What's it Worth?

One of the things freelancers just starting out commonly ask about is pricing. How do you set a fair price?

One of the few shows I watch fairly frequently (I don’t have cable – I use Hulu.com for all my Tv needs) is House. In a recent episode (5 to 9 – though it expires soon) Dr. Cuddy renegotiated the hospitals terms with a leading insurance company. And the main question in the episode boils down to “What’s it worth?” What is your clients’ business worth to you, and what are your services worth to them?

On House, Dr. Gregory House offered Dr. Cuddy (his boss) this word of advice when she doubted she was in the right to demand better payment for the hospital – he told her to crunch the numbers.

In order to figure out what you should be charging for your services, the first step is to do the math. What must you be making on a monthly basis in order to make ends meet? If you have a partner or someone else who can temporarily help out great – but figure in your share of the bills, so your final number makes sense.

Add together all your miscellaneous bills – your cell phone, rent, food costs, child care – whatever bills you have to pay on a monthly basis. If you’re going to continue working at another job, part-time or full time, you can deduct the amount that you make there from you total. The number you are left with is the amount of money you will NEED to make on a monthly basis, if freelancing is going to be feasible for you.

So: Rent + Cell phone bill + rent or mortgage payment + Food Bill + Cable & Internet + any other bills – stable monthly income = amount needed per month from freelancing.

Now, figure about how many hours a week you’ll be able to dedicate to your freelance business. For me, it’s a few hours a day (ab. 15-20 hours / week). Figure that you’ll spend about 80% of your time marketing and looking for work and about 20% of that time actually working. So, for my 20 hours / week, I’d spend 4 hours working on paying gigs (this percentage will likely change as you become established in your market, but that’s about right for a start-up).

For those who don’t remember how to do that math (it’s been a while since grade school) :

MULTIPLY the number of hours you will work by 20, then divide by 100 for the number of PAID hours you will have.
20 x 20 / 100 = 4 hours.

That is the number of hours in a month that you will (likely) be working on paid work. Now, divide your original number (the amount of money you need to earn per month) by that figure. My eventual goal is to make $500 per month freelancing part-time but my start-up goal is $400 (since I work full-time this is my goal vs. the amount of money I NEED to be making). $400 / 16 =  $25 <— this is what I charge as an hourly rate.

Once you have determined the minimum you need to charge hourly in order to pay your bills, it’s time to see if the market will bear that price. One of the things I discussed last week was conducting market research; in my survey questions, I included one that asks small business owners (my client base) what price they believe is fair. If someone responds that they don’t know, have numbers ready and ask them if they would pay x amount (the amount you came up with above) for those services. If you’re number is a weird one (25.68 or something) feel free to round-up for the survey – who knows? Maybe you’ll find the market will bear much higher than the minimum you need to charge.

If every person you talk to says, yes, they’d pay your asking price, your price is probably too low. If no one will pay it, it’s too high. Ideally, approximately half the clients you talk to should consider it a fair price (note: I made that part up; that’s my own personal belief).

NOTE: There are a lot of factors that go into whether or not you will actually be able to make that amount per month. I’m basing this off of my own experience and the experience of freelancers I know and trust. If you have no experience or very, very, little the 80/20 ratio may be a bit off for you – you may have to do even MORE marketing to land those first few gigs. If you are particularly poor at marketing, it may take longer to achieve these numbers.  By no means is this formula an absolute, and I ALWAYS recommend before you understand freelancing as a career choice that you have enough money set aside to pay all your bills for at least 3-6 months.

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