Value-based pricing
- It’s fine to be paid hourly if you’re just a warm body
- You will probably get more rejections, but the jobs and clients you do get will be better quality.
- I usually price jobs with no reduction from my previous prices - my efficiency is not for my clients, it’s for me.
- I stopped giving out hourly or piece-meal rates.
- How long it takes or how much work it is isn’t really any of their business
- Value vs. fixed rate
- Transition from hourly to day or week rate first
- Employees sell hours; businesses sell products or services
- Tell clients
- you’re investing in outputs not inputs
- incentives are aligned with value-based
Setting hourly rate based on full-time salary
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A good approach would be to figure out what you feel you deserve to be paid a year, in this case at least $70k. Now add at least 30% to account for your increased tax burden, insurance and business licensing/fees. That gets you to 91k as your gross target. But you have experience right? You were good at your job because they want you back. And you don’t want to stay in one place, you want to move forward, yes? Good. Let’s call it 100k gross target.
Now divide that by your number of realistic billable hours. Subtract 4 weeks for vacation, holidays and sick days, minimum. You now have a 48 week year (not 52). Assume a good, busy week is 24 billable hours a week. That leaves you with 3 days client billable hours and 2 days a week to manage and grow your business. You now have 1,152 billable hours a year.
Divide gross target by billable hours and your rate should be 90 or round down to $85.
And of course sanity check what other professional contractors in your field charge in your area. If you are in an Urban area it will be more. Midwest rural area, less.
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I don’t think it’s unrealistic to ask for double what your W2 rate was. Between taxes, insurance, and time off (sick or vacation) that you’re now on the hook for, you’re worth at least that much!
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Take what you made before in total annual comp and divide by 1,000 - that’s your new hourly rate
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Double your w-2 rate. I didn’t feel really financially comfy until I was 125% above my hourly w-2 rate, but double made me pretty ok.
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They don’t get a discount because she’s already gainfully employed.
Income taxes
- I set aside 35% of my gross for taxes, which had me just toeing the line during tax season.
How to raise rates
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If you’re asking if there’s a foolproof way to raise your rates with no chance to lose a client: no. That’s not to say you shouldn’t ask to raise you rates: you should. You just need to understand that there are many outcomes in which you lose a client by doing so, but also many outcomes in which they say yes or something in between.
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Some are reasonable enough that they understand rates need to go up with time. It’ll help a lot if you can show extra value for your increased rates. You’ve gotten some new software, you’ve learned new skills, etc.
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The ultimate question is whether or not you can still acquire this work from different clients
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I let my client know a few months in advance that as of a certain date my rates would be increasing from XXX. I also let them know why, and offered to give them an extra month past the rate increase at the old rate since I valued my relationship with them.
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Of course you’re nervous about losing contracts, but have you ever had to find a reliable freelancer? It’s a pain in the butt. People generally want to avoid that at all costs.
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I’ve been charging monthly rates to my clients and am planning to raise it on one of them. What makes sense to me is the idea of my time being “bid up”.
I have a base of 3 clients where I’m making decent monthly income. A new prospect showed up and I quoted them for much more a month than I do for each of my current clients. Now I have a new client paying 50% of my monthly income, where 3 of my current clients make up the other 50%.
I plan on going back to one of my current clients (who used to be my largest client and who I did the most work for and has been very happy with me) and saying that I just took on a new client who is paying me a larger amount than he is so my time has to shift more towards them. We can keep the rate he’s currently paying me, but I won’t be able to dedicate as much time as I used to. If he would like to have me working at the same level I’ve been working at (or to get equal time), I’d be able to do it at $X amount (where X is greater than or equal to my new client’s monthly pay, not that he has to know this detail).
Estimating things that are impossible to estimate (like debugging and fixing a problem)
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Charge them hourly, but give them an estimate. Just make it clear that it is an estimate. They don’t know the extent of the problem, they want to know a ballpark range, and they don’t want to throw their money away. Its the same thing we go through when we go to the mechanic with our car making a funny noise.
Basically, you need to say, “I have no idea.” Simply say it with confidence. Maybe something like this:
“Unfortunately, there’s no way to tell how long this project will take us exactly, not can we guarantee that it will be resolved easily, or within a pre-determined timeframe. As I currently understand the issue, I estimate that it will take us X hours at my hourly rate of $Y/hour to debug and fix this issue, however, it is entirely possible that the current issue may be larger and more complicated than expected. I will remain in contact with you during the process, and at the conclusion of debugging or the completion of X hours (whichever comes first), I will work with you to re-evaluate the problem and come to a reasonable solution and timeline to fix the problems that arise. No hours will be billed above X hours without prior approval.”
Something like that. Sometimes for these projects I charge a consulting rate to evaluate the problem and come to a more exact estimate.
