At the beginning of a career, it is common to have questions about what to consider when pricing your work.
Is it better to price by the hour? By project? Which is the best way?
In this article, we explain which are the most common ways to price projects and what are the pros and cons of each.
Initial research and settings
Before understanding the existing types of pricing for freelancers, we need to establish the minimum amount we should charge for all bills to be paid.
So it is important to list all the expenses and costs that you have every month. This includes fixed costs, variable costs, and expenses related to the work itself. Check out some examples:
- Rent;
- Electricity, water, gas;
- Grocery, restaurants;
- Internet;
- Paid software (Figma, Photoshop, Office, etc.);
- Red tape costs (accountant, taxes, etc.).
Mapping out all the expenses you have for the month is important to find out the minimum amount of income you need to secure each month.
Identifying and listing these amounts may seem simple, but in reality, it is a job that requires a lot of attention so that no expense is left out. Simply list all the bills and expenses you have in a month, no matter how small.
Don’t forget that there are differences between employee and freelancer regimes with regard to remuneration. Usually being hired as an employee comes with a benefits package that includes health insurance, life insurance, dental plan, paid vacation days, and a Christmas bonus, among others, depending on the company.
So it is important that you also consider these costs in your endeavor as a freelancer, especially when it comes to health insurance and life insurance. These are things that may go unnoticed on a daily basis, but that make a lot of difference in terms of comfort and safety.
Be in the know of how much the market pays for your type of work
Once you have listed your expenses, the next step is to do some market research to be up to date on what is being paid for your type of work.
To this end, networking can be of great help. Talk to friends, and colleagues, or even meet new people to learn how much they charge for services similar to yours.
At the same time, you can conduct research on sites such as Glassdoor, where you can get an average salary equivalent to your position, by region.
This information will be important for you to have a basis to start calculating the pricing of your work.
Setting the MAR
MAR is an acronym for Minimum Acceptable Rate.
This value represents the minimum income that you are comfortable with and that covers your monthly expenses and provides an interesting amount of salary.
The MAR should not be an amount that only covers your expenses. Otherwise, you would be working just to survive, when in fact it’s important to have enough to ensure a certain level of quality of life.
In order to reach your ideal MAR value, consider the following information:
- The total amount of your expenses;
- Desired amount as a salary.
So basically, the calculation is done as follows:
- The total amount of monthly expenses + Desired amount as monthly salary = monthly MAR
Example:
After your research and settings, if you identify that the total amount of your monthly expenses is US$5,000.00; and your desired salary amount would be 30% on top of your expenses, you have:
US$5.000 x 1,3 = 6.500
In this example, the monthly MAR would be US$6,500.00. If you want to have the annual value, just multiply by 12 months:
US$ 6.500 x 12 = 78.000
The interpretation of this value is that US$78.000,00 is the minimum annual income to cover your expenses and expected quality of life.
In the example, we set the salary value as a percentage on top of the expenses. But actually, you don’t need to calculate it this way, you can set an exact number according to your goals.
What are the types of pricing for freelancers?
With the MAR in hand, it becomes easier to understand the different types of pricing for freelancers you can apply to your clients.
Basically, there are two types of pricing:
- By time (hour, day, week);
- By project.
Pricing by time
Pricing by time is perhaps the most common for those starting out in the freelancing world.
The idea is to be able to price your work time so that you are able to let the client know about the costs for you to take part or work on a specific project.
With this in mind, it’s possible to calculate prices per hour, day, and even per week.
To do this, it’s important to be aware of the number of hours you are willing to work per month, or throughout the year, taking into account vacations and holidays, and keeping in mind the value of your MAR.
So here is one more calculation:
Setting the number of hours you are available
A standard year has 365 days. Of this total number of days, you need to disregard:
- Weekends;
- Holidays;
- Emergency days;
- Vacations.
For example, let’s consider the following figures:
- Days in the year: 365;
- Weekends: 104 (Saturday and Sunday);
- Holidays: 10 (national holidays only);
- Emergency days: 5 (illness, personal issues, unforeseen circumstances, etc.);
- Vacations: 20.
Thus, we have:
- 365 – 104 – 10 – 5 – 20 = 226
But before you consider that your number of working days is 226, let’s ponder over an important point.
