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Last week in our ‘Meet Our Friends Hnry’ article, we touched on a few of the ups and downs of living the freelance life. One of the best things about being self employed is that you are in charge of how much (or how little) you work and one way we can control this is through our pricing.
The way we price our work has a huge impact on our career so it’s important to find that sweet spot which balances cost with time spent, ensuring you’re covering all your expenses with some cream on the top. Price too high and you risk not booking enough work while pricing too low is the fastest way to burnout and debt.
So before you dive head first into your new freelancing or self employment design journey, here’s a few tips to help you not only find your pricing sweet spot but also decide on how to go about charging for your work.
Hourly Pricing versus Fixed Rates
We’re going to jump into some gentle maths below, but before we do so, here’s some quick definitions of these two pricing formats and a few pros and cons to consider of both.
Let’s start with hourly pricing.
The big pro of pricing by the hour is the predictability of income. Because you know how much every hour of your time is worth it’s much easier to hit daily income targets.
Another benefit of hourly pricing is that there is less admin work involved onboarding a client because you’re not spending time trying to scope out the project while negotiating pricing and deliverables. So, hourly pricing is a great option to use when you can’t get a clear scope on a project or if you’re just starting out as a freelancer.
The downfall to hourly pricing is that it penalises efficiency i.e. the more advanced you get in your trade and the faster you complete your project, the less you get paid.
With hourly pricing, as your efficiency improves, your revenue goes down and that doesn’t feel fair at all.
Another issue with hourly pricing is that it does not consider the value add you bring to your client’s business and positions your time as a commodity. This makes it easier for your client to find someone else who is selling their time for cheaper (and harder for you to raise your rates as time goes on).
Now, fixed rate pricing means setting a rate for a set piece of work.
This pricing model is best suited for freelancers who have a few years experience in the self employment game.
The benefits of fixed rate pricing is that you can earn more in less time and it also provides you with income certainty because you know, no matter how much time spent on the job, your income amount won’t change.
This type of pricing model rewards efficiency, so the better you get at your job the more you get paid.
The downfall to the fixed pricing model is that you take on more risk through pricing too low (which lands you with a lower hourly rate), scope creep (when projects are bigger than you expected, again landing you with a lower hourly rate), and spending too much time on proposals.
This article by Hnry breaks down in more detail about each pricing model and how to make it successful for your business.
So now that we have a basic understanding of the main types of pricing, let’s gently move onto working out your minimums with some non-scary maths.
Start here: Work out your minimums
The first thing you need to know in order to set your pricing is to find out what your costs of doing business are. Your minimum pricing is the lowest amount you can charge in order to pay your bills and yourself.
Knowing your minimums is important because it provides you with an anchor number and a clear decision point once you go into price negotiations with your client.
First thing you’ll want to do is work out the minimum amount your business needs to earn in order to pay all its bills and you.
To do this:
1. Work out how much money you want to make per year. A good place to start is by researching how much you would make as an employee doing this same type of work.
2. Add up the monthly costs of running your business and multiply by 12. This gives you an annual C.O.B. (cost of business)
3. Add the amount of money you want to make per year with your annual C.O.B. and this is the minimum amount your business needs to earn for the year.
Now that you know the minimum amount of income your business needs to generate for the year, divide that number down into smaller chunks to find your monthly, weekly, and daily rate – keeping in mind public holidays, annual leave, and any seasonal fluctuations in your workload.
If you plan on charging an hourly rate, work out what your target weekly revenue is from your minimum income above and divide that by the number of hours you plan to work per week.
Target Weekly Revenue / Hours Per Week = Hourly Rate
If you’re looking to find out what your average job cost needs to be in order to hit your minimum income for the year:
1. Take the average number of jobs you have capacity to do per month x 12 for an annual job number.
2. Divide your minimum income by your annual number of jobs and this is the minimum amount you should be charging per job.
Minimum Income / Total Number of Jobs for the Year = Minimum Amount per Job
This equation above does not factor in value based pricing but is a good starting point to ensure you’re covering your costs and time if you plan on offering set packages like a graphic design ‘branding package’.
Factoring Value Based Pricing
Your minimum pricing i.e. the overheads of running your business and paying yourself – in reality, should only be relevant to you, not your clients.
The price you give to your clients should be all about value.
Value comes from three places:
Using your minimum cost as a starting point, you can use one or all three of these factors to help you charge above that number, so that you can gain some of the value you create for your clients – rather than just charging to meet your own costs.
If you can, estimate the revenue gain and/or cost reduction your service has on your client. This will give you a good idea of the value you’re adding to your client’s business, allowing you to position your services which justifies your pricing.
The other factor, emotional contribution, considers the peace of mind a client gets from hiring you which relies less on your work itself and more on how you conduct yourself. These are things like: your ability to deliver on time, how easy you are to communicate with, and your reputation.
Now that you’ve got your minimum amount nailed down and you know how you add value to your clients the next step is justifying your pricing.
The fastest way to get ghosted by a potential client is to respond to their enquiry with a number and little to no explanation of your value proposition. Here’s an example:
“Hi Name, thanks for your email. My rate is $____ for a logo design. I’m fully booked until May so let me know asap if you’d like to secure your booking with me. Regards, ____“
This response leaves the client with so many questions about what value they’ll be receiving for that price.
Instead of just giving a number to your client, provide a price with an explanation that addresses any potential questions they may have and outlines the solution you’re providing with the value you intend to bring your clients.
Here’s an example:
“Hi Name, thanks for your email. My logo design package includes:
– A 1 hr strategy session where we dive deep into your brand messaging and values. This is where I’ll do some initial sketch ups
– 2-3 weeks later you’ll receive 3 draft logo options to choose from
– You’ll receive one round of complimentary revisions
– Final files will be sent through 1 week from receiving your revisions
My turnaround time for logo designs is _____ and I’m currently fully booked until May. The price for this package is $_____. If you’d like to secure your booking please let me know and I can pop through a deposit invoice to secure your project in my diary. Regards, _______”
When you are very clear about what value you’re offering and the deliberate steps you take to get there for your clients is when you can reliably start charging higher rates.
We hope this article was helpful in building your pricing foundations and if you’re interested in more tips for growing your design business, make sure to register here for our FREE webinar ‘How to Thrive as a Freelancer’ which will be running on the 30th Mar from 12:00-1:00pm
In this webinar presented by Hnry CEO, James Fuller, we’ll be covering all the freelancing gold topics – from how to find consistent work to getting paid on time – so it’s not to miss, especially if you’re just starting out on your freelancing journey.