Why Freelancers Need to Charge Based on Value
Many economists will say, “You don’t set prices. The market does.” At some level, this is true. But, ultimately, it’s still your decision to make. If your price is too high, you may lose business or set the wrong expectations for a client. If your price is too low, you may become unprofitable or attract the wrong clients.
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According to Marion McGovern, author of Thriving in the Gig Economy, the most common mistake free agents make is thinking there must be one rate for all clients. McGovern says, “People think it’s somehow unfair to charge ABC company differently than XYZ company. This is absolutely wrong.”
So, if you’re a free agent, how do you set your price most effectively? Do you stay within a market range? How do you charge each client differently? How do you avoid competing directly on price?
Tips for setting effective prices.
It helps to know the market range for certain types of work. There are benchmarking tools available to show the median rate for common industries, as well as the range of common prices. This is a good starting point.
Another consideration is what it costs to be a free agent. Consider the time you will spend on prospecting clients, unbillable hours, marketing costs and upcoming vacation time. There are many online calculators to help you determine a rate that makes freelance work sustainable.
Once you know the market rate and a rate that will support you as a free agent, you’re almost there. McGovern suggests five other considerations:
- The riskier a project, whether due to the scope or aggressive goals, the more you should charge.
- The more a project allows you to deepen or broaden your skills, the more leniency you should have on price. Consider it an investment in building your business as a free agent. In the long run, you become more marketable and potentially able to command higher fees.
- The tighter the timeline for a project, the more you should charge. It’s a convenience tax. For example, you may not realize it, but Uber is much more expensive per mile than a rental car. Convenience and urgency costs a premium.
- Your daily rate should be approximately 1 percent of your annual revenue target. A marketing consultant who feels $200,000 would be the going salary for her expertise should charge $2,000 per day for her services or $250 per hour.
- Your anchor client should get a deal. An anchor client is one that pays your rent, so to speak, by giving you recurring business. Having a project year in and year out from one client is a wonderful thing. Some free agents may want to increase the fees after a few years. Unless your costs have risen dramatically, resist that impulse.
With this approach, you can choose a rate that supports your career independence and takes into account your clients’ needs. While market rates are helpful for understanding your place in the market, you’re better off competing on quality, personalization, convenience or other factors that make price a secondary consideration for your clients.
Online marketplaces are great when you’re just starting out.
A recent report found up to 27 million Americans want to switch from traditional jobs to self-employment by 2020. Whether you’re new to the workforce or simply yearning for career independence, getting started is often a big leap.
Online marketplaces, such Upwork, Fiverr and 99Designs, can help you get started by sourcing clients. Most of these marketplaces also set prices, which is a double-edged sword. The benefit is that it’s one less task for the free agent to manage. The challenge is that it’s hard to make a living when your only controllable variable is time. Just consider Uber as an example. When you can’t set your own price, your time becomes the limiting factor.
In order to stay independent for the long run, it’s important to prospect your own clients and learn how to price effectively.