"How do I know how much to charge?" (best 3.5-minute read today)

This is the question that I often get during my Q&A portion of my talks, and I understand the struggle, especially when you are starting out and still trying to find your footing. Valuing your time is something you need to get good at, and then get better at it over time and raise its value.

Time is money.

But you can't buy time.

This realisation was early in my career, and it really hurt. It was one of my first "big projects", where I really poured my heart and soul and a lot of my time into making it happen. And when I got paid - I felt miserable.

How I calculated my rates?

I quit my agency job to "be my own boss". I had no idea how much to charge for anything; I knew how much the agency was charging so I used that as a base and reduced prices because I was a freelancer and my only bargaining chip was lower pricing. Idiot.

HOW TO KNOW HOW MUCH MONEY YOU NEED

This is individual for everyone. We don't have the same goals, ideas of what "a lot of money" is, and what covers our basic needs, and what covers our desires.

I was just happy to be working for myself, so I did something along the lines of:

rent + utilities + gas + spending money + savings + new phone. For a year.

I did not even include my equipment, because I had a computer.

MY FIRST HOURLY RATE CALCULATION FORMULA

Let's say that you want to make 50.000$ / year doing what you do. (I did not start with that much money, btw. NOT EVEN CLOSE. Growing up in Croatia, 50k USD was unimaginable when I started.)

You divide 50k with 10 to get your monthly target.

Why not 12? Because you aim at one month of vacation and one month of unbillable hours (networking, admin task, invoicing, meetings, etc...). Now, how many hours can you realistically work every month?

For reference - full-time employee works 8h/day (160h / month).

So with that amount of hours, your hourly rate would be 5000 / 160 = 32$ (always round up).

Are you in a position where you can charge the rate that you calculated?

If yes, great, if not - why not? If there are people charging that much or more, it means it's possible. If you think you're not good enough - you get better. Over time, you will (need to) raise your rates. Or you find something else.

This can be a struggle between doing what you love vs what pays well. If they are not the same thing, it's a decision that may potentially shape a large portion of your life.

Personally, I'd rather be happy and love what I do every day than "cry in my Ferrari". But I believe if you truly love what you do, and do it well, you will find a way to make a decent living out of it.

PROJECT-BASED PRICING

Ok, you want to make 5000$ / month. How many projects can you take on every month? Let's say it's two. So your project is valued at 2500$. For comparison, let's say that you are doing illustration. If you are pricing your work at 2500$ per project, with the time you got better, and you completed it in 30h instead of 80h.

Your time would be worth 83$/h. (2500$/30h)

If you charged hourly, you would've earned 960$ (32$*30h)

So, do you want to charge by project or hour?

What's your value of life per hour?

We all work for money, but there are things that money can't buy. This is why I put a price on everything; not the in terms of money, and not literally. But I value some stuff over others, and I will say "no" more often now than when I was younger.

There's no client in this world anymore that would make me work outside of my working hours or weekends that I spend with my wife; this wasn't always the case before, and I was eager to get as much work as possible.

I've calculated how much time I am losing when commuting. 2h/day to get to and from an office? That's 40h per month. A full week of full-time work (and money) I leave on the table to go to some office? Nope. Never again. I work from home. It only took a global pandemic for companies to realise that this is ok and work still gets done.

With this kind of thinking, I am now doing a new hobby. My wife asked me "when will you find the time for that with everything that you do." But I got myself gym equipment at home, so daily I save 30min on travel. I use that time to send this email. Isn't that awesome?

That's it for pricing.

Value based pricing will be topic for some other day.

Cheers,

T.

P.S.

One thing that was pointed out by one of the readers about previous email:

One question though:

"One thing to keep in mind: Your day rate is not a guarantee of completion. You are giving them your day. That's it. When I do this - I usually don't onboard additional clients, so I don't divide my focus. But it's a rolling engagement, and it doesn't come with an estimate"

How is that different from contracting?

This is how I differentiate Freelancing from Contract work; for example, I will have 3 days/week rolling contract, and then one fixed pricing project that spans for a month or two, and maybe a small retainer.

In that case I will not onboard additional rolling full day commitment. That's the main difference from contracting where you're 9-5 "non employee" from Monday to Friday on a contract instead of permanent salary. Some would say "Hidden employee" not a freelancer...