Pricing Your Projects
By Rachel Goldstein
Posted Monday, December 27, 2004
This is the second article that I am writing about setting freelance rates. The reason I am writing another article is because of numerous questions that weren't answered in the previous article. I will first summarize what the last article was about and then I will go on to new details.
Determining how much to charge for your services is often one of the biggest challenges for a new freelancer. If you charge too much you won't get hired and if you charge too little you'll starve. Take the time to read this article and you will figure out what you need to charge to thrive.
If you are a new freelancer, you have probably searched the Internet trying to look for average rates of professionals in your field. Don't even bother. I will let you in on a secret . now that the Internet is here, there aren't any "average" rates because demographics are too widespread. The United States has banned competitors from discussing rates amongst each other based on Antitrust laws. This is why you are having such a hard time finding rate surveys, there aren't any. Instead I will show you how to figure out what your rates should be by using a formula.
Start by figuring out what you want your annual salary to be. To determine your salary, you might want to pay yourself what you earned as an employee or take a look at salary.com to find out what an average salary for your profession is.
For this formula, you will need to figure out what your overhead is. Overhead is an expense that cannot be found billable to a client, it is just a cost incurred by running your business. Please fill out the following form. If you aren't sure what your overhead is, then look back on last year's credit card bills and checking account statements.
MONTHLY OVERHEAD:
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Rent
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Income Taxes (Use 45% of your annual salary)
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Utilities
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Insurance
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Office Supplies
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Marketing
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Postage and Shipping
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Telephone
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Accounting / Legal
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Travel
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Office Furniture
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Dues & Memberships
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Licenses
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Health Plan / Medical Insurance
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Disability Insurance
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Retirement Savings
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Multiply above by 12 to get yearly Overhead | | | |
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NONPRODUCTIVE TIME
There are duties that must be completed for each client that are not productive towards completion of the project. Figure out the actual work hours are spent on the following duties. You will need this total later, so keep the number handy.
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Sales
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Emailing Customer
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Phone Calls
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Meetings
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Administrative duties
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Training
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TOTAL | |
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PROFIT
Now you will need to figure out how much of a profit you wish to make. Profit is the amount that you make over expenses. I recommend 20% in order to make an acceptable profit margin. Profit is necessary for a successful business so make sure to count profit into your formula.
VARIABLES
There are always variables that you will need to take into consideration when figuring out what you will charge. You must take into consideration the following:
1. What does your competition charge?
2. What is your niche?
3. How many years experience do you have under your belt?
4. What skills do you have?
5. What clients do you want to attract?
6. Are you working online or local?
FORMULA 1
Follow these steps to figure out what your hourly rate should be.
1. Subtract nonproductive time from Annual Hours to get Billable Hours.
2. Add Salary and Overhead Together
3. Multiply Total By Profit Margin (10% - 20%)
4. Add Total (1) and Total (2) Together
5. Divide Total (3) by Billable Hours (the amount from #1)
For example, if the following is true:
1. Salary = $30,000
2. Annual Hours = 2,080
3. NonProductive Time = 500 hours
4. Profit Margin = 20%
5. Overhead = $15,000
Then this is how you figure out the hourly rate:
1. 2,080 - 500 = 1,580
2. $30,000 + $15,000 = $45,000
3. $45,000 X 20% = $9,000
4. $45,000 + $9,000 = $54,000
5. $54,000 / 1,580 = $34 / hour
FORMULA 2
This formula is the easiest of them all. However, I don't recommend this formula unless you are a very established professional. This isn't the way to start out your freelance business, only very skilled freelancers can get away with this.
Ask yourself the following questions:
1. How much money do you want to make on this project?
2. How many hours do you want to work?
Now all you need to is Divide these two numbers. Its that simple, you now have your hourly rate.
FORMULA 3
Use the following formula if you are interested on how to set the rates for your entire business.
Add up all costs to run business on an annual basis (including profits) by annual hours (2,080). This will give to you your pay rate.
1. Salaries + Overhead = Annual Costs
2. Divide Annual Costs by Annual Hours
So For example, if the following is true:
1. Salaries = $60,000
2. Overhead = $50,000
3. Annual Hours = 2,080
Then this is how you figure out the hourly rate:
200,000 / 2,080 = $52
FORMULA 4 - PRICING BY ORDER FORM
This method is the order form method. The reason I call it this is because you use an order form to add up all ingredients of the project. This would be how you figure out how much to charge for your work. I don't recommend using this method unless you are only designing simple sites that all have the same basic ingredients. Otherwise, there are too many variables to use an order form. Here is an example of an order form:
====== Purchase Order #=====
Customer #
Company Name
Domain Name
Your Name
Address
State
Zip Code
Phone Number
Fax Number
Email Address
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# of Pages
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# of Photographs
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# of Illustrations
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# Custom-made Illustrations
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# Custom-made Animation
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# Forms
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# Pages of Flash
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# of Scripts (What Language)
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Other
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TOTAL | |
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FORMULA 5 - ESTIMATION BY PROJECT
Most clients are going to want to hear how much the entire project is going to cost. Even if you have an hourly rate already, probably this isn't going to be acceptable to your future clients. It takes practice but you are going to need to learn how to break projects into individual tasks in order to estimate how long the project is going to take. Make sure to find out what responsibilities the client expects you to take care of. If the client expects you to do everything, then take this into account. If this is the case break up the project into the following phases in your mind:
================================ TASKS # Hours
================================ Administrative
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Purchase Server / Domain
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Planning / Flow Charting
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Storyboarding / Mockups
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Optimize Images
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HTML / Programming
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Create Prototype
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Testing
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Make Site Live
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| |TOTAL | |
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Now Visualize how many hours you feel each stage of your project is going to take. Add up all of these hours.
Multiply your hourly rate (figured out from one of the above formulas) by the total estimated number of hours for project (from above). This amount would be how much you bid on the project.
So For example, if the following is true:
1. Hourly Rate = $30
2. Total Estimated Project Hours = 50
Then this is how you figure out how much to bid on a project:
$30 x 50 = $1,500
Make sure that your client is very clear on what the scope of the project is. You should write a clear contract to make sure that the outline of the project is written down in clear terms, otherwise the client may take advantage of you.
The bottom line to your freelance business is that you want to make a good living. If your hourly rate seems too low then raise your rate till you feel comfortable with it. If several clients are way too eager to hire you as a freelancer, rethinking your hourly rate might be a good idea. On the other hand, if clients are very interested in you at first and then stop communicating with you after they hear what your hourly rate is, then you need to lower your rates. In other words, feel customers out to see whether your fees are correct or not.
If you have determined that your fees are too high then you might need to lower your overhead in order to lower your fees. Try cutting some of your unnecessary expenses in order to make ends meet. When you make the change over to freelancing, sometimes there is a little suffering at first. Don't worry; it doesn't usually last long if you know how to save when times are good.
Good Luck.
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