Understanding what your time and skills are worth and determining your hourly rate can be quite challenging tasks. After all, there is no standard freelance rate calculator to help with these dilemmas. This is true for both startups and seasoned freelancers. But, don’t worry. We’ve got you covered.
Developing a pricing strategy is necessary, and it needs a thorough understanding of your value and the target market. If your rates are too low, it means you get underpaid for the value you offer. However, if your rates are too high, you could lose some projects to others with lower rates. Learn some tips and strategies to determine the price which you’re comfortable charging your customers.
A Freelance Rate Calculator
If you’re looking for the perfect formula to tell you how much to charge for your freelance services, you are in for some disappointing news. It doesn’t exist. You need to determine your rates and see how your clients react to this so you can make adjustments when necessary to achieve your goals.
Before getting into the steps on how to price your services, it can be valuable to learn about the two most commonly used pricing approaches: hourly and fixed pricing models.
Hourly pricing is the most commonly used model by new freelancers because it’s relatively simple to follow. Using this method, set an hourly rate for your services and multiply it by the total number of hours spent on an assignment. Some project types using this method include technical support and customer service. Note that software developers have the highest average hourly rate of $73.
Project-based or fixed pricing is a pricing model where you can charge a fixed rate for an entire project rather than basing your fee on the number of work hours spent on a job. This model is perfect for those projects with well-defined deliverables. Some projects that work well with this method include mobile app development and web design. According to DDIY Freelance Statistics, 48% of freelancers get paid at a fixed rate, 29% get paid an hourly rate, and 23% say they experience a mix of both.
Calculating hourly rate based on the desired salary
The most commonly used freelance rate calculator is dividing your desired salary by the number of workdays each year. Here are the components used in this formula:
- Determine your desired monthly salary
- Count the number of workdays per month
- Decide on the number of work hours per day you will work
For example, if your desired monthly salary as a freelance writer is $5,456, which is less than the national average, your hourly rate using the formula would be $31/hr.
Here is how the formula works: (Desired monthly salary) ÷ (Number of workdays per month) ÷ (Number of work hours per day)
Example: $5,456/month ÷ 22 days ÷ 8 hours = $31 hourly rate
However, this freelance rate calculator completely misses out on your business expenses, such as overhead costs and taxes. When working out your rate, there are several factors you still need to consider that impact your bottom line.
Tips on Setting Your Freelance Rate
Before figuring out your hourly rate, you have to consider many factors.
Ask some basic questions
Ask yourself the following questions before calculating your hourly rate. Your answers to these questions help you determine what pricing strategy to use and how to determine your rates.
- Lifestyle – How much do I need to support my current lifestyle?
- Goal – What are my salary goals?
- Competitors – How much do my competitors charge for the same services I offer?
- Full-time Salary – If I go full-time, how much do I need to make?
- Expenses – What are the costs associated with my freelancing services?
- Skills – Who is my target customer? Is my expertise and skills in demand?
- Value – What value can I offer to customers?
Calculate your expenses
After asking these basic questions, it’s time to list all the expenses your work will involve. It’s very easy for any freelancer to forget about these unavoidable expenses. When determining your freelance hourly rate, there are several things you need to consider:
- Phone, internet, software, and utilities
- Office equipment, supplies, and office furniture
- Website development, web hosting, and service subscriptions
- Workers salary, insurance, and other benefits
- Cost of advertising and marketing
- Licensing and business insurance
- Legal, accounting fees, and professional service
- Professional memberships
- Training/skill improvement, education expenses
- Travel costs
- Out-of-pocket expenses
Of course, don’t forget your own salary, and consider it as an expense as well. So, if you want to earn a salary of $100,000 per year, and your overhead costs total another $80,000, then your total expenses of running your business amount to $180,000.
Set your desired salary
Determining your expenses is a great place to start when you using any freelance rate calculator. You wish to pay yourself well while covering your costs. But you also need some room for self-improvement and to build a safety net for rough times or emergencies. Funds for these areas may come from your profit margin, and determining the profit margin varies widely by industry.
