The Freelancer’s Pricing Model

Hey Superorganizers! Dan here. A special treat for paid subs today! We're sharing an exclusive excerpt from a newly released book: Art for Money, the missing manual for every creative freelancer. It's by Michael Ardelean a former pro BMX biker, who spent years managing a design studio after his athletic career was over.

I know a lot of you are freelancers, and this excerpt speaks beautifully to one of the biggest challenges freelancers usually run into: how to price their work. If you like it, make sure you check out the full book here.

And if you like the idea of more book excerpts let me know in the comments!

Value Yourself

As a freelancer, putting a price on your work can be difficult. Every freelancer has an anecdote about a friend of a friend who bills premium rates, and gets paid every time. Why does she get her asking price, and you don’t? Be careful not to brush off that person’s success as luck or good marketing. In part, it may be those things, and that’s OK. But there’s probably a story there. What is she doing differently? What is the client seeing when they look at her?

Most likely the client sees results, delivered on time, by someone who articulates and carries herself well, backed by a good reputation.

And there’s probably even more to the story than that. In my experience, the cheapest clients are also the highest-maintenance clients. When they see how willing you are to bend over backward for their endless requests for out-of-scope favors, they will pile them on. Why wouldn’t they? It’s their job to get the most for the least. On the flip side, great clients with healthy budgets tend to understand quality and pay accordingly without too much fuss.

Successful freelancers not only know this, but back it up with action. This is risky. You have to know your value and believe in it enough to quote a respectable price, and be ready to walk away if the client can’t afford you. How you walk away is important. Be friendly and cool and express interest in staying in touch.

You have to know that those clients who can’t afford you will at least respect your professionalism and your price, and they’ll remember how pleasant and excited you were. They’ll come back to you in the future when they have money, or they’ll recommend you to someone who already does. This happens often.

Clients regularly encounter freelancers who are out of their price range. There are freelancers out there doing great work and getting paid great money for it. Like them, you want to stand out from everyone else by offering a unique overall package that no one else can replicate—not by simply being cheaper.

Determining Target Revenue

When you argue for your limitations, you get to keep them. - Jim Kwik

If you want to make proper money as a freelancer, it’s important to not avert your gaze and say “Uuuuhhhhhh” when someone asks you how much you charge.

Professionals know how to field this question: with a calm smile, they say, “Sure, tell me more about what you need and I’ll get you a quote by noon tomorrow.”

To do this, professional creatives need a fast, bulletproof method for calculating a quote. There are two ways to create that method:

If you’re an experienced freelancer, take the total amount of money you made last year (or whatever was your best year to date) and divide it by 2,080 (the number of business hours in a year). This is now the minimum value of one hour of your time. This can serve not only as your starting point for pricing out jobs, but also—and I’m going to get a little philosophical here—it’s your measuring stick for how you should be spending your time in general.

Let’s say, hypothetically, that you made $88 per hour last year. You want to improve this year, so now your baseline is $100 per hour.

Think about what that means. It means that from now on, whenever you spend an hour on something that could have been outsourced for less than $100 (or not done at all), you are throwing away money. Instead of throwing away money, I humbly recommend that you channel that time into your art. When you show yourself that level of respect, it’s easier to expect your clients to do the same.

Now let’s get back to pricing.

If you don’t already know your target revenue for the year, no problem. Let’s create it right now.

Years ago, one of my mentors (previously a CEO and now a successful investor) broke down for me the basics of how to price freelance services. I listened carefully and took notes furiously, because A) he’s an intimidatingly smart man who would shout when teaching me business fundamentals, and B) he had used these fundamentals to earn himself some of the same things I wanted out of life (control of his own time and a vintage Ferrari collection, to name a few).

So, I put those basics into an Excel model which spits out a quote based on the answers to a few simple questions:

1. What would your annual income be if you were employed, at your current level of experience, by a healthy sized company? (If you’re unsure, I’d skip most of the online articles about this, and instead make friends with a recruiter and ask them). Add 50% to that number, for reasons outlined in the chapter “The Benefits of Freelancing.”
2. What are your fixed and variable monthly expenses related to your freelance work?
3. Do you have anyone working for you and what do you pay them?

