This is not an easy question to answer but it is also possible to over analyze and make it a lot harder than it needs to be. I also want to say, before going any further, that I am still working to do this better but what I want to do today is share a little knowledge from my own struggles in trying to do this well so that maybe you don’t have to make the same mistakes. This post is really for those individuals who are trying to start out with a business where you are freelancing or otherwise and are struggling to charge the right price to your customers. You’re afraid that if it’s too much no one will want to hire you and if it’s too little you won’t be able to pay the bills! Well, hopefully I can help you take another step or two in this journey.
I think the best way to approach this is to discuss a few principles that I have found quite helpful when coming up with a price to charge a customer for some services oriented work you are proposing to do for a potential client.
First, don’t under estimate your value. You are doing work for a client because you can do something they can’t. I will often have these discussions in my head where I will end up convincing myself that the skills I bring to the table are not really all that valuable and “anyone could do this” if they put their mind to it. Don’t allow yourself to fall into this kind of trap. There is a reason the customer is looking to have the work done, however easy or “common” it might seem. Therefore, you are valuable so charge a price that reflects your value. I think it’s important to realize that if you charge a price that is unreasonably low, it may cause your potential client to doubt whether you can actually do the work you say.
Second, actually calculating a price is more important than the method you use to calculate it, particularly when you’re just starting off. There are a lot of opinions out there about the “best” way to calculate a price for work you are proposing. Some say that you should have an hourly rate, others say that this doesn’t reflect you’re total value and therefore you should charge on a per project basis. I personally tend to agree with the latter more often than the former mainly because you may never reach your business and personal financial goals if everything is based on the number of hours you put into a project. But, particularly for those just getting started, focus on getting an actual price to your candidate customers and don’t fret over every little detail. As you do this, you will learn and refine how to come up with a price that reflects your value.
Third, know how much you need to make to be profitable. This is often called your “break even rate”. What this means is that if you were to charge less than a certain amount per hour you would not break even. In order to calculate this you need two numbers, (1) the cost you will incur in a month both personally and for your business, (2) the number of hours you work on things that you can charge to a paying client in a month, these are typically called billable hours. Then, you divide the monthly cost by the monthly number of billable hours you plan to work and this is how much you need to charge per hour in order to meet your costs. When calculating your cost, don’t forget things like taxes. When calculating your billable hours don’t forget things like time off, and sick days.
Here is an example of why the break even rate is important. Let’s say that you’ve been asked to build a website and you’re break even rate is $100/hour. And you know that it will take you 80 hours to build the website start to finish. This means that if you charge anything less than $8,000 for the website you will end up loosing money. This is where the rubber meets the road and you have to sell yourself based on the value you bring to the table in order to make a profit.
Fourth, charge more than your break even rate. This is really the obvious next point based on the previous lesson. How much more you charge should be determined on a case by case basis but this is where your intrinsic value to the customer comes into play. Let me just say, that in the beginning you will likely have to take on work for much less than your break even rate, even possible doing some work for free just to get yourself going but once you’ve built a reputation and established your credibility to do the work you do, you should aim to charge more than your break even rate if at all possible and no less than your break even rate.
These are a few lessons that I have learned when wrestling with how to price the work that I do. Don’t under estimate your value, in the beginning don’t fret too much about the intricacies of your pricing model, know your break even rate work to get to a place where you can charge more than your break even rate.