If you are thinking about a career as a freelancer, one of the crucial decisions you’ll need to make is how to set your daily rate. Setting your rate can be a challenging task.
You must balance charging enough to cover your expenses and making a profit. At the same time, you need to ensure you keep yourself in the market with a consistent income.
In this guide, I’ll walk you through the essential steps for determining a competitive yet profitable hourly rate as a freelancer. I’ll cover everything to set your freelance rate confidently.
How to Set Your Hourly Rate as a Freelancer
Setting your hourly rate as a freelancer is a crucial decision that can significantly impact your success and profitability.
Whether you are an experienced SEO specialist or just starting your freelance career, determining the correct hourly rate requires careful consideration and research.
But before setting your hour range days per week, it helps to understand why it is crucial.
Why a Well-Defined Hourly Rate Matters
Setting an hourly rate is crucial because it determines your worth and sets the foundation for your business. It’s like putting a price tag on your expertise and time.
With a well-defined hourly rate, you can avoid undercharging or undervaluing your services, hurting your profitability and professional reputation.
The Impact of an Inaccurate or Undervalued Hourly Rate
If you set an inaccurate or undervalued hourly rate, you may be overworked and underpaid. Clients may take advantage of your low rates, expecting more work for less money.
Taking on more work with less money can lead to burnout and financial struggles. Additionally, potential clients might perceive your low rate as a reflection of poor quality or lack of experience, undermining your credibility in the industry.
For this reason, it’s vital to determine a fair and competitive hourly rate to avoid pitfalls in the long run. Great, now that you know the importance of setting a well-defined hourly rate, what factors should you consider?
But before I answer the question, first ask yourself the following questions.
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Ask Yourself These Questions First
Before picking a random hourly rate, there are several essential questions you need to ask yourself. These questions will help you determine your income goals, the number of billable hours you can realistically work, and your overhead expenses.
What Is Your Annual Income Goal?
The first step in setting your hourly rate is determining how much you need or want to earn in a year. Do you want to match your previous annual salary, pay your living expenses, or aim for an ideal yearly figure?
Or are you supporting a family or only yourself? Understanding how much money you need will help you determine your monthly or yearly average salary goal, so you have a number in mind when calculating your rate.
Once you pick your yearly salary, you can use the figure to calculate the working hours you’ll need to earn that monthly salary.
Here is an excellent example: a $60,000/year salary will break down as follows:
- $60,000/year (before taxes)
- Working 40 hours a week ( 5 days x 8 hours a day)
- Four weeks off for sick time, unexpected absences, and vacation days
= 48 weeks working x 40 hours a week = 1920 hours worked
=$60,000 / 1920 hours = $31,25 per working hour
Still, this rate considers all your time worked as billable hours. For many of your activities, it is time you will not receive money.
These include replying to emails, administrative tasks, prospecting, finding new clients, invoicing/billing, finding new clients, and so much more-this takes us to the next important step.
Consider The Number of Billable Hours You Can Work
The number of billable hours you can work directly impacts the hourly rate you need to hit your income goals. It all comes down to how many hours per week and months per year you can realistically dedicate to freelance work.
Someone working 20 billable hours per week needs a higher rate than someone with 40 billable hours. So, each situation can differ as the average freelancer’s hourly breakdown is 60% for billable hours.
At the same time, non-billable hours are 40%. Hence, you can adjust your ratio when calculating your hourly pricing to match your processes to expectations.
When taking the 1920 work hours from the above calculations, how much will your time be billable versus non-billable? You work with a 60%/40% calculation as your baseline.
For example, you can recalculate your hourly rate when using the billable hours:
1920 hours x 60% will equal 1152 billable hours (plus 768 non-billable hours)
$60,000 / 1152 billable hours = $52.08/hour
Hence, you must balance your time the best way you can. I recommend considering if you want to seek a more significant number of projects at lower rates or instead work on smaller projects at a higher rate.
Once you understand the amount of billable time for each project, it will help you to calculate if it makes sense to the number of non-billable hours you need to get your project done.
The fantastic thing is that you can increase the rate for small projects as a discount when working on long-term or significant projects. Alternatively, you can use an hourly rate calculator.
Remember Your Freelance Expenses
Next, you need to tally up all your business expenses by listing the costs to total them up. You must add the number to your salary to increase the hourly pricing to ensure you cover all expenses.
Here are some standard costs to consider as a freelancer:
- Freelance platform fees
- Advertising and marketing costs
- Office space/rent
- Software subscriptions
- Equipment and office supplies
- Taxes
- Business insurance and licenses
- Health Insurance
For example, if those expenses tally to $10,000 per year. You will need an annual goal of $70,000, and the hourly rate will also increase to $60.76 ($70,0000/1152 billable hours).
