To begin, you have to establish your hourly baseline.
What is the minimum amount of money you need to charge as your hourly fee? What is the minimum amount of money you need to cover your overheads without making a profit? This, fellow freelancer, is your break-even baseline. Once you establish a baseline and start to understand that earning anything less than this equals a bad, unprofitable business, it will make it a lot easier to determine how much profit you then want to make. In turn, this will ensure financial viability for your ventures, and can help price your projects more competitively in the current market.
Above all else, establishing a baseline is about being honest with yourself. If you are unrealistic about how much to charge a client, you are only fooling yourself and in the long run you’ll probably get hurt doing it.
So to start, calculate your minimum baseline by finding the price point where anything less, will kill your business. This can involve some guess work, but the best way to do it is to estimate how many hours a week you think you can bill, then find how much money you need to survive, and divide that by the number of hours. For example, if you must have $600 a week coming in to pay the rent and you think you can bill around 20 hours a week, then your hourly baseline would be $600/20 = $30p/hr. When calculating your bottom line, remember things like holidays, time when you are sick, weeks when you might not have any work, and so on.
So now you have your bottom line. Your objective of course is not to merely break-even every month, rather you should be aspiring to turn a profit.
Profit is not about over-charging a customer. Profit is about reward because your work or your services create value for your client. Additionally, consider that profit is different to anyone else’s. This could mean your customer service is better than anyone else, you are faster than anyone else, or perhaps the quality of the end-product you produce surpasses that of other competitors.
Profit is simply a percentage on top of your hourly baseline. The profit can be anything, but you have to justify it to yourself in order for it to be realistic. Sure, you could try factoring a 100% profit on top of your hourly baseline, but the freelancer who decides to go down this route is in danger of minimizing long-term profitability.
For example, a freelancer wishing to make 100% profit is likely to establish a high price for their services, but over a given period of time they may receive fewer offers for work as a consequence. The freelancer who factors a more realistic percentage on the other hand, will receive more project offers resulting in more money long-term. Unfortunately there’s no magical figure here and you will need to find the price point that works best for you.
Always account for how unique you are or how unique your services are as a freelancer. You don’t have to be in the top 3% of your field to be unique – one of your positive traits could be your customer support, or the fact that you turnaround projects faster than anyone else. For unique services like this, you can afford to increase your profitability slightly since you are offering something that someone else might not offer.
The final ingredient we need to add to our formula is an accurate calculation of the number of hours needed to complete the project. The key to successful project estimation is to create a requirements document with your client. A requirements document is simply a vehicle for the client to outline what they want, but simultaneously, it is a way for the freelancer to police those requirements and establish rules and regulations. It is in other words a very structured brief of the job.
A requirements document should clearly outline what the client wants and the freelancer should charge accordingly based on what is spelt out in that document. If at any time the client changes a requirement or asks for extra work which is not in the requirements document, then the freelancer has every right to charge a secondary fee for any extra work required. The requirements document will not only help you assess the number of hours needed to complete a project, but it will also be your insurance policy should the client intentionally or unintentionally try to change the original requirements. This is often referred to as scope creep, and it’s something you need to be aware of as a freelancer, as the consequences of scope creep can be traumatic both personally, and financially.
Having a thorough requirements document will allow you to accurately calculate how long a project is going to take you to complete. Knowing what the project fully entails in advance, will then assist you to more accurately predict the amount of time it will take to complete.
So you now have your hourly baseline, your profit margin and the number of hours the job is going to take. The moment of truth… The magic formula!
So to use our example from earlier, let’s say your hourly baseline was $30 p/hr and your profit margin was 50% = $15 p/hr, and you had a project which would take 100 hours. Then the price for the job is going to be: $30 + $15 = $45 x 100 hours = $4,500.
But wait a moment; that’s completely obvious, right? Wrong. There are many freelancers out there, who whether they are writers, designers, programmers or musicians, continually fail to create business rules when it comes to pricing a job correctly.
All too often, and this is especially true for new freelancers, there is a tendency to under-price a project; maybe because they have no idea what they should charge, maybe because they are too concerned with potential competitors and feel that the lowest price is the best price (this is not necessarily true at all and is a common faux pas with new freelancers…), but more-often than not, it’s because they have not assessed their baseline, the profit they need to make, and the number of hours a project will take to complete.
So now you know. Create your own personalized baseline and profit margins and never offer a price for a contract/job that is lower than how much you need to break-even and/or make a profit – it’s a bad and self-abusing habit that freelancers must avoid at all costs. Do these simple things, and the price will always be right!