How much should I charge for my freelance services?

Today’s question prompted by Melanie Pinola at Lifehacker, answering the question of a reader who’s newly going freelance:

I’ve decided to strike out on my own as a freelancer. I already have some people interested in my work, but I’m not really sure how much to charge. Do I set my rate based on what other people are charging? Or how do I come up with the best price to charge?

Melanie gives a clear explanation of how to calculate your costs as a freelancer (take your desired salary, add overheads, divide by number of hours worked, add profit margin). But this misses all the interesting parts of the pricing conversation. Just a few of the questions not answered by a cost-based approach:

• How much salary should you take? Melanie gives an example of $45,000. Well, I’d want to take as much salary as I can get. Let’s say $2 million. Unfortunately I don’t have the freedom to set whatever number I want, so the method falls down right at the start.
• Similarly, how much profit do I want? Naturally I’d like a 700% markup, but this method won’t help me get one.
• How many hours am I going to work? A new freelancer has no idea, and in any case the answer will depend on the price they set – so this is circular reasoning.

The factor missing from all these calculations is: what will the customer pay? Without knowing that – or having a way to ascertain or influence it – you can’t work out the right price.

You don’t know in advance exactly what a client is willing to pay. But you can get an idea of it by working out the value they will gain from your work. Will your brilliant advertising copy help them sell £2 million more of product? Will your business process optimisation save 30% of staff time, and what does that work out to?

Whatever figure you come to, use this as the benchmark for the price of your project. Let’s say it’s £100,000. The client will usually expect to keep most of this value for themselves, but you could take 20% or 30% of it – £20,000-£30,000 – as a reasonable starting point for a negotiation. This way the client will have little to gain from negotiating hard – even if they get you to cut your price in half, their profit from the project will only go up from £80,000 to £90,000 – only a 12.5% increase.

This structure also gives you a good argument for why they should use you rather than a cheaper competitor – if they are paying you 20% more than the competitor and you get a result that is at least 5% better, they are better off

You’ll notice that this has no relation to an hourly rate. That is exactly as it should be – the value the client gains is not directly related to the time you spend on the work.

The hourly rate does form part of your decision, though. First, because it provides a baseline below which you shouldn’t go. If the work generates £50,000 of benefit (so your price is going to be £10,000) and if it will take you 100 days to complete, this works out to a rate of just £100 a day. It is not worth doing this work and you should walk away from it; or else try to persuade the client to give you a higher share of the value.

Hourly pricing enters into the client’s mind when they consider if they’re getting a fair deal, and what they could hire a competitor for. So you should be ready to defend against these kind of questions. Explain why you’re charging for the project – you may not even know how many days the work will take, so does the client really want to enter into an unknown commitment with an unpredictable price? If the client is worried about day rates, offer them multiple choices – maybe using subcontractors with different skill levels, and putting in different amounts of work – to show that the choice they are making is actually about the value created and not just the time spent.

Offering a range of options also serves other psychological purposes – it gives the client a feeling of control, it lets them “own” the choice they’ve made, and it anchors them on a high value figure. Three choices is usually a good number to offer.

So a step-by-step answer to the question “How much should I charge for freelance services” is:

1. Understand the scope of the project as a whole, and work out how much value the client will get from it.
2. Create three project options priced at approximately 25%, 15% and 5% of this value figure.
3. For each project option, create a different work plan – clearly the client should get a higher quality, more detailed, lower risk or more exclusive service at the higher level. You don’t need to tell them exactly how many days each plan will take, but chances are the 25% option will take longer.
4. Make sure all the project options meet a basic benchmark for the cost of your time – you could use the Lifehacker article linked above as a guideline to calculate this. If you’re picking the right markets, many projects will come in at a multiple of this benchmark – even if you only need to make £50/hour, if the project’s worth £300/hour why charge less?
5. Pitch these options to the client, showing why the higher options will generate more value, and use these as the basis to negotiate. Even if you have to move downwards from your initial figures, you should have the confidence to insist on a scope reduction in return for any price change.

If you use this approach you will make more money and have more spare time than basing your pricing purely on cost.

For more on this subject, order my book which tells you how to use hyperbolic discounting, decoys, free offers and many more techniques to get a higher price for your services while keeping your clients happy.