For the example above, say your business total expenses are $180,000, and you choose a 20% profit margin, your desired salary would be:
Formula: (Desired Salary) = (Overhead Expenses) x (1 + Profit Margin Percentage)
In this example: $180,000 x 1.20 = $216,000 per year
Consider the number of billable hours you need to work
As a part of freelancing work, you need to complete other tasks such as answering phone calls, emails, and marketing. This means that not all of your working hours are spent on a specific project.
Calculating the total billable hours for a project helps you determine if it makes financial sense when you consider the number of non-billable hours needed to get the project done. This needs to be a factor when you price your services for a project.
In the example below, we calculate first the net working hours by subtracting the total hours from the total number of working hours per year.
Total number of working hours per year: 2,080 hrs (40 hrs/week for 52 weeks)
Here is a typical breakdown of the number of hours spent off-duty:
Vacation hours (We all deserve a break): 120 hrs
Holiday hours: 80 hrs per year
Sick hours: 80 hrs per year
Total hours off per year: 280 hrs (vacation hours + holiday hours + sick hours)
Thus, the net working hours per year would be:
Net working hours = Total number of working hours per year – Total hours off per year
Net working hours = 2,080 – 280 = 1,800 hrs
The equation above for your net working hours assumes that you’re charging customers for every working hour you spend each week. As mentioned, you also need to do some business management. We’ll use a billable ratio to account for these times, which is the percentage of time you’re not working actively on billable client work. Using a 25% billable ratio, assume that 75% of all the hours are billable. That leads you to the equation below:
Total number of billable hours = 1,800 hrs × 0.75 = 1,350 hrs
So, you have 1,350 billable hours annually.
It is important to realize that in order to reach your business and financial goals, you need to account for the fact that not every working hour is billable.
Establish your hourly rate
You’re now down to the last step: establishing your hourly rate. The final step involves dividing your business expenses by the number of billable hours.
Formula: (Hourly Rate) = (Total business costs per year) ÷ (Total number of billable hours per year)
For example: $216,000 ÷ 1,350 hr = $160 per hour
So, the minimum rate for running the business and earning your desired income as outlined above is $160. This rate already considers your overhead expenses, business profits, and downtime.
Other Items to Consider in Pricing Your Services
If you want to understand how to price your services as a freelancer and arrive at the best hourly rate, it’s crucial not to isolate yourself from what’s going on in your industry, both on local and global scales. Conduct some investigative work to determine your competitors’ pricing models and what others are pricing similar customers. Through this, you ensure that your hourly rate aligns with your market and with what your customers are willing to pay for your services. Here are some of the ways to find this valuable information:
- Industry trade organization
- Research average salary information
- Shopping other freelancers
- Asking/surveying past clients
- Asking others in the same industry
Understand your worth
Knowing your value is essential to make sure that you charge your clients a reasonable price. So, how do you determine your value? One way to decide is by considering the following factors that normally affect pay rates:
- Years of experience
- Skills developed and level of expertise
- Past work portfolio
In 2020, there were about 59 million freelancers in the U.S, which was an increase from 53 million in 2014. As the freelancing industry becomes more saturated, you must stand out through training and development. Increasing your level of expertise is an important investment to gain more clients.
And successful gig workers are constantly developing their skills. A recent survey shows that about 20% of freelancers attended skill-related training. The more skills you acquire, the higher the value you can put on your services.
Raising your hourly rates
It’s reasonable to increase your initial hourly rate due to various reasons that include:
- Increased expenses
- Improved reputation/credentials/skills
Your business costs may increase when you hire more people or buy new equipment. If this happens, you have to recalculate your hourly rate by considering these additional overhead expenses.
You also need to recalculate your hourly rate if your skills and capabilities have improved or you have completed projects for big clients successfully.
Hourly rate variables
Hourly rates may also vary depending on the project or on the size of your client. You don’t need to stick to one rate for all your clients and projects. Because your clients have different requirements, you can charge them depending on the specifics of the project and business.
No freelancer does work for free. You don’t want to be underpaid for the value and services you deliver. You deserve to earn a fair wage for the work you do and live the life you want. Now that you know how to use a freelance rate calculator, it’s time to start pricing your services appropriately so you can pay your overhead expenses, pay yourself well, and make your freelance business successful.