Category Archives: Business

How Much to Charge as a Freelancer: Why Almost Everyone Gets it Wrong

“How much should I charge as a freelance designer/developer/programmer?”

This is one of the most commonly asked questions by freelancers (both newbies and veterans alike.) Well-meaning responses posted on messageboards often include a link to one of several online calculators. The inputs include questions like “how much is your monthly Internet bill?” and “How many vacation days do you take each year?” The final question on the of most popular of these calculators is “How much profit do you want?” What a curious question… For anyone trying to grow a business, there is only one correct answer: As much as possible. These pricing tools are broken at a basic level because they’re asking the wrong questions.

The most valuable class I ever took in college was ECON 101. It fundamentally changed the way I viewed business and has had lasting influence on how I make decisions. One of the lessons that has stuck with me is that the price of something has almost nothing to do with it’s cost. Neither the cost of a beef patty or the hourly wage of the cashier affects what McDonald’s charges for a Big Mac. What matters is the price of the Whopper down the street and what a customer is willing to pay to avoid having to pack his own lunch. Businesses seek to maximize revenue; they will always charge what the market will bear, regardless of the product cost. The price the market is willing to pay is a function of the available alternatives.

Quite simply, your clients don’t care what you pay for Internet access so it has no bearing on what you can charge them. Your overhead does affect how much money you have leftover at the end of the month (profit). It’s important to be mindful of costs, but they don’t belong on a spreadsheet used to figure an hourly rate.

The problem with the question “how much profit do you want?” is that getting the answer wrong means that you’re either undercharging (thus missing out on income) or overcharging (and losing business you could profitably undertake). And, unfortunately, there’s no way to arrive at the correct answer by examining your costs.

Getting to the right answer

Figuring out how much to charge as a freelancer means understanding the price of the client’s alternatives. This tends to be more of an art than a science, thus does not neatly fit into an online calculator—and “price” isn’t always purely dollars. There’a IBM WebSphere partner here in Michigan that bills $750/hr for what is largely Java development. Yet, I can find someone similarly skilled via ODesk.com for less than $40/hr. Additionally, anyone who has been in the business for even a short amount of time knows that talent has very little to do with how much you earn. So, your costs and your skills have nearly no influence on your income as a freelancer. What gives? The two most important factors to consider are: a) the size of your client and b) the probable value of your work.

Size matters

The size of a client affects their buying decisions and what rate they’re willing to pay. Starting a business is a very risky endeavor, thus when talking directly to a small business owner, buyers tend to be very risk-tolerant people. They’re also being persuaded to part with their own, personal money. Most small business owners are willing to tolerate a higher risk of project failure in order to save on costs. For freelancers just starting out, this is why smaller clients are ideal: as someone with an unproven track record, it’s an easier sale if the price is right.

Larger businesses operate very differently. They tend to be more sophisticated buyers who are working with an allocated budget. Their primary concern is ensuring that a project is done correctly and on-time because its a component of a much larger initiative or strategy. The decision makers are often much more risk-averse than small business owners because it’s their reputation on-the-line, not their own pocketbook. Freelancers with a roster of proven successes can frequently charge larger businesses an hourly rate matching those of a well-paid lawyer, yet would struggle to get a fraction of that from a smaller client for very similar work. People who provide social marketing or online lead generation services often see this massive divide in rates.

Quantify your value

We tripled pageviews and increased annual sales by more than $1.2 million dollars.

This is a pretty powerful statement that is listed directly on my company’s website. It was the result of work we did over a few months for a client that dramatically increased the SEO of a SaaS application and streamlined some e-commerce operations. Unlike a typical portfolio piece, I don’t have a screenshot of the client’s website (which we didn’t design anyhow), I instead explicitly quantify the value of our work. Crunching the numbers takes a whole lot of guesswork out of figuring out what a similar client might be willing to pay for similar services. I highly recommend that this process be done after the completion of every project.

While it does get simpler with hard numbers, there’s no magic formula because it depends on the size of the prospective client, the size of the opportunity, and a multitude of other variables. Most importantly though, it’s dependant upon your ability to communicate the value of your services. In other words, your ability to sell yourself is one of the most important factors in determining what you can charge as a freelancer. For the readers who’d rather gouge out an eye with a spoon than consider themselves a “sales person,” this sounds like a raw deal. However, it’s not all that scary once you really understand what “sales” actually entails. Most technical people have the potential to be way better at sales than they realize. I will expand upon this topic in a future article (follow me on Twitter and stay tuned.)

Where to start

Okay. What if you’re a new freelancer and don’t yet have any proven, quantifiable successes? Where do you start? Return to considering the price of the client’s alternatives. Predictably, this would include the rates other freelancers in your industry. But a common mistake is to confuse your alternatives with the client’s alternatives. If a small web design client doesn’t know about oDesk.com (and wouldn’t consider it even if she did), then you don’t have to pay mind to price of your competitors there. US-based workers frequently complain about the prices their Indian counterparts charge via the online marketplaces. However, unless both people are bidding on the same jobs posted on these sites, they are not direct competitors.

