One of the questions that come to mind as a freelancer is how to price your service. This question is especially important when you are just starting out. The probability is your first jobs will come from personal relationships you have and eventually you branch out to serve people you have never known before.
If you have no experience in your chosen field, the starting out with no charge to build experience is a great idea. Do not be too money hungry too quickly as it could prohibit you from growing.
How to price your freelance service
To charge what your service is worth, there are certain things you need to do
- Define the value you provide to clients
- Figure out who will be the people most likely to appreciate that value
- Determine the costs of providing that value to your target market
- Determine how you will stay profitable
Define the value you provide to clients
The very first thing you need to do is define your skill set and how others might find those skill sets valuable. For instance, if you have web designing skills, how does what you do as a web designer defer from other web designers. What unique skill sets do you bring to the table?
When starting out, you are not sure what these unique values are so you have to start somewhere and tweak it as you go. The important thing is you keep redefining who are as a business person and communicating that to your potential clients.
Business relationships with no clarity are very uncomfortable for both the freelancer and the client. The freelancer seems to be working hard but the client does not really understand what the freelancer is doing and does not feel an obligation to pay. People will happily pay for what they value. The questions comes when you are asking someone to pay for something they do not want. This lack of clarity is the source of most unpaid invoice conflicts.
Figure out your target audience
Once you have verbalized how you provide value, figure out who will be the most likely people to appreciate the value you bring. Basically, this is a trial and error process. You start by serving a wide range of people and narrow it down as you go.
Determine the costs of providing service
There are 3 things you should consider when determining your costs namely:
- The cost of supplies and subscriptions: these are things you will need to buy to complete the project at hand. For instance if you need an app to get the project done, that will be a cost you need to consider.
- Labor costs: This includes the hourly rate/ salary you pay yourself for working on the project and any subcontractors or employees you may hire.
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Overhead: You should apportion a fraction of the cost of your office (whether it be a home office or somewhere else) to every project. To do this you will need to figure out what your total overhead costs is and divide that by the number of hours you plan to work for the year. This is called a predetermined overhead rate. This amount has to be figured out at the beginning of each budget year.
For example:
Your office rent is $6,000 every year and that is your only overhead.At the same time you plan to work 6,000 hours for the year.
Your predetermined overhead rate is $6,000/ 6,000 hours = $1 per hour.
Once this rate is determined, every job you get has to be apportioned one dollar per hour worked
Once you know the direct supplies and subscription costs, the labor costs and the overhead, add these 3 numbers and this will be your total cost of the project.
Determine how you will stay profitable
Obviously, you do not want to charge your clients your costs as that means you will only be breaking even. You want to charge a rate that keeps you profitable over time. The first thing to do here is to first check out what your competitors are charging.
Once you know what the market will bear (competitor pricing) and you know your cost, figure out a premium markup that keeps you profitable but yet competitive. You may need to find ways to lower your costs to stay profitable if your competitor’s charges lower than your costs. If you charge way above your competitors, you have to justify why your clients should pay more working with you.
In summary, the issue of pricing is never an easy one as there are so many factors to take into consideration. Pricing is your way of communicating value to the market and it is a two way stream between you and the market. Staying in tune with what your market wants is the best way to price competitively.