We consider that a working day is usually 8 hours long (excluding the lunch break). However, as a freelancer, you don’t work all 8 hours focused on a client project. Among other activities, you should also consider work:
- Organizing finances and issuing invoices;
- Organizing paperwork;
- Answering and making calls (not related to the project at hand);
- Putting proposals together;
- Prospecting new clients.
Therefore, it’s important to consider that there are activities that are not part of the project scope but are inherent to your profession as a freelance designer.
In this regard, suppose that about 25% of your time (2 hours) is dedicated to solving these other issues. So, as a final calculation, we have:
- 8 hours – 20% = 6 hours;
- 226 days x 6 hours = 1,356 hours/year.
In this example, we come to the conclusion that you have, annually, 1,356 hours available to work as a freelancer.
Calculating your hourly rate
With your MAR value and the number of hours defined, we can calculate how much you should charge per hour on your projects:
- 78,000 (Annual MAR) / 1,356 hours = 57.52.
That is, in the example, we are building, the hourly rate to achieve the annual MAR of US$78,000 should be US$57.52.
In this sense, this type of pricing for freelancers allows you to negotiate how much you will get for participating in a project depending on the number of hours you put into it.
Pros and cons of hourly pricing
Although it is a common and interesting type of pricing for those starting out as a freelancer, hourly rates have advantages and disadvantages that should be considered.
Pros:
- Hourly pricing is very common and highly accepted by most clients;
- Suitable for projects with well-defined scope and briefing;
- The more you work, the more you earn.
Cons:
- Earning potential is limited by the finite amount of hours;
- The more experienced you become, the faster you get and, consequently, the less you earn;
- Sometimes the control of hours is complicated to keep track of;
- If a project ends up being shorter than planned, you’ll be paid less.
Pricing per day or per week
To reduce the risks and drawbacks of hourly pricing a bit, freelancers can adopt fixed daily or weekly rates.
In these cases, simply multiply your hourly rate by the number of hours in a day or a week.
This type of pricing reduces the risk of a project taking less time than expected, negatively affecting your hourly earnings.
So if you establish that it takes 4 days to finish a job, even if it takes you 3 and a half days, you will be charged for the full 4 days because of the negotiation.
Thus, this type of pricing can also help reduce the risks of more experienced freelancers who are faster and swifter to finish projects.
However, still, pricing by day or week has its pros and cons that should be taken into consideration:
Pros:
- Easier to account for time worked;
- Clients are still paid by time, which facilitates contracting;
- Easier to estimate project time in days or weeks rather than hours;
- Ideal for longer projects, especially pricing by the week.
Cons:
- Earning potential is still limited, number of days and weeks is finite;
- Problems in calculating time estimate: a project never takes X days or Y weeks as planned;
- The clients may want to negotiate the price per hour since they know the value per day or per week.
Pricing per project
Project pricing takes the focus off the freelancers’ time and puts it on the expected results.
In a way, you will still estimate how long it will take you to finish the project, but this information is not passed on in detail to the client. Keeping an eye on the timing of your work is important in order not to lose sight of your MAR.
To price by project, besides estimating the amount of time, it’s important to take into consideration your experience, pace, and complexity of the project as a whole.
You can create a template that helps you calculate the value of your work for a given project, taking into account all the variables that influence its price. Besides facilitating the calculations, the template helps in the negotiation and formalization of the contract.
Although pricing by project is more interesting from the earnings point of view for freelancers, there are still pros and cons that should be taken into consideration.
Pros:
- Extinction of accounting of hours to present to the client;
- Focus on the result and not on the number of hours worked;
- If the project takes longer than planned, the client feels comfortable not having to pay for additional hours;
- Good use for short and long-term projects.
Cons:
- In case the project time extends, you will not receive additional hours;
- Risk of underestimating the complexity of the project and proposing lower rates;
- The longer the project takes, the less you get paid per hour worked.
Pricing for value creation
Pricing by value creation takes into account the impact of your work on the company’s results, through the project at hand.
This means that you can tie a portion of the price of your work to a commission based on the results of the project.
For example: if a client needs to create a Landing Page to sell a certain product, you can price your service by placing a commission on top of every conversion that the landing page has.
Thus, if the proposal is 15% of the result of the Landing Page and it manages to convert US$20,000.00 in sales, your work will be remunerated by US$3,000.00.
This type of pricing is more complex and will not always be accepted by clients, because it’s very difficult to predict what will actually be paid to freelancers.
Just like the other types, value creation pricing has its pros and cons to be evaluated.
Pros:
Possibility of earnings well above your estimates and MAR;
Encouragement for the freelancer to work to their full potential;
No need to account for hours worked.
Cons:
- The unpredictability of actual earnings since it is impossible to know what the company’s result will be in advance;
- Work pressure due to high risk;
- Not every project works for this type of pricing;
- Not every client can open their financial results to suppliers.
As seen, each type of pricing has advantages and disadvantages. It is up to freelancers to identify the best type to work with by evaluating their own experience, skills, and risk aversion.
How to lower your risks as a freelancer?
Since we are talking about risks, another important thing for every freelancer to know is how to reduce them. Here we will specifically discuss how to reduce payment and pricing risks.
The biggest fears of freelancers regarding payment revolve around:
- Not receiving the amount agreed upon with the client;
- Delay in receiving payment;
- Working more hours than agreed;
- Project brief changes by the client and requests for unscheduled revisions.
We can avoid or reduce these risks if we work with:
- Well-defined contracts and proposals;
- Payment in advance;
- Fixed work contracts for freelancers.
Well-defined contracts and proposals
It is always worth remembering that any service contract should be formalized via a contract detailing the services, the values, and the number of hours, if applicable.
Contracts are beneficial for both sides, for freelancers as well as for companies and clients.
So always pay attention to specifying exactly what the proposed work will be, how much it will cost, and how and when it will be paid.
Large companies work with long payment terms, which can reach 90 or even 180 days. This must also be clear at the time of hiring the service to avoid surprises.
Moreover, on the freelancer’s side, it’s always good to establish the number of revisions and activities that will be charged separately, should they happen.
A project can have numerous setbacks; sometimes, the client may ask for something not in the scope. If this happens, it’s important that these additional amounts are specified in the contract and the proposal.
Advance payment
As mentioned, large companies have a standard payment term that can be quite long.
Depending on the client, it may be important to establish an advance payment before the work begins.
The amount may be around 20% to 50% of the total, and this should be established by the freelancer taking into consideration the resources needed to perform the work.
Paying in advance provides more assurance for the freelancer, but it’s also interesting for the company. Once they have already made part of the payment, they can feel more comfortable asking for the status of the project’s progress.
Fixed work contracts for freelancers
Another way to reduce risk is to establish a fixed contract with the client.
A fixed contract establishes a monthly payment amount for the freelancer. In turn, the freelancer is available for a certain number of hours to participate in any established project or activity.
This model is very interesting for some freelancers because it gives more predictability of monthly income and guarantees that there will always be a monthly payment.
On the client side, this model makes the freelancer available for any project, regardless of the number of hours or any other type of value proposition.
This type of model closely resembles an employee type of contract, differentiating in benefits, and taxes, and, in theory, ensuring more flexibility for the freelancer to choose their hours and the possibility of working with more than one company at the same time.
Final pricing tips for freelancers
Pricing is an important issue for any freelancer. At first, it may seem complicated to set a price for your type of service, but with time and experience, this process will become easier.
As final tips on pricing, we can list the following:
Be flexible: you don’t need to have a fixed pricing strategy for all your clients. It may be that for some clients it is more interesting to price per day, while for others it is better to price per project.
In this matter, it’s important that you understand the needs, both yours and the client’s, so that you can propose interesting pricing for both sides.
Raise the price: Always keep your price up to date with the market. If you feel you need to increase the price, do some research and understand the best moment and the best percentage to apply.
The important thing is not to keep the same price for a long time, years for example. The price is “alive” and the value of your work must follow the market and inflation.
Be prepared to negotiate: The price you propose will not always be accepted by the client right away. Negotiation is almost always a truth, and you must be willing to do it in the best way possible.
Set minimum and maximum values, and work with the figures between these two extremes. Assess whether the customer is good or bad, and make the negotiations more flexible based on that.
Consider the context and charge accordingly. Take into account whether the client needs the project to be done quickly, and charge accordingly.
If the client requires the work to be completed in one day, you should charge extra for the work and the pressure involved.
Furthermore, understanding the context is also about assessing whether the customer has the potential to be a good or bad payer, a rip-off, or even an inconvenience. All these issues must be taken into consideration when putting together a proposal. Each client is different in the way they work, and this should influence the pricing of your services as well.
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