As you set out to build your business, it can be challenging to evaluate your skills and experiences and subsequently translate them into a dollar value. As a freelancer, some project opportunities come with a listed rate, but other clients will ask you to price your own services. Understanding how to calculate your freelance rate in a meaningful way—and more importantly, how to define your worth—is key to maximizing your earnings, finding fulfilling projects and growing your business.
The right frame of mind to measure your value
For first-time freelancers, the pricing process is flush with uncertainties. Should you test the limits or play it safe? Calculating a freelance rate higher than you’ve been paid historically won’t guarantee success in the long-term. On the other hand, too low a rate may affect your confidence and how clients perceive your expertise.
Tying your self-worth with a dollar amount can be damaging. Rather than choosing a price based on what you believe a client wants or how they may evaluate you against other options, focus on what your client can achieve because of your efforts.
Paro fractional expert Brian D. explains how he knows that he’s on the right track. He states, “It’s about knowing what your value is, and making sure that your client understands the value you bring to the table. So, as long as you feel like you’re providing the best value to the client, and the client understands that value, then you’re in a good place.”
Your rate should reflect the total value that your client receives. This can extend beyond the tasks within the project’s scope. Think about the intangible value that you’re providing to the client on top of the deliverables. This intangible value could be in the form of your organization style, your level of flexibility, your willingness to provide additional advice or information and other beneficial qualities. Perhaps your leadership leads to long-term returns and benefits for your client well after the project ends. Your price should reflect these qualities and the unexpected value that comes with them.
Find worth in your clients, too
Sometimes, a smaller project with less earning potential can turn into a much larger opportunity.
Value is a two-way street. While you define your value as a freelancer, you should also be considering the value of the client. Is the time spent on the project worth it? Can it help you build your career, your skills or your working relationships?
Brian explains that when one of his clients started to find success and increase revenues, he saw that smaller projects could turn into greater earning opportunities down the line. “Right now, it’s opened up doors for me for other things that I might not even think of. [This client] is becoming qualified,” he states. In other words, he saw value in a smaller opportunity that could turn into larger returns.
Practical factors to help you calculate your freelance rate and increase earnings
While value is key to calculate your freelance rate, it can still be difficult to calculate a number from subjective value alone. Practical factors that go into pricing can’t be ignored. Factors like the expense of running a business or seasonal ebbs and flows will also influence your financial success and wellbeing.
If you want to ensure that you maximize your earnings, then you’ll need to consider:
- The minimum amount you must make to match your desired lifestyle;
- Strengths within your skill set that differentiate you and increase value;
- The power of building lasting relationships with clients that create continued earning opportunities;
- Supply and demand; and
- The advantages and disadvantages of hourly versus flat rates to maximize earnings.
Define your salary goals with business costs in mind
What does your desired lifestyle look like, and how much will it cost? Maybe it’s based on better work-life balance, or maybe you want to make enough to hire others in order to build your business. In order to reach these goals, you also need to factor in the obvious and hidden costs that can affect profitability and your ability to achieve your desired lifestyle.
- Calculate expenses – Add out-of-pocket business costs to your desired salary, including insurance, taxes and software, so that your business expenses don’t cut into your broader goals.
- Account for non-billable hours – Billable hours will differ by the individual, but professionals often fail to factor in non-billable hours. Non-billable hours include non-profitable tasks and administrative tasks necessary to run your business or improve your skills. How much does that time cost you, and are you charging enough in billable hours to make a profit?
- Prepare for monthly earning fluctuations – Does your rate take into account slow seasons or holiday slumps? How often and how consistently must you work at your current rate to maintain your desired salary or lifestyle?
Evaluate and build your skill sets to add value
Determine how you’ll market your skills: are you an expert or a generalist? If you’re an expert, what is your niche? A specific accounting software? Specific industry knowledge? These skills can differentiate you in the market and allow you to increase your rate, as these skills add value that is hard to find.
As a generalist, maybe you’ve worked in one industry but held various positions. You’ll want to highlight your diverse skills and how they can provide additional financial value to your client that may lie beyond the scope of the immediate project.
The important thing to remember is that skills evolve over time. Paro fractional expert Jeffrey F. says, “I think for freelancers, maybe on the earlier side, maybe a year or two into the business, [you should] really find what you’re good at and what you can implement to a company and do that. Eventually you’ll gain more skills to do other things.” And as you gain skills, you’ll be able to calculate a freelance rate to reflect this added value.
Communication is key to greater earning potential
Soft skills set you apart and should be shared. They include working independently, communicating well, building relationships and being comfortable with change.
Brian explains how communication can help him create relationships with clients that can turn into ongoing income streams. He states, “When I speak to clients, I tell them, ‘Listen, I’m looking at a partnership, and a partnership for me means that we’re working to get together for a long time.’” By communicating yourself as a trusted partner and approaching clients as a long-term relationship, you can shape how clients see your value as a freelancer.
Brian goes on to explain that knowing how to communicate and respond to needs quickly allows him to become a go-to person and build his project pipeline to better ensure continued income. By demonstrating his value in ways beyond his project-based skills, he can increase his earning potential and maintain stable work.
Experiment with supply and demand
Supply and demand affect opportunities. Sometimes, demand may be high, providing you with more jobs and higher pay. Use this advantageously.
Jeffrey explains, “For the first 18 months, I raised my price every quarter. Every three months, I raised my price as long as I was getting business. And then I raise it by 10% every quarter, so I went to 110 and maybe 120, 140, etc. So that’s how my pricing has evolved over time.”
But there is a limit. Jeffrey adds, “I increase a certain amount every year, or I just keep increasing until I see demand go down, and then I realize that’s the price.”
Valuing time: hourly vs fixed rates
How you value your time plays a direct role in how you calculate your freelance rate. Fixed rates pay a set price for a job based on its scope of work; you’re typically paid upon its completion. Meanwhile, hourly rates are paid based on the actual hours you work, which may be billed throughout the project or at the end.
Whatever your preference is, determine your rate before the assignment begins. Both routes have pros and cons and can change over time or on a case-by-case basis.
Hourly rates allow you to be certain that you’re being paid for the full efforts of your work. For freelancers who can’t easily estimate the hours needed to complete a project (perhaps they have not worked on a project of similar size or complexity), then an hourly rate can safeguard against uncertain flat-rate estimates and timeline revisions.
Conversely, an hourly rate does not guarantee a minimum payment for a project if the project requires fewer hours than expected. And, you may not be paid for the full value it brings to the client. Perhaps you’ve taken a five-hour bookkeeping project, but the value of the project is higher to the business overall than the short amount of time it required.
A flat rate is advantageous for freelancers who can use past project experience to estimate the time, effort and value of similar projects. With flat rates determined upfront, some clients may have an easier understanding of what they’re paying for in your statement of work and how it fits their budget.
The risk of using a flat rate is that the scope of the project may change or take longer than expected, potentially causing you to lose money. You may end up putting in more time and effort than expected, thereby being paid at a rate that would be lower than the equivalent hourly rate you would otherwise make. Though clients can see what you’ll provide upfront, you can also expect to negotiate. price more. Clients are looking at an abstract total, and you won’t have the hourly timesheets to back up the effort required.
Embrace the journey
Working as a freelancer brings new opportunities, freedom and satisfaction, but it takes time and persistence. Jeffrey F. offers this wisdom: “I don’t look at every client like a check. I look at every client as a learning experience. It’s part of your journey as a consultant.”
Are you a finance or accounting professional ready to go fractional or looking for additional income? Sign up to become a Paro expert and match with high-quality clients, set your own rates and receive tailored support to optimize your earnings.