Analyze Your Competition
Understanding market demand and competition is crucial in determining your hourly price. Research what other freelancers with similar skills and experience charge.
The rates they set can act as benchmarks for your pricing strategy. Remember that rates vary depending on location, industry, and target audience.
You want to strike a balance between being competitive and adequately compensating yourself.
Evaluating the Complexity and Scope of Projects
The complexity and scope of projects you undertake should also influence your hourly rate. More complex projects that require specialized knowledge or extensive research will warrant a higher rate.
Consider the expertise and effort necessary for each project when setting your hourly pricing. Remember, you deserve to be compensated fairly for the time and energy you invest.
Respect Your Value
Your skill set and expertise are significant in setting your hourly rate.
Consider your level of specialization, the demand for your skills, and the level of difficulty involved in your work. If you possess rare or high-demand skills, you can command a higher rate.
Yet, if you are starting or have a general skill set, it may be appropriate to set a lower rate initially.
Factoring in Continuous Learning and Professional Development
Another essential thing to factor into your pricing strategy is continuous learning and professional development. Invest in improving your skills and staying up-to-date with industry trends.
The more you invest in your growth, the more valuable your services become. Clients will be willing to pay a premium for freelancers who continuously enhance their expertise and bring fresh ideas to the table.
Helpful tip
Remember, setting your hourly rate is an ongoing process. As you gain experience, expand your skill set, and establish a solid reputation, you can adjust your freelance services hourly rate accordingly.
Pricing yourself correctly not only ensures you earn what you deserve but also positions you as a respected professional in the freelance world. So, research, assess your worth, and confidently set your hourly rate.
Your future self will thank you! Great, now that you have answered the above questions, it brings us to the next section.
Why Is It So Difficult To Set Your Hourly Rate?
Setting your hourly freelance rate is tricky because it directly impacts your income, work volume, and client perceptions about your work quality. Some common challenges include:
- Experience Level: As an experienced freelancer, you can often command a higher hourly rate than someone just starting. Your expertise and reputation in your field play a significant role in pricing your services.
- Competition: The freelance market is highly competitive. It would be best to consider what other freelancers with similar skills and experience charge for their services.
- Value-Based Pricing: Pricing should reflect the value you provide to your clients. It’s not just about your time; it’s about the results and solutions you offer.
- Overhead Expenses: Running a freelance business comes with various costs, including office space, software subscriptions, and marketing expenses. You need to factor all of these into your rate.
- Income Taxes: Freelancers are responsible for their income taxes, which can be higher than traditional employees pay, and you should consider this when setting your rate.
The ultimate goal is finding the optimal rate at the intersection of your income needs, market rates, and perceived value.
How To Increase Your Freelance Rate Over Time?
Setting your initial hourly rate is only the beginning. As you gain experience and build a solid reputation, you can increase your freelance rate.
When you work towards keeping clients happy, you will gain a positive reputation. Firstly, you can build your portfolio to improve your skills and showcase your best work. It will justify higher rates.
Then, deliver exceptional value, going above and beyond to satisfy your clients. Happy clients are more likely to pay a premium for your services. Always see high-value projects that are interesting but offer higher pay.
Specializing in a niche can often lead to higher rates. Lastly, reassess your rates regularly. Don’t stick with the same rate forever. As your skills and experience grow, so should your rate.
Periodically review your pricing to ensure it aligns with your value. So, raising your rates is like supply and demand. The more in demand your service, the more you can increase your rates.
Add more skills to justify your hourly rate and grow your client list. While your rates should be competitive, you must remain fair to your clients.
So, slowly raise your freelance hourly rate by a dollar or two every five to ten clients you complete a project with.
Wrap-Up: So, How Do You Set Your Hourly Rate?
Setting your hourly rate as a freelancer is a complex but critical task. It involves evaluating your financial goals, understanding your expenses, and considering your competition.
Remember, your hourly rate isn’t static. It can and should evolve as your experience and reputation grow.
Ultimately, setting a competitive, value-based rate will attract clients and ensure a sustainable and fulfilling freelance career.
Follow this step-by-step process:
- Set income goals for your desired annual salary as a freelancer.
- Calculate your annual business and personal expenses. Tally up costs for taxes, healthcare, software, equipment, office space, marketing, and more.
- Determine your maximum billable hours per day/week and number of work weeks per year. Multiply for your total annual billable hours.
- Compare your skills and experience to other freelancers to identify the appropriate market rate range.
- Start by pricing on the lower end of the range as a new freelancer. Gradually increase as you gain value.
- Test rates on a few projects, adjusting as needed based on client feedback and work volume.
In the ever-evolving world of freelancing, adaptability and continuous self-assessment are crucial to your success.
By following these guidelines and valuing your skills appropriately, you can set a competitive hourly rate that reflects your worth and contributes to your freelance journey’s prosperity.