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Tell them if they can’t tell you exactly what is to be done, you can’t tell them exactly how long it will take
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Do you have previous work that’s comparable? You might be able to say “I’ve done similar work with XYZ company for a rate of $X, to give you a ballpark idea of what your project may end up costing.”
Things to charge for
- admin time
- meetings/emails/calls with client
- planning
- design work
- referencing documentation
- travel time (if they make you go somewhere)
- project expenses (bill them through)
Things you’ll have to pay for
- self-employment taxes
- vacation/holiday pay
- retirement
- health insurance
- life insurance
- time spent doing other business activities like marketing, sales, accounting, etc.
Payment terms
- 50% up front. Paid in full before delivery of finals. Never, ever do anything else unless you have a trusted relationship with the client and even then things can go south on you.
- 100% upfront. Always
- good for productized service
- For smaller projects, I want 50% upfront, and 50% at completion. For larger projects, I split 25% / 25% / 25% and 25%, set at major milestones (like Define, Design, Develop, and Deploy).
- Net 30 and I bill for services at the end of the month. I have one customer with Net 45 and one with Net 60.
- Less than a mont of work 50/50. More than that I usually break into thirds or 30/30/30/10
Red flags
- If their first question is “what’s your rate?” that’s a bad sign
Get the client’s budget
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It’s easy to deal with this. Tell the client, “I can craft a 50,000 solution. Obviously, you get a lot more with a $50,000 solution. So I need a ballpark idea of what resources you have before I can recommend an approach.” (Adjust the numbers to fit the circumstances, of course.)
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Just state your project minimum or the normal project range after you hear the basic overview to save yourself time.
Most clients will not want to state a budget upfront or they will lowball as part of the negotiation process.
If you ask for a budget, your client is going to think you’re going to price based on the budget and not the actual cost.
Doing work for experience or exposure
- you lose credibility out of the gate
- Are you or are you not qualified to perform the work? If you are not, you should not be attempting it. If you are, then why not fair market rate?
Estimating (generally)
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For my programming and designing, I provide an estimate, with a high/low range of what I think it will take to accomplish the project, based upon a written, detailed set of assumptions, but it’s explicitly laid out that the final invoice will be for actual time spent at my hourly rate.
Invariably, the client asks for something different, so that adds to the total, but the additional work is covered by the fact that it wasn’t a part of the original proposal and that the proposal stated that the final invoice will include all time. It’s still the service-provider’s burden to provide documentation (perhaps as simple as an email stating what the client’s request is for, and at least a rough estimate of the additional time). Providing the documentation is important, because it allows the client to say, “oh, if it’s going to cost more, then I don’t need it” BEFORE you do the work, rather than having a far less pleasant conversation after.
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When providing an estimate, take mockups, split them into components, make sure you understand all possible cases of components use, make sure these cases are available as mockups themselves and then estimate each and every element on the page.
See a screen with several blocks of static links, some weather widget and a couple of checkboxes? Count them to start with. There can be 3 checkboxes or there actually can be 33 hidden under some panels. If the block of links looks like static content make sure it is static and you won’t have to get the link values via some ambiguous external API.
Put the estimate into a spreadsheet. Make sure it looks like a list of JIRA issues that are ready to be sent to development and not like an enterprise roadmap with enourmous milestones like “integration with that thing” or “administration UI”.
Classic mistake here is that you’ve estimated the elements, but forgot to add time to put everything together, make general layout and configure routing, prepare build and deploy scripts and other stuff. So on day one you take this list and want to start with the first task and find out that there is lot of infrastructure work to do before that.
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That way from something that could take 20 minutes, the final estimate could be 1–2 hours total. Because to “take 20 minutes”, it means to be written from a developer and send to a QA. This does not make it ready and it’s not how much it takes. Never make an estimate of how long you need to code something.
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I require paid discovery engagements. I’ll quote a client anywhere from 1–5 days of discovery time and produce and estimate afterwards. This is a pretty common practice in enterprise consulting. I use that time to gather requirements, put together mockups, and estimate the amount of time each phase of the project will take, +/- 10%. Once that is done, I deliver it along with recommendations to the client. I operate a consulting firm, so I will also attach rates to each phase, based on the time estimates.
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Base estimate on previous similar projects
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Start with wireframes
Billing for education
- As the service provider, it’s on me to meet the estimate as long as my assumptions hold true. Almost always, I have to figure something out — learn how to do something new to me; this does not get added to the invoice, because learning something to do what I said I could is what’s called “cost of doing business.”
How to talk to client about pricing
- Lead with value instead of pricing
- Anchor by talking about pricing before client
When to raise rates
- When you’re booked up (supply and demand)
- When you complete your first successful project (and your second, maybe third)
- Test doubling your rates with new prospects. You can always change it back if it doesn’t work out.