When you start working as a full-time freelancer, the learning curve can be pretty steep. The freelance lifestyle offers plenty of flexibility and autonomy; it’s undeniably attractive. But make no mistake, when you’re a freelancer, you effectively run a one-person business. And like any business, you’ll live or die on profitability.
New freelancers will learn that the hard way. It can be hard to land any clients in the beginning, but if you don’t establish a reasonable system for pricing your services, you simply won’t last long in this line of work. Once you’ve tackled a fair number of projects, and maybe have a handful of clients on retainer, your income is more stable. Even so, you should still take the time to evaluate and reprice your services—here’s why.
The need to revisit your rates
Businesses evolve to survive—constantly. The smart entrepreneur isn’t content to merely follow along with changes; they analyze data, look at trends, and see where the industry is headed so they can continuously crest the waves. As long as freelance work is your primary source of income, you’ll need to adopt a similar mindset and do market research. And when you do that, you’ll notice that rates change frequently.
Why do rates change? In the big picture, we always have to take inflation into account. This raises the cost of goods and services, and of living for every individual. Thus, freelancers who charged a certain hourly rate a year ago might find that at those prices, they’re losing money in today’s world. Technology can also be a game-changer; year after year, new features and services become available. Clients begin to demand those; freelancers who provide them can get away with charging more.
Finally, you need to factor in your personal improvements. You’ll inevitably get better at various aspects of what you do. Maybe you upgrade behind the scenes and get agency hosting to streamline your workflow and handle multiple client websites. If your skill proficiency goes up, or your tools get better, output and efficiency increase. Stay at the same rates, and your clients are winning the bargain—without even realizing it.
Exploring different pricing models
Most freelancers who make it past the early goings will have realized that a reasonable pricing system must be able to cover their living expenses, and then some. When you reprice your services, you can still follow this model and refine it a little.
Calculate your annual cost of living by today’s standards. Divide that by the product of the number of hours you work in a day and the number of days you expect to work in a year. This is your break-even price point. Charge anything below this rate, and you’re losing money. Add more—how much exactly depends on the client and the nature of the work—so that you can remain profitable.
Working off the break-even rate provides you with a good reference point. But it has its limitations. First, not all freelancers are aware of their true cost of living. If you get the numbers wrong or don’t have the appetite for accounting, you pay the price of that miscalculation. There are other simple pricing methods to help you out in this case, such as basing your prices off other freelancers or doubling your ‘resentment number.’ These are not without risk but can take a lot of the effort (and math) out of your considerations.
Scaling instead of relying on pricing
The second problem with pricing your services off of your cost of living is that it effectively puts a ceiling on your capacity to earn. Even if you’re able to charge some clients more, on average, you’ll be earning at a linear rate. Yet your time is a scarce commodity. If you start taking on multiple clients or bigger projects, you can expect to spend more time working, and yes, you’ll be earning more, but your income will be diminishing relative to the value of your time and effort.
Being a freelancer is running a business. And businesses can potentially earn exponentially. If your product successfully connects with the right audience, you can bring in much greater revenue in proportion to the capital and sweat equity you’ve invested. Why shouldn’t freelance work have the same capacity to scale? While repricing your services will help you maintain baseline profitability, scaling up can be the only way to reward you appropriately when your inputs cross a certain threshold. Perhaps instead of taking on more work, you can create and sell a product related to your work, such as a book or online teaching course. Or you could outsource administrative or financial tasks and free up time to focus more on your core competencies.
As a freelancer, your rates determine profit margins and should be reviewed periodically. Beyond that, look to overcome the innate limits of a rate-based profit model, and you can start earning like a real business.