Toss the above numbers, along with an estimate of hours you plan to spend on a given project, into this Excel model and out comes a cost.

Here’s what that looks like, using made-up numbers for illustrative purposes:

• You’re a copywriter who made $75K in your last full-time role.
• $75K plus 50% is $112,500 per year. Your deductible rent is $6K per year (you can consult an accountant to find this number, or estimate how much you can deduct), you spend roughly $7K on hourly assistant help, and you have $8K in additional business expenses, so your annual overhead is $21K.
• Your new total target revenue is $133,500.
• There are 2080 business hours in the year. Your base hourly rate is $133,500 divided by 2080, or roughly $64 per hour.

Now you know that it costs at least $64 for you to do work for an hour.

​This is not your quote. It’s your starting point. It’s the minimum amount of money you’d need to charge in order to pay yourself, your people, and your expenses. If you take less than this price, you are either discounting your hourly value, or worse, losing money. Think carefully about what a client thinks of a freelancer who jumps at the chance to lose money. Think carefully about yourself, your training, and the quality of your work. Remember that you may not actually be collecting money for every single one of those 2080 hours you have available to work.

Determining Retail Value

The next thing to determine is the retail value of the work you are going to deliver. You can do this by Googling, knowing your industry, talking regularly with your peers, reflecting on your past experience, understanding your client’s financial goals, and consulting with mentors.

Graphic designers have the Pricing and Ethical Guidelines to reference; your industry might offer something similar. As you gather data on other peoples’ rates and salaries, keep in mind that some people may not be paid fairly, so some data may be more noise than signal.

Part of the beauty of freelance work is that you get to decide what’s fair. On the flip side, the market will keep you honest. If a client is asking you to create a logo, for example, chances are they’ve asked others to quote the same job, and their reaction to your quote will give you an indication of whether it’s over or under the market. This is just another data point of course, not an absolute truth, but after a few failed attempts at charging $10K for a branding job, you might learn that charging $7K is actually more lucrative for you, because at this price you’ll actually be working.

Creating Your Quote

Your quote needs to be somewhere between your cost basis and the retail value of the work. That difference is your profit margin, which is the money that stays in your business savings account until you either need it for an emergency or it’s time to pay yourself a bonus, whichever comes first.

Play with margins, shooting for 50%, in your Excel model until you settle on a quote that matches the retail value of the work. Make it precise, and not too round in number.

When you put out your first quote, it is not unlikely that the client will come back to you with a startled tone and a story about budget constraints. Don’t be mad. This is part of the dance, and now it’s your turn.

You will respond with a smile and an, “OK, well let’s revisit the scope and see what we can adjust.” Your tone is unfazed and cool, because you know that there are only two outcomes, and both are good.

• Outcome #1: You remove some items from the scope and allow yourself to (scientifically, not arbitrarily) reduce your price, because now you’re doing less work for less money, and the client agrees.
• Outcome #2: The client can’t (or won’t) pay even your reduced price, at which point you get to evaluate if they’re worth working with.

Should You Just Bill Hourly? 

You may ask, why don’t I just keep it simple and bill all my clients on an hourly basis? It seems fair and easy. It’s not wrong to do that—you can incrementally raise the value of your time as you grow and improve.

However, in practice, most freelancers are not well served by billing at a simple hourly rate.

First, you are an artist, and it is highly unlikely that every single hour of your work requires the same skill and effort—or delivers the same value. For example, you might be helping a client with a new strategy for a product that could transform the company, while also doing some copy editing for the website. Billing a fixed hourly rate makes it difficult to vary your pricing based on the importance (retail value to the customer) of the work.

Second, you can’t price jobs in a way that accounts for all of your own internal costs, which are not static day to day.

Finally, it matters how much the client is committing to: the overall size of the job. There is way more overhead to working ten 4-hour jobs for ten clients than one 40-hour job for one client. You’re doing ten times the sales efforts, on top of the mental gymnastics. A short engagement costs you more per hour than a long one. If the scope is starting small but might expand, you can quote a higher rate but explain that you’d be glad to consider a lower rate once the larger commitment is clear.

When you price a job, the first step of your calculation should be to cover your own hours, but your ultimate goal should be to deliver an incredible result at a price that reflects the value you deliver—that’s what your client really cares about.

