When you’re starting out as a freelancer, there are countless things you need to work out. There’s the technical: whether you’re a limited liability partnership, a sole trader or whatever else your company might be. There’s the practical: whether your new office is actually a shed, a coffee shop or a beach. And there’s the rather important matter of how much you’ll be paid.
It’s not easy to set your rates at first, particularly if you don’t have much experience; IPSE’s research around our #NoFreeWork campaign suggests some companies are exploiting new freelancers by suggesting they work for free.
While you don’t want to overvalue your talents and deter potential clients, you also have to know what you’re worth. Plus, unusually low rates could suggest a substandard service. It’s a dilemma – but there are several techniques to help you work it out. They include:
1. Your earnings as an employee should help determine your day rate
This is perhaps the best starting point. Ben Matthews, a communications consultant and 2015 IPSE Freelancer of the Year runner-up, says a simple way to work out your day rate (not to be confused with a project rate or value rate) is to take whatever you earned as an employee and add a third.
“So, if you earned £30K in your job, adding on a third equals £40K. Then you divide that by the number of days you expect to spend actually working – let’s say 222 – equals just over £180. This would be your day rate.
“Oh, and make sure you always add on VAT to this (20% in the UK) so £180 per day excluding VAT, £216 including VAT. As someone new to freelancing, hourly rates are the only way to go. Time-based pricing gives you a sure and steady freelance rate to work from. As you become more efficient, you can raise your rate for similar hours, and eventually start using daily or weekly rates.”
2. Do your research
You also need to know what similarly experienced freelancers are charging for the same kinds of work. Ask any freelance connections you have, or anybody who knows other freelancers, what the going rate is to make sure you’re competitive. Of course, everybody’s different and the specific experience you have will ultimately determine your rate. But it’s good to scope out the market first!
Joe Griston, Director at Freelancer.com, the world’s largest freelancing marketplace, says that several factors should be taken into account: “Understanding your initial Minimum Acceptable Rate ([(Personal Overheads + Business Overheads) / Hours Worked] + Tax = MAR) is a good point to start. Obviously the amount of work required, the employer’s budget, standard market rates, timescale and the profit you would like to achieve all come into play.
“However, freelancers should not be afraid to set a high price for good quality work. 47% of all awarded jobs on Freelancer.com are awarded to a median bidder or higher, proving employers really do consider many more factors over just the price.”
3. Take time to negotiate your terms
A client isn’t paying you to spend time with them; they’re paying you to solve their problem. Any discussions therefore need to cover the actual value your expertise is adding to their business. If a task may only take you a couple of weeks, but the end result is a huge increase in their web traffic, for example, your services are going to add a whole lot more profit that what they’re paying you. This should be reflected in your rate.
The general consensus is that higher value-added work costs more. But Paul Allington, IPSE Freelancer of the Year 2015, disagrees.
“I typically try to avoid projects where the rate is based on how successful the site/service will be (although it’s always thrilling to see a project be successful!). There are too many unknowns in there, and it’s very rare for just a website to increase business – it requires sales, marketing, picking up the phone, networking, tea. So I try to keep the relationship clean and honest.
“There's no formula, and no project is ever the same. But I know roughly how long something will take me and use that as a basis to charge. There’s always extra that goes in, but that’s all about wanting to do the best for a project.”
Ultimately, it’s up to you to decide which technique works best. Perhaps it’s one of the above, perhaps a combination of more than one. But there lies the beauty of choosing this way of working – the freedom to make your own mind up.
By Mark Williams, IPSE Press & PR Officer