One of the most common issues I come across when talking to freelancers or entrepreneurs that are new to their industry is how much should they be charging clients. This is a particularly challenging question if you work in a service based industry that operates entirely on the concept of perceived value. With the rise of services such as Fiverr and People Per Hour, people feeling the need to undercut themselves in order to secure work has become a toxic trend in many industries. The challenge in particular for people starting out in a new industry is understanding what is a fair cost for each project.
This is a difficult question to answer simply because, the correct costing for a project depends entirely on the individual and their situation. In this article I have included a few basic ways to break this down and figure out how much you should be charging for your work and how to justify that to a client.
What is my rate?
Firstly, lets start with the most obvious question. What is your time worth? In order to work this out you will need to calculate the following figures:
The first step for any entrepreneur should be to work out their survival budget. This is not the money you want to make but the money you have to make in order to survive each month. You should include things such as rent, food, bills, office hire, staff costs etc. This figure represents your breakeven point. Your goal should be to look at ways to achieve this amount month on month before anything else.
This is how much money do you want to make on top of your survival budget. Consider this your "me money". For most people this is worked out as a percentage. The usual rule of thumb is that a 40% profit margin provides good value for the client and provides a comfortable living for most. This is where your "wiggle room" exists for negotiations. You may choose to reduce your profit margin if you are new to an industry or are trying to secure future work with a client, you may also choose to increase this margin based on experience and achievements. You should never, under any circumstances, negotiate with your survival budget. If a client is not able to pay this then they simply cannot afford your services at this point in time.
Hours of work
Your hours of work will entirely depend on your personal situation and your goals. These are the hours you are happy to work per week. You may be willing to do a higher amount of hours if you are trying to build a new business or slightly less if you have other commitments. You should always price based on your "ideal" amount of working hours per week, if you are required to work more than this to accommodate this should be your choice and not factored into the formula below or you may find that you are undercharging yourself.
Now, take all those figures you have worked out above and apply them to the formula below, remember to multiply your hours of work by 4 before applying to the formula.
(Survival budget + Profit margin) ÷ Hours of work= Hourly rate
This amount is called your "Baseline Rate", you may chose to increase or decrease this based on your clients but you should always consider this amount as the minimum amount you should be paid for projects.
For example; if my survival budget is £1,500 per calendar month, I choose to stick with the average 40% profit margin and due to commitments I am only able to work 20 hours per week, my formula would look something like this
(1500 + 40%) ÷ 20 = £105 ph
This would mean by baseline cost for a project should be £105 per hour. With this I can work out how many hours I think I will take on a project and charge accordingly. Most people when presented with this figure instantly tell me that this seems like a lot to charge as a freelancer, especially when the average hourly wage is £7-£10 per hour. This is all based on mindset. You are not asking your clients for a wage, instead you are charging them as a business. The amount you charge not only needs to support you as an individual but your time needed to secure new work, provide time for meetings or consultation and allow your enough profit to grow.
This also gives me a rough average of how much each project will cost a client. In this case, I would need to charge my client a minimum of £1,680 for an average project.
How many projects should I aim for?
Ok, so you now have your baseline cost. Once we have this figure we can start to work out your aims as a business. Let's start by looking at how many projects you need to secure to survive in an average month. For this you need to work out your average hours per project, this will obviously vary project to project but, bny giving yourself an average time slot for each project you can can work out your sales goals and also assess if a project is a big project (much higher than your average time per project) or a smaller project (much less than your average time per project) and adjust your goals and costs accordingly. Once you have this, the formula to figure out your sales goals is:
(Average hours per project x Hourly rate) ÷ survival budget = minimum projects to survive
If we look at an example using the figures I gave in the example above, assuming that I am a web designer and it takes me on average 16 hours to design a full website, my formula should look like this:
(16 x 105) ÷ 1500 = 1.12
You should always round this figure up to the nearest full number. This means I would need to gain two website design clients per month to hit my sales targets.
What if i can't get that many clients?
If you have worked out your minimum projects to survive and the number seems a little high or your don't feel comfortable doing that many project in one month, you can adjust your baseline costs to accommodate for the clients you think you can gain and facilitate comfortably. To work this out use the formula below:
(survival budget + profit margin) ÷ (Average hours per project x desired amount of clients) = hourly rate
For example, let's say I want to deliver a more exclusive service and only want to take on a single client per month. In this instance the forumla would look something like this:
(1500 + 40%) ÷ (16 x 1) = £131.25
This increases my cost per hour to facilitate the amount of clients I am comfortable working with per month without compromising on income. In this case I may choose to round this number to £130 per hour for the sake of simplicity for my client.
Now you have these figures you have an idea of your worth as a business, what you choose to charge clients is completely up to each individual but, hopefully, you now have a foundation to inform your decisions and costing.