Trading your time for money isn’t the worst thing in the world when you’re starting out, but you want to work toward decoupling your “input” and “output.” If the quality of your work is excellent and your approach is unique, you’ll create scenarios where your output (the price a client must pay you because no one else can do what you do) is much higher than your input (the hours you spent creating). God bless your grandparents for working the same job for 50 years for flat hourly wages. But this shall not be your destiny.

There are exceptions to every rule; use your own judgement based on the nature of your art. A writer might be paid by the word, for example. But keep in mind the value your words are delivering, and on what scale. A post for your cousin’s blog, although valuable, will impact the world differently than a piece for the Times.

In conclusion, your hours should be tracked and you should internally assign value to them, but keep a flexible relationship between your estimated hours and your client quote:

• Prices should reflect the true value to the client.
• Prices should reflect your overall expenses.
• Smaller jobs should cost more per hour, while larger commitments earn a lower rate.
• Prices can reflect your other priorities and convenience.

This will allow you to work on a variety of big and small projects while keeping your prices fair.

Offering Discounts

There are a few reasons why a freelancer like you would consider discounting your work for a client:

• You need money. You’re desperate. But like the wise Sheriff in Super Troopers says, “Desperation is a stinky cologne.” If you cave in easily when it comes to your value, you are only learning to agree to what you’re offered, rather than learning what might be possible. And with the stink of desperation on you, you’ll be offered even less. Keep cool and you could walk away with more than you’re willing to accept.
• You want this client longer term. You believe this client could be a great long-term partner for you, and you want to start off by making them happy. However, what they’re willing to pay you on your first job is highly indicative of what they’re willing to pay you on every job, ever.
• You want to build a portfolio. You’re just starting out, and you want to take on as much work as possible to build up your portfolio and get referrals. If this is the case, it’s a legitimate choice. But make sure you revisit the above calculations each year and give yourself a regular raise.
• You care about the client. You really like the client, you believe in their brand, or they’re personal friends or family. In any of these cases, still quote them full price. If your full price quote is out of their budget, they’ll come back to you and say so. Or, if you know for a fact that your price is out of their budget, you can preemptively write a friends and family discount into the invoice, making sure they see the full price quote next to it, in order to set a fact-based high bar regarding your value. Negotiators call this “anchoring.”

On the flip side of the latter situation, sometimes you’ll be asked to do jobs that you simply don’t want to do, or for a client that you might not feel a strong sense of closeness or obligation to. In these cases, you can easily use your pricing model to dial up the margin for the job. Not enough to gouge them, but enough to make you more enthused about doing the job, and creating a financial cushion that could enable you to dial down the margin for deserving clients on the other end of the spectrum. Do this ethically and you can actually create win-win pricing scenarios: if they say yes, you make a lot of money, and if they say no, you don’t have to do the job.

Consider the above reasons carefully, and if you reach a point where it’s pretty clear that the client does not intend to pay you anywhere near your rate, I encourage you to smile and say, “Well, thanks anyway for thinking of me, and let’s stay in touch. I love your brand and I hope we can find a way to work together in the future.”

Does this sound like leaving dollars on the table? It is, and for good reason.

Consider the alternative: you cave to the client’s budget, you deliver, and what do you think happens next? The client comes to you with the next job and brings more money this time?

Nope. The client has identified you as the bargain option in the marketplace, and you can bet that every time they need big work for small money, they’ll come right back to you.

You can also bet that within the company, when your name comes up, it will be accompanied by words like “inexpensive” and “works with us on budget” and maybe even “cheap.” These are not words you want associated with your art.

Think carefully about what a client thinks about a freelancer whose default mode is to immediately offer a discount. Make them ask for it.

Even if you aren’t necessarily in love with the client or their brand and you just simply need the money, you have an ace up your sleeve–you can actually go down in price without losing money.

Once you know that the client needs a discount from you, there’s nothing wrong with offering it. The important thing is properly communicating the discount. And that doesn’t mean fabricating some pretend pricing just to show that you’re giving them a discount. Use your pricing model, and make it real.

What did you think of this excerpt? Let me know in the comments or feedback! And make sure to check out the full book on Holloway here.