Pricing for profit

Introduction

Freelancers determine fees by considering their own expertise, the market for their services, and their expenses. By now you will already have established what you need to live on comfortably and by looking at your fixed overhead expenses you'll have a starting figure to work with. At the minimum, you'll need to earn this amount just to get off the ground, cover your bills, and break even. You now need to establish what return you would like to see from your business longer term. Setting your prices is probably the single most important and difficult decision that you will make for your business. To succeed you must "Price for Profit".

Agency contracts

If most of your work comes through an agency you will probably have relatively little scope for choosing your prices. However, if your skills are in short supply and high demand, the agency will need you as much as you need the contract - and you should be able to get a good price for your time. Research agencies and jobboards to see what the "going rate" is for your skills.

Other contracts

If some of your contracts are directly with the user - i.e. there is no agency involved - you are really no different from any other small business, and pricing is critical to your success.

Successful businesses

Most successful small businesses realise that, as niche players, what they should offer their customers is a high quality product with unparalleled standards of service at a price that is fair.

They understand that they should not, and ultimately cannot, compete on price, and certainly not on price alone. They also realise that they cannot afford to project themselves as being "cheap", since that has all the associated connotations of also being "nasty". Instead they must emphasise and market their quality, service and (possibly long-term) value for money. Most freelancers will set a basic rate that acts as a starting point from which any negotiations are made.

You may consider negotiating that rate down if the client has a limited budget but with the promise of ongoing work, or if client deadline demands, you may need to charge a higher rate to compensation for evening overtime. We would recommend that you set a "pricing table" (that you keep private) as it will enable you to be consistent when quoting the easier jobs from the more complex, to the 'rush' rate.

Your lowest rate may be for smaller companies that have restricted budget, but the promise of ongoing work makes it worth your while. Set your lowest rate as one that still remains profitable and reflects the value of your services - you then have a lower cut off point at which you turn away projects.

Setting your price

Some factors to consider:

  • When setting your basic rate, how does your service compares to competitors? (Carry out some research, talk to competitors - some may be willing to share information to a newcomer.)
  • How price sensitive are your customers?
  • What does price convey to your customers?
  • What position does your service has in the market? (How much experience do you have? Do costs vary geographically?)
  • Other factors may impact that basic rate, such as seasonal demand, the requirements of each project (such as a project requiring technical expertise or specialist knowledge, in which case a higher-than-average fee is appropriate for bringing those skills to the work).
  • A job requiring a rush schedule by the client also commands a higher fee.

Billable hours

The general consensus is that you will only be able to bill for 60% of the week as the rest of the time will be admin, sales or time spent building your business. You will therefore need to take this into consideration when setting your basic hourly rate.

Rush charges

It is a good idea to establish what rate you will charge 'rushed' jobs out at. Occasionally, a client presents you with a project that cannot be completed within the time they specify unless you agree to work additional hours during nights, weekends, or holidays. A rush fee may be negotiated here to cover the overtime involved. You can either add a percentage to the hourly rate to cover working those additional hours or negotiate a representative allowance on top of a flat fee to cover only the additional hours worked.

Client Amends

Clients will invariably ask for additional work or deviate from the brief at some point during the project. Bear in mind that it is never a good idea to set a precedent whereby you agree to make changes without charging to keep the client happy. It teaches the client that they can ask for many more "quick changes" and it takes away from your bottom line as at some point those amends will mount into hours of time that you can't bill. If during review conversations or meetings your client requests extra work or changes, agree at that time how long it will take you and what the subsequent additional charge will be. Then write to your client to confirm this. A "contact report" which briefly outlines what was agreed, by whom and by when is a good way to keep tabs on these extra bits of work - it also makes it easier to tally up these sub totals when you come to invoice. At the very least keep hold of any emails where your client requests extra work. (Contact reports are also good if you need the client to undertake any activity or to provide you with additional material which is crucial to your ability to complete the project. Again sending this to the client as confirmation acts as a reminder on action that has been agreed and gives you documented notes to back you up should you need it in the case of a later dispute).

There are many "formulas" on the internet for working out how to bill clients, always ensure you build in your profit margin however. When negotiating project costs with clients build in adequate time for project management and ensure the client is aware that changes are charged in addition - you may even add in 10% contingency at the bottom of every proposal. Make it clear this is only charged to cover some client changes - if that time is used. It can soften the blow at invoice time if the client already had that figure in mind as having been approved.

Every freelancer must determine a reasonable profit margin; generally speaking, this can range from 15%-40%, with 20% being considered fair in most markets.

                             

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