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This article was written for the first time freelancers who don’t know how to price their service. In particular, this is for those beginners who are looking to piece together a full-time freelance career in the near future. You see this first client as an opportunity to build a portfolio rather than a one-off payday and you’re worried that your pricing will make a mess of a good opportunity.
It very well could.
The five most common ways to price are copying the internet’s prices, pricing based on personal costs, value-based pricing, pricing based on time logs and, of course, guessing and hoping.
The Most Common Mistake We Beginners Make
Selling ourselves short.
Right now you’re pricing to build a portfolio. You know you don’t have the experience of seasoned competition and you’ll compensate with lower prices. You figure that once you land a client at "this price", you’ll be in the door to up-sell them to "that price" in time.
One Quora responder calls this the "Chinese Restaurant Problem". Lowball pricers expect to raise them later, but new lowballers fill their position for an unfortunate cycle:
*“A really common problem in the Bay Area (not just Silicon Valley) is what I have termed 'The Chinese Restaurant Problem'.
It’s very common for a new Chinese restaurant to open for lunch with absurdly low (perhaps loss leader?) pricing. They want to build a clientele by undercutting the other restaurants pricing.
This is incredibly common in the business parks around Foster City, which has a number of biotech firms in the area. People go to the cheap place.
*And then, once they have driven the competition out of business by absurdly low prices, they raise their prices. They assume customer loyalty will abide. It doesn’t. What happens instead is that someone else comes in with exactly the same idea and undercuts the pricing.” * Don’t be just another Chinese Restaurant. Price yourself competitively from the start with one of these 5 strategies. Well, really just 4.
1. Reference the Internet
And the freelancers who make it great.
Get talking to people right away. Ask the people who have gone before you in the same field. I recommend LinkedIn Groups and Quora to find active freelancers.
Protip: If you join a LinkedIn Group you can direct message the person without being connected.
A template message could look like this:
“Hi (freelancer), my name is (rookie). I’m a freelancer and found your resume (words / comment etc.) to be insipring. I’m just starting my freelancing career and would love to ask you a couple of questions that have been on my mind as I try to grow my portfolio. I’m a (insert situation / education / experience). I’m looking and asking for answers wherever I can. Would really appreciate it. Keep up the great work!”
- How did you settle on your price and what was it?
- Did the price change for your first client at any point in your relationship? Why, why not?
- Once they know more about you, tell them the price in you’re thinking about. What do they think about it?
2. Calculate the Costs
Find the number you need to realize your vision.
This is a little more time intensive. By calculating your costs of living, the hours you hope to work, and a few other easy metrics, you can come up with a bottom line number that can serve as your floor price.
In the beginning you probably won’t be given enough hours to support yourself. If you’re like most of us you’re probably working another job, maybe living at home, with family, or with enough friends to make renting a place frighteningly affordable.This is still an insightful exercise. Feel free to try it:
Divide (Desired Annual Salary + Living Costs + Business Expenses) / (Billable Hours Per Year)
3. Reference Your Time Logs
Which you can easily develop with Timely.
If you bill hourly for a logo design and it takes two hours you might make $200. If you charge a $1,000 fixed price for the same design and it takes two hours, you just made $500 per hour. By logging your time you’ll come to understand how long each task takes. That’s a profitable habit to develop.
I used Timely to figure out how long I spent researching, writing and editing 2k word articles for clients. With the information from Timely’s reports, I came up with a fixed number based on market rates (it changes depending on my familiarity with the subject I’m writing about, interest in learning more about that subject — see "relative value") and have been working with that number for a few months now.
Since Timely integrates with any major calendar (I use Google Calendar) I also discovered how poor my predictions are. Under Planned hours you can see my Calendar had 10 hours saved but with Timely I only actually logged 8:43 minutes. Not too far off, but it adds up over several full weeks of work.
This information can easily double your earnings if you’re coming from all paid-per-hour projects.
4. Value Based Pricing
Requires negotiation skills and the ability to track the ROI of your work.
“Value-based pricing in its literal sense implies basing pricing on the product benefits perceived by the customer instead of on the exact cost of developing the product.” Find out what they’ll earn from your work and charge against that. For example, if they’re going to make a billion dollars from your campaign, charge half a billion dollars to create, implement and measure it.
The argument for is you can justify it with numbers.
The argument against is you could scare them off with a big number.
A lot has been written. You can read elsewhere. In my opinion it’s not so much for first-timers unless you understand how to calculate the real value of your work well and are a comfortable negotiator.
I’ve done it. With no frame of reference.
I did it. I put a number out there that I figured would make me rich. I didn’t do the math. It wouldn’t make me rich. They did say yes. For a few months, I lived like I was rich. Again, I wasn’t rich. I know that now. Lesson learned.
Think about Context
Why they will pay you $50 to do it but an employee $25
“I’m gonna be rich, rich, rich I’m gonna be rich, rich, rich I’m gonna be the richest flea in the land, ka-ching!” (P.T. Flea)
In the beginning, we all feel like P.T. Flea. It’s from the movie A Bug’s Life, by the way.
The numbers are high. Like, "how could that be?" high. I can tell you businesses aren’t paying any more than they have to. In fact, hiring freelancers saves them money. To bring your ego and expectations back to earth, simply understand the costs they avoid by hiring you.
When a company hires you they absorb a lot of costs that, as a freelancer, you’ll have to cover. Paying employees means paying overhead — insurance, pensions, vacation, office space and supplies, downtime and more. Employees are guaranteed. They’re a commitment.
Freelancers are paid only when it’s convenient for the business. You do this project. You recieve this cash. Do a great job, pay your taxes yourself and get off our stoop. If we need you again, we’ll call you. You contribute everything to your retirement fund, pay for health care, ink cartridges and so much more.
Barring exceptional clients, soon after it becomes less expensive to hire an employee to do the job, you’re out.
I remember reading an e-mail from my first client. The first "company" company I ever signed up. They asked the price. I gave them an answer and winced, stepped away from my computer and DING, “We can do that.” Felt like a King. Now it’s your turn to go find that feeling. Good luck!
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