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Finding that Sweet Spot When You're Setting Your Hourly Rate

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One of the things that seems to most perplex new freelance web workers is setting an appropriate hourly rate. As a starting point, let me tell you how not to do it: do not take your current weekly salary for doing the same work as an employee, divide it by 40, and set that as your hourly rate. Well, not unless starvation appeals to you. As a quick rule of thumb, if you’re moving from full-time employment to freelancing in the same field, take your hourly pay and multiply it by 2.5 or even 3.0 to arrive at a more realistic hourly rate. If your boss pays you $20 an hour, you should be thinking about charging clients $50 or $60 per hour when you go out on your own.

The reason for the multiplier is that you’ll be paying for a lot of things as a freelancer that you can ignore as an employee: more taxes, legal fees, accounting fees, hardware, software, telecommunications…the list goes on and on. While you can cut or lowball some of these expenses,you do need to be realistic about how much money needs to come in the door to make ends meet. If you want to take a systematic approach towards estimating your rate, try the hourly rate calculator from Freelance Switch.

You also need to consider other factors besides your own needs when setting a rate, of course. Chief among these are your clients and your competition.

Clients provide a useful barometer for the reasonableness of your rate scale. If you’re having trouble getting anyone to call you back after you quote them a price, even though they were very interested in your professional qualifications up to that point, it’s quite possible that you’re setting your rates too high. On the other hand, if you have more work lined up then you can possibly fit into a sane work week, it’s probably time to raise your rates.

Those new to web work often want to set the lowest possible rate, so as to attract business. I personally counsel against this, for three reasons. First, if your rate is too low, people will be suspicious that you’re not really professional (would you trust a doctor who offered to perform brain surgery for $12.95?). Second, the clients you get at low, low rates tend to be the biggest nuisances, who demand rework of everything and take forever to pay their bills. Third, it’s a lot easier to offer a discount than it is to raise a price you already quoted. To my mind, it’s far better to quote a fair rate than an artificially low on in the first place.

As for your competition, one way to judge whether your rates are reasonable is to compare them with others doing comparable work. This can be tricky, though. First, it’s sometimes hard to judge what is comparable – is a developer who has been freelancing for three years comparable to you, in your first week of web workerdom? Second, most folks who have been out on the freelance circuit for any length of time are very reluctant to quote actual rates. But if you buy a few beers after dinner at the right conference or trade show, you can usually get some useful information.

Finally, don’t be afraid to admit that you made a mistake. While I would never change the rate for work that’s gone to contract, there’s no reason to feel “locked in” forever to a particular client at a fixed rate. As your career advances and your skills develop, it’s normal and necessary to review and raise your rates, even for existing clients.

16 Responses to “Finding that Sweet Spot When You're Setting Your Hourly Rate”

  1. Wow, I’ve been looking all over for advice on this very topic. I’m still cutting my teeth at freelancing after several months, and your article really put things into perspective. I had been advised by a friend on insisting on a percentage advance for my own security, since I’ve already been ripped off once, but I was worried that I would scare off potential clients by asking for money up front. Both your article and the comments here have been a great help.

  2. Great and useful article!

    Just wanted to comment another thing, a thing about billing. I almost always inform my clients that when a project is confirmed and where going for it, that they will be billed 40-60% in advance. Thats just our way of doing it. And they except it, as long as you keep an honest and professional relationship to your clients.

    This is, a way to guarantee some income on the project in case something goes wrong. Example for us, clients get to slow on delivering, or actually just drops out. Clients that have payed in advance stays more active since they already have payed for project startup. Its also to finance some of the project. For us, expensive equipment rentals. Its better to secure those rental bills getting payed than getting the risk of having to pay it from you own money, and Then something goes wrong.

    Just something I recommend for freelancers.

  3. I think the calculation of rates is especially tricky for new folks. Nice to see another great guide to how to do it. Your point about not setting rates too low in the beginning is a good one. There’s an old saying about that too, you may have heard: “The good aren’t cheap, and the cheap aren’t good.” ;-) Funny, but at the same time, people do have that notion internalized, so if you set absurdly low rates in the beginning, people will consciously or unconsciously wonder if you’re worth hiring at all. Thanks for the article.

  4. It’s not only those extra expenses. You also have to take into account that not every hour you spend working is actual billable work.

    I’ve made a handy Excel (or actually Calc) table for web workers with which you can calculate your hourly rate by changing different variables.

    Think I post a link to the file here — I just have to translate it into English first.

  5. I agree with you about multiplying your rate. I think it is fair, and generally, when you work for a good wage, work gets completed efficiently, because you don’t have to slow your work flow down to make sure you accumulate enough hours to pay your bills.

    I charge $X per hour, and then offer 10-25% off that rate when clients pre-pay for 10 hours. This keeps me working, keeps the bank account happy, and ensures that clients don’t go looking around for a cheaper provider. Not right away, anyway. ;)