Pricing your services as a freelancer is one of the harder decisions you will make.
How much you charge, how often you charge your clients, how you collect payments, and what you do regarding late payments are just a few of the considerations you need to consider when you consider building a career as a freelancer.
It’s surprisingly tricky to make this decision.
If you don’t charge enough, you end up doing work without getting fair compensation. Clients can’t afford to pay you if your rates are too high.
Either way, you aren’t making money.
But money is also so personal. You might have a little experience negotiating a salary.
But telling potential clients that you will charge them a certain amount for your services is more direct.
Money makes a lot of freelancers nervous.
In this article, I’ll take you through the three primary questions you’ll have to face:
- How do I charge my clients?
- What do I need to factor in to ensure I’m charging the correct amount?
- What are some critical practices I need to implement around collecting payment?
Then, I’ll talk to you about increasing your rates over time without damaging your client relations.
How to charge your clients
Broadly speaking, you can follow three main pricing strategies as a freelancer.
Each has benefits and drawbacks. Each also works for a different type of work or situation.
When most freelancers start, they charge based on their time. Often this involves an hourly charge.
But, time-based pricing isn’t just about charging your client for hourly work.
Time-based pricing also includes:
- Daily rates
- Weekly rates
- Monthly rates
The benefits of this structure are straightforward.
You know how much money you’ll make for whichever increment you choose as your default billing cycle. The client knows how much you’ll charge, and you know how much you will be working.
The drawbacks are that you limit your earning potential whenever you bill clients based on time.
The other pricing structures have more potential upside at the cost of a bit more risk on your end.
When you charge based on time (hourly, daily, weekly, or monthly), you trade potential for predictability.
But, this isn’t a bad thing.
Both new and veteran freelancers choose to bill based on time because it’s clear, simple, and easy to manage.
The sheer simplicity is why it’s the most common method of billing.
It’s relatively easy to predict your income, incrementally raise rates, and charge your clients, whether you charge by the hour, week, or monthly.
If you are just starting, do yourself a favor and begin with this billing method as you build up your experience.
You may find that this method works so well for you that you will stick with this method for a long time.
You can use project-based pricing in at least two ways.
- Use it when taking on a specific (limited) project like a website design, security fix, or API development.
- Or, for large projects, take payment when you complete key objectives within a larger project.
Why use project-based pricing?
If you know what you are doing and how much time or expenses you will incur in a project, charging them in a lump sum often means you can charge more than with time-based pricing.
Clients often are willing to pay a little more because they value certainty about the cost. If they know it will only cost “X”, no matter how much time it takes, it makes that capital expenditure a little easier.
It’s more lucrative, but it’s also riskier.
If you incur unexpected expenses like spending 15 extra hours on a project because you underestimated the difficulty, or you have to sub-contract a piece of the project to finish it on time, that extra money can vanish quickly.
This is the downside, too.
Because you don’t always know what a project involves before you start, something that seems like a profitable price can turn into something that isn’t so profitable once you finish.
But, if you have experience or have a good idea of how much time and resources it will cost you, it’s a great way to increase your rates.
Clients love knowing exactly how much they’ll spend and are willing to pay extra for this certainty.
In certain situations, you might be so sure of your ability to deliver incredible results that you are willing to risk your up-front fee for additional compensation.
Under this schema, you sacrifice some upfront compensation, thinking in the long term, by taking a percentage of sales or profits after the work is completed. You may think of your position more as a partner than a freelancer in a particular project.
Value-based pricing makes your income potential almost limitless.
Who wouldn’t love the idea of doing work once and collecting a fee on it for months or even years? And, the better your work, the more money you could make.
But, this isn’t without risk, either.
There are a lot of things, even things entirely outside of your control, that could impact that back-end compensation.
Clients love this because they have virtually no risk. It’s cheap for them. And, if it doesn’t work out, they haven’t wasted any money.
An agreement like this requires serious guardrails to protect you. It’s also something that you shouldn’t enter into lightly. You’ll want an iron-clad contract and the ability to independently verify whether the other party is being forthright about compensation.
Without independent verification of the results and a contract clearly outlining your back-end compensation, things could get very uncomfortable quickly.
Pricing your services is always a risk-reward balance.
The more risk you take, the more reward (compensation) you will receive.
But, the less risk you take, the less reward you’ll take.
Ultimately, though, the question isn’t “which one is best?” Nor is it, “which one will help me make the most money?”
The question is, which one suits your needs best?
There is nothing wrong with charging a client hourly or monthly. Many successful freelancers have done this for years, slowly increasing their prices. They build solid, profitable, and busy careers with this method.
Some projects, some situations, and some personality types work better with different pricing models.
If you are more conservative and risk-averse, stick with the time-based model. The stress may not be worth the potential reward.
Are you someone who loves to go big and take chances? Do you genuinely believe that you can do something that revolutionizes your client’s world?
Use the value-based pricing model.
What do these pricing models look like in the real world?
Let’s say a company contacts you to build a new website. How would you structure your payment?
You charge an hourly or daily fee for the length of the project. It’s simple, straightforward, and easy to track. The company takes all the risk, and you bill them for the time you spend on the contract.
You offer to oversee the entire development and design process, from security to copywriting, to database management and front-end development, for a set fee. You know you’ll be sub-contracting the copywriting and the UX design (since you specialize in API development), but you have trusted partners. When you give the quote, you build the costs for copywriting and UX design into it and pass them along to the client. In this model, you share the risk with the client. As a result, you can charge more, expecting the client to help you complete the project in a reasonable amount of time.
The company exists in a growing industry, and you know their most significant issue is that their website doesn’t allow online orders. So, instead of charging your “normal” fee, you’ll only charge 10% to design the site and 1.5% of all online orders on the backend.
Which one is the “right” model?
It comes down to your personality, your comfort level with the client, and how much work (and risk) you want to take on.
Any pricing model can be the “right” one in the right situation.
Four factors that impact every pricing model
No matter what you choose, you need to make money.
A freelancer who doesn’t make money isn’t a freelancer. They just have an expensive hobby.
So, before you choose a pricing strategy and give your clients a quote, consider the following.
Business expenses: Every freelancer has miscellaneous expenses. Do you use a project management system? Pay subscriptions to the software you use? Have you purchased training or devices to use for work? What if they break and need to buy a new one?
Calculate your business expenses, including software, technology, hardware, and more. Then, factor those things into your rates. If you are using tools YOU pay for or hardware YOU have purchased, it’s reasonable to pass a portion of those expenses to your client.
Taxes: Do you know how much you are charged for taxes or what your tax rates will be once you start freelance work? The minute you step away from an employer, your taxes change dramatically. You will owe a lot more taxes.
Schedule a meeting with your accountant, or if you don’t have one, find a good one, sit down with them, and figure out how much you’ll have to pay.
Don’t make the mistake many freelancers make at the start of their career and forget to factor taxes into your rates. If you get behind on your taxes, catching up can be very painful.
Other people: Some projects may require you to hire specialists or sub-contractors. Other times, as your freelancing business grows, you may hire a part-time assistant or someone to help you do things like managing your books. Don’t eat these costs. Pass at least a portion of these costs on to your clients.
Your time: How much do you WANT to get compensated for your work? How much do you want to make per hour? Did you become a freelancer because you weren’t making enough money? Don’t make the mistake of undervaluing your time.
How do I increase my prices?
Once you have a few clients and you’ve begun making money, you’ll want to think about increasing your prices.
There are a few things to consider:
Tie price increases to reviews and renewals.
If you have contracts, tie any price increases to the renewal date of a new contