Last night I posed a question to my followers on several social media networks. It went something like this:
If I were to pay you to stand still and alone and do nothing for an hour, how much would you charge?
The responses varied from $40 to $800 but the majority landed at or around the $100 mark.
The purpose of the question was to find out what people think their personal time is worth when there are no other factors involved such as enjoyment, value, communication, relaxation, or learning. My theory, bolstered by this completely unscientific study, is that people value their time greatly but are willing to undercut themselves in the extreme when it comes to work. This is especially true for freelancers.
What should I charge per hour?
One of the first and most difficult questions facing a freelancer is how much to charge per hour. In most cases new freelancers come from previous employment in companies and the only gauge they have for hourly pay is their salary. Because of this and their general devaluation of the worth of their own time they tend to set the bar much too low and charge hourly rates that are unsustainable and irresponsible.
To guide you away from this pitfall and spark a discussion about what fair pay is for freelancers in web design and development and in particular WordPress let me present a model for calculating your hourly rate. Keep in mind this is not the only one and there are many people who have published content about this (check out the excellent course Running a Design Business: Pricing and Estimating at lynda.com and Curtis McHale’s aptly titled book Don’t Be an Idiot for starters).
For the purpose of this article I define a ‘freelancer’ as a person working in web design and or development focussing on WordPress and/or Open Source with several years experience and education in the field. She runs her own business out of her home or a rented office space and is responsible for all business related activities including invoicing, contracts, accounting, hardware and software costs, and general office overhead.
Step 1: Set a base rate for your time
The process starts with finding a base rate for your time. This is where the question I asked above comes in: How much is your personal time worth to you in cash? If you could sell it to someone in hourly units, what would you charge? It is important that you set this rate based on your personal time (spending time with family, reading a book, watching your favourite show, doing your hobby) because if you think of it as work you will automatically devalue your time. More on that later.
Based on my unscientific query it appears the people in my social media circles value their time at approximately $100/hour. That seems to be a reasonable estimate.
Step 2: Set a value to your expertise
Next you need to set a monetary value to your expertise. This can be done by asking a question:
Compared to a novice with zero experience, how much more is your hour worth?
This returns a dollar value. How exactly you reach that figure is up to you. Some say you should charge $5 per year of experience, some say you should charge $10 per year of school, some say you should charge on a scale from $0 (novice) to $100 or even $1000 (the best of the best). For the purposes of this article we can say you charge $5 per year of experience so with 4 years experience your expertise is worth an additional $20.
Step 3: Set a value to your speed and effectiveness
The more skilled you are, the faster you’ll work compared to your competition. This also means the more skilled you are, the fewer hours will be logged and the project will be completed quicker. Both of these elements need to be factored in to your hourly rate.
Start by asking a question:
Compared to your closest competition, how much faster do you work?
This returns a percentage. If you are 20% more efficient you’ll work 20% faster meaning you’ll log 20% fewer hours and will wrap up 20% sooner. This should at minimum be evened out and in most cases be charged as a premium (you work faster and that is more valuable). I think the premium on more effective work should be at least 20% giving us the following formula:
Your speed (%) x 1.2 (20%) = Speed Value (%)
So if you work 20% faster you’ll charge an additional 24%.
Step 4: Set a discount
The last step is optional and should be applied with great care: If you are just starting out as a freelancer or want to break into a new market you can opt to set a discount to your fees. This is tricky territory and needs to be done in a systematic way to avoid problems down the road.
The discount you set for yourself is governed by several factors including how much you can afford to cut your own rates, whether discounting your rates will devalue your services in the eyes of the customer, and whether discounting your services will undercut the competition and devalue the market as a whole.
This last point is important and you can see the real life implications of wholesale discounting in many creative fields including photography services and WordPress consulting: New actors have been using price as a competitive factor for too long and have driven the overall price down to the point that the general public have a false impression of the true cost involved in these services.
If you feel you need to set a discount for your hourly rate, you also need to set a firm plan for how to phase the discount out over time. Otherwise your discounted rate ends up being your permanent hourly rate.
A real life example
Let’s put this into practice with a real life example: Maiken (not her real name) is a seasoned designer and developer with 4 years experience building custom WordPress sites in an agency. Now she is breaking out on her own and needs to set an hourly rate for herself.
She starts out by setting her own base rate at $120 (she really likes to spend time outdoors and this takes more time than just watching TV or reading a book so she values her time higher than the norm). She has 4 years of experience and decides that’s worth an extra $20/hour. Because she is an extremely efficient coder she estimates her speed to be about 35% higher than her peers for a total Speed Value of 42%.
Putting it all together Maiken’s hourly rate calculation looks like this:
(120 + 20) x 1.42 = $198.8/hour
Justification for charging what you’re worth
At this point I’m pretty sure you’re thinking “$198.8 per hour? You’ve lost your mind Morten!” If you ask around you’ll find very few freelance web designers and developers who charge an hourly rate in this range, especially in the WordPress field. In fact you’ll find very few who charge an hourly rate over the $100 mark. That is alarming and indicative of a disconnect between what the work is worth and what the people who do the work think it’s worth. What’s needed here is a generous serving of perspective:
Freelancing is a business
Freelancers often think that because they are freelancers they should charge less than a full scale business. This is just plain wrong. A freelancer has the same expenses that a business does, just on a smaller scale. The fallacy happens because you don’t consider many of your expenses real expenses: If you work for a business you just do your job. If you work as a freelancer you do your job and you also do invoicing and accounting, procurement, licensing, legal contracts, HR management, maintenance, and cover overhead. You may outsource some of this to a 3rd party, be it an online service like Harvest for invoicing or Redbooth for project management, or by hiring a real accountant for your year-end taxes, but most of these costs are invisible to you – especially if you work from your home office.
To get a clear picture of what running your freelance business actually costs per month you need to do the math:
- Hardware (computers, peripherals, bags, etc)
- Software including licenses
- Office expenses (printer ink, paper, notebooks, pens, etc)
- 3rd party expenses (taxes, legal, medical, dental)
- Office overhead (power, heat, maintenance)
- Office rental (what would it cost you to rent an equivalent office in an office building?)
You’ll find that these costs easily run over $1200/month and usually a lot more. So if you are charging $20/hour you need to bill a minimum of 60 hours per month just to break even. That may not sound like much but ask any freelancer and they’ll tell you getting 60 hours of billable hours in a month is a real challenge.
And this doesn’t include all the other elements of your job like advertising, chasing leads, website maintenance, client pitches, meetings, project management, the list is endless. In a typical company all these things are handled by people. As a freelancer you do all these jobs and they all eat away at your available billable hours.
Freelancing and salary work are two different animals
When I meet people who charge $20, $40, or $60/hour for freelance work I always ask them how they came to that number. The answer is usually “that’s what I would get paid in a real job”. Based on what I just told you it should be pretty obvious why this is just plain wrong. While you might get paid $25/hour in your “real job”, the company probably charges the client upwards of $250/hour for the work you do. That money is divvied up into business expenses, salaries for other employees in peripheral jobs, and profit for the owners. As a freelancer you need to do the same thing.
You are not a salary worker: You are a business owner. So charge what you’re worth.
People will pay what you’re worth
“But Morten, if I charge over $100/hour I won’t get any business!” you say. That simply is not true. You might not get the business of people looking to have a $600 website built, but you will get the business of people who actually know what a website costs. Charging more will more often than not increase your business and your success. And it also means you can take on larger and more time consuming projects and not have to worry about always landing new contracts. Charging more allows you to go after bigger fish. And think about it: Call a plumber to your house and she’ll charge you at least $150/hour plus travel time and materials. Why do you think your ability to build that plumber a website is any less valuable?
Let the games begin
The issue of charging what your worth is a hotly contested one and my approach is an extreme one. There are as many opinions on this as there are business owners and all those opinions can and should be heard. So I invite you to join the conversation in the comments below or in your own blog. If you do write an article of your own, let me know and I’ll link to it right here.
@mor10 interesting. At $100/hr, and an average working lifespan of 40 years (20-60y/o), people think their life time is worth $35,040,000.
— Grant Landram (@GrantLandram) January 22, 2014