Alright, alright… a lot of readers are going to be disappointed if they’ve read to the end I never lay out exactly how to figure out how much to charge as a freelancer. Here is what I’d recommend if you’re starting from zero:

  1. Ask around and get five rates for competitors. Match them as closely to you as possible: age, years of experience, location, size of past clients, portfolio, etc. This is going to require a bit of legwork and feeling like you’re being nosey. Do it anyhow.
  2. Drop the highest and lowest hourly rates, average the three remaining and reduce by 10%. This will put you on the slightly cheaper side of the average.
  3. Continue to charge this rate as until you get too busy. Getting “too busy” can be tough to spot from down in the weeds. It generally manifests itself as feeling overwhelmed, not caring about your work as much as you used to, and increased irritability with clients.
  4. Increase your rates by 10% on existing clients and 20% on new clients. This should slow the stream of work coming in. You want to occasionally hear “you’re too expensive.” If you never hear that, keep raising your rates until you are. If you always hear it, reduce your rates (slightly).
  5. Rinse and repeat until you have enough quantifiable successes that you can use the more sophisticated, “value add” method of determining what your services are worth.

Your mileage will likely vary. Keep a close eye on your market and make sure you’re listening to clients. Good luck to you.

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The most successful change I’ve ever made to my company website.

My blog here is the stock WordPress theme because it suits my purpose. It’s not pretty, but it doesn’t have to be. However, I have put quite a bit more thought into my company website because appearances do matter there. The single most successful change I’ve ever made to the site was investing in professional photography.

Like a lot of small businesses, I had used stock photography for years—guy wearing a tailored suit and plastic smile on the home page, ethnically-diverse group huddled around a conference table on the “contact us” page, etc. My decision to finally breakdown and hire a photographer was borne our of pure frustration. I wanted to feature the Android app that we developed for active duty members of the US Army on our site. I spent two days trying to Photoshop together someone who looked like a solider holding a smartphone. Every attempt looked amateurish. I finally threw my hands up on the air and called an extremely talented photographer friend of mine. Two weeks later, we were in the dungeon-of-a-basement below my office, with a glow stick, my cell phone, and my wife wearing a borrowed pair of BDUs. The shot came out awesome.

Adam, the photographer, spent the day on-site at our office snapping shots of everything: all the staff, our building, interesting looking items on our desks. Planning ahead, I also invited a few clients to come out for a “client appreciation day.” In exchange for their time and their permission to be featured on our website, I provided full-resolution copies of their photos for them to use as they saw fit. This idea has been one of my better ones. Having a cohesive series of professional shots of clients has turned out to be significantly more credible than snippets of testimonials.

Like most investments in creative services, it’s somewhat difficult to quantify the value of this project. Revenue has grown more than 3x since those photos were taken about a year ago. I’m sure it’s not all due to the cute picture of my daughter. However, what I do know is that the online chat feature on our site now gets used more than twice as often by prospective clients. I’m never buying another stock photo again. Well… maybe they could be used to spruce up my blog a bit.

Excited Geek

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Something Every Freelancer Needs to Learn (as Soon as Possible).

There’s a great scene in Netflix’s new “House of Cards” series that illustrates an important lesson for freelancers. Kevin Spacey’s character, a US congressman named Frank Underwood, is meeting with a Warren Buffet-like billionaire. Frank is asking this business tycoon for a large favor and, after a bit of back-and-forth, the billionaire insists that he be owed a favor in return. However, he is not willing to reveal the nature of this reciprocal favor, preferring that Frank simply remain indebted to him:

Frank: And what exactly would you want me to do?

Raymond: Well, that part I don’t know yet. We’ll have to wait and see how things play out.

Frank: I’ve already told you I will not do a blank check.

Raymond: I must say I’m surprised, Frank. You have a reputation for pragmatism.

Frank: And I also have avoided a reputation for indentured servitude.

Raymond: I never make an offer more than twice, Frank. Tell me now if I can count on your cooperation.

Frank: You’re not offering cooperation; you’re demanding tutelage. So let me make you a proposal: I am absolutely willing to work together as equals. I will take your opinions seriously, just as the President does, but I will not bind myself to them in advance. If that doesn’t interest you, fair enough. Good luck finding someone as pragmatic as me [to help you]. You can’t purchase loyalty, Raymond; not the sort I have in mind. If you want to earn my loyalty then you have to offer yours in return.

This is an interesting exchange. Despite how badly Frank wants this favor, from a very powerful man, he is unwilling to kowtow to him. He understands the importance of mutual respect and establishing a balance of power in a business relationship, even if that means risking the relationship itself.

I recall my days as a freelance developer and I see this axiom in action. I think back to how often I pulled all-nighters because the client screwed up or allowed myself to be intimidated when negotiating payment. I was miserable and resentful and yet still always broke. This wasn’t the freedom that I was expecting since I found myself working for multiple unreasonable people, rather than just one unreasonable boss.

I no longer even negotiate on our hourly or weekly rates and I don’t get squeamish asking about budget early in the conversation. I engage each client and prospective client from the perspective of a business-to-business relationship–I’m not their employee. I don’t really know how or why this changed. It could be because I finally settled into my position as a business owner with employees of my own that need to get a paycheck twice a month. Or it might be because I’ve just gotten older and I now have a family to support. But I really wish I had figured this out 10 years ago. I still deal with challenges every day, but disrespectful and deadbeat clients aren’t among them. I choose who I work with now; it feels good and actually allows me to do better work because I care about these people more.

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