platformIf you’re selling your product or service via a third-party platform — like Etsy, Upwork or Society6 — read the contract and ask yourself these five questions:

1. Does this third-party service have posting fees?2. Do they get commissions?3. Do they cap your rates?4. Do they require minimum prices?5. Do you have to pay an annual membership fee?

Remember: If you’re using a third-party platform, it’s important to incorporate any and all associated fees and costs into your monthly budget planning. Doing so will help you understand what you should charge in order to get the gross income you’re seeking.

12How to Price Yourself as a Freelancer

How lowballing can hurt your freelance businessNow that you’re without a regular paycheck, you may feel the need to make up for it by taking whatever comes your way, especially at first or during slow months. This is where your emergency fund can come into play: to give yourself the luxury of picking quality over quantity. Learning how to negotiate for the rate you deserve will also set you up for future success.

A freelance writer, Zina Kumok, made the mistake of accepting projects at half her desired rate during a slow season. This provided Kumok with a lot of work, but she was left with very little time to find new clients or pitch for higher paying assignments.

“I started thinking about the successful freelancers I knew and what made them different,” she explains. “I realized that charging too low for so many articles was really affecting my average rate.” So Kumok decided to raise her required payments and look for new, higher paying clients. “It was a huge gamble, but so far — four months later — it’s worked out great!”

How lowballing can hurt other freelancersWith so many freelancer platforms and the option to bid for work, it can be difficult to get competitive pay as a freelancer. Whether you’re a photographer, virtual assistant, programmer or accountant, you’ve likely seen someone in your field accept a less-than-desirable freelance payment rate. Unfortunately, this mindset can hurt other soloists. After all, a single freelancer who accepts a low rate can set unrealistic expectations with clients.

It’s important to remember that in order for a client to complete the work you are offering in-house, they would likely have to offer additional benefits and perks to a full-time employee. In this way, they may already be saving money by outsourcing a project to you in the first place.

Ideally, the freelance community should strive to band together to ensure getting a livable income. Keep in mind that rates need to be at a certain level to offset the hours devoted to pitching, finding new clients and interviewing—and don’t forget about insurance plans, retirement savings and (our favorite) quarterly taxes.

Part III: How to avoid lowballing yourself

13How to Price Yourself as a Freelancer

HowtorespondtolowballoffersTurning down work will definitely be hard, but it’s okay to decline low offers. With that said, there’s an art to handling these often-difficult conversations in a professional, diplomatic way.

First, thank them for their interest and time. Mention your experience, talent and rates, even if this has already been discussed. Explain why your rates are what they are. Express your interest in working with them if they can raise their rate in the future.

Here’s an example of what to say to an interested client that wants a lower rate:

“Thank you so much for your interest in my work. You seem like a wonderful group to work for, and I know I can provide quality work that will make your business stand out from the competition. I have attached my resume and portfolio, so you can see my expertise and experience and understand why my rates are what they are. I would love to work with you in the future if your budget changes.”

When business is slow, it might be hard to let go of a low-paying client. But it’s important to understand that these clients will often expect more for less and be difficult to please. Your time will be better spent looking for new clients who understand your true value and can afford your rates. When you decline low-paying freelance work, you’re not only helping your business, you’re raising the bar for the freelance workforce.

As you continue your freelancing career, you’ll get a better idea of what to charge for your services. As you get more experience, you may find that you’ll be able to start charging more. It may be a good idea to review your rate every year or two to stay up-to-date with the industry and your experience.

The main idea behind this book is to give you a general starting point on figuring out a reasonable and competitive rate to support your business and lifestyle. Simply charging per hour what you used to get paid as a W2 employee could be a huge setback. Don’t feel bad if your rate seems substantially more expensive in comparison. After all, you will be responsible for all of the hidden costs, ie: taxes, insurance, retirement, etc. And remember that you’ll actually be saving the client money by providing your own work space and budgeting for your own benefits.

When you’re the boss, you get to set your prices. So, go ahead, find your rate, and be in control of what goes in your pocket.

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This document is intended for informational purposes only and does not constitute, nor should it be relied upon, as business, legal, or tax advice, or as an exhaustive guide to freelancing or starting your own business. bSolo does not provide tax, legal, investment or accounting advice. You should consult your own legal, tax, financial, and business professionals before starting any new freelance or business venture, and should not act upon any such information without first seeking qualified professional assistance relative to your specific situation and circumstances.

The information presented herein is provided “as is” without representation or warranty of any kind -- as to suitability, reliability, applicability, merchantability, fitness, noninfringement, result, outcome or any other matter. bSolo does not represent or warrant that this information is or will be always up-to-date, complete, or accurate. Any representation or warranty that might be otherwise implied is expressly disclaimed.

You agree that bSolo is not liable to you or others, in any way or for any damages of any kind or under any theory, arising from the information presented herein, or your access to or use of or reliance on the same, including but not limited to liability or damages under contract or tort theories or any damages whatsoever, regardless of prior notice to us.