Pricing Your Services: Newbie To Basics
How to price yourself as a freelancer. An issue many beginning freelancers and entrepreneurs deal with. In this article I will help you with a basic approach. We establish the minimum wage you need to cover life’s necessities and add a couple of key insights. The goal is to provide you with a clear method of you to calculate your freelancer prices starting from your personal and professional expenses. Once you’ve set your minimum income goals, you can build different pricing structures on top. Like higher rates for rush jobs, discounts for projects spanning several months,…
Calculating Your Rate
We begin by setting a baseline. A total of all your personal and professional expenses. Also known as your break-even point. Break Even is when Money in = Money Out.
Grab an Excel or Numbers sheet and note down all your expenses on a monthly or yearly basis. What’s your rent? How much do you pay for software and webhosting? It will take a while and you will probably forget a few things – no biggie. You can come back to it and improve it over time.
Let’s build an example. Jimmy is a beginning freelancer. He lives in the big city where he rents an apartment for 500 a month. Utilities are 50 a month. Jimmy has kept track of his monthly trivia expenses like going out for dinners, drinks, groceries etc. On average he spends 400 a month in trivia expenses.
His living costs are thus 940 a month.
Professionally Jimmy uses a laptop he bought for 2000 that he plans on using for at least 2 years. Coming down to 2000 divided by 24 months = 83,33. His software costs 100 a month. His profession related insurances are 50.
His professional expenses are 233,33 a month.
Jimmy’s monthly grand total is 1.173,33 a month.
Unless you’ve studied some kind of accountancy you notice we’ve skipped a step in calculating the grand total.
Jimmy still owes taxes on his personal income!
Let’s assume Jimmy is a European citizen and pays 50% in personal income tax. Meaning that the state takes half of Jimmy’s profits. Which means that we have to double his living costs if we want to be able to cover them.
940 x 2 + 233,33 = 2.113,33.
What does this mean? Well, Jimmy will have to make 2113,33 euros to cover his basic expenses like a laptop, software, rent, food, drinks and dinners. If Jimmy is able to work 4 weeks a month, 5 days a week, 8 hours a day, he will establish a price of 13,2 an hour.
From Living To A Real Wage
The basic necessity is covered. If Jimmy can work every single workday of the year. Each for a full 8 hours, he will cover his basic expenses. Neat, right? Na-uh! How will Jimmy save up money? How will he retire? Buy new equipment? What if he falls ill? Spends a month in the hospital? Wants to take a vacation?
As a freelancer you rarely enjoy the perks that employees do. Perks like paid vacation, an extra month’s wage at the end of the year, an expense account, travel reimbursement, pension saving,… and so on. Our current budget leaves no room for Jimmy to save up money, buy luxuries like expensive gifts for his loved ones or travel!
Adding these expenses is a tad more variable than the previous calculation. How much money a person wants to save or have to spend on extras is a personal matter but it can be calculated never the less.
Recalculating Your Freelance Price
Earlier we established Jimmy’s personal expenses to be 940 a month which we doubled to account for the 50% taxes he has to pay. Let’s add some:
- Savings, 200 a month
- Extra cash for fun, 100 a month
- An extra month’s pay just like employees get, so we’ll multiply by 13 instead of 12 later on.
- A month’s extra income as buffer, in case Jimmy falls ill or finds himself without a job for a while.
Totalling his personal expenses to 940+300 = 1.240 a month. Professional is still at 233,33 a month. Totalling to 2.713,33 a month. But this doesn’t yet account for the 2 extra months of income Jimmy wants to add to cover any uncertainties like falling ill or being unemployed for a while. Freelancers rarely enjoy unemployment benefits! So instead of multiplying our monthly cost by 12, we multiply by 14 and then divide it by 12.
2713,33 x 14 = 37.986,62 a year
/12 = 3.165,55 a month
If Jimmy wants to not only cover his basic living costs but also save up some money for a pension or a rainy day like unexpected unemployment or hospitalisation, he will have to make at least 3165,55 a month. A whopping 1052,22 a month more than previously thought! That is a 33% increase if he wants to enjoy similar benefits to a regular employee.
If we do 3165,55 a month / 4 weeks / 5 workdays / 8 hours a day = 19,78 an hour.
This is of course an oversimplified example. Each case if different. Try to decide for yourself what you want like to do. Do you want to acquire a new camera? Is your software not hundreds but thousands a month? And so on,…
Real Freelancing Prices
It is good to know that in the real world freelancers earn a lot more than 19,78 an hour. An intermediate web developer easily earns over 75 an hour. The biggest reason: a freelancer rarely has 100% occupancy. It is a rough life that brings a lot of uncertainty with it. Periods of no work do happen. It is best to combat this by raising your price in order to cushion the blow. Another big reason is market demand. Western web developers are just really sought after. Programmers in Silicon Valley easily earn over a 100.000 USD a year. Almost triple our example! But their rent and other living expenses are also ridiculously high compared to the rest of the world.
Note: Research your country’s taxes. How much do you pay in income taxes? How much is VAT? Which business expenses can you write off? Are there any benefits? Like electric vehicles being a 120% write-off, actually MAKING you money! It gets fun once you realise you can write your date-dinners and flowers for the significant other off as a business expense. Which means the VAT regular citizens pay gets reimbursed AND you can pay with pre-tax cash, halving an already 21% discounted cost. Meaning you only pay 40% of what regular, non-freelancing people pay!
Though an easy exercise, it is a valuable one down the line that you can go back to every so often. Once you have a clearer view of how much your competition makes, how many days a year you actually work for clients and how your costs and investments pan out,… You will have a good grasp on how much you need to make in order to fulfil all your needs and wants.
Now you have finished this article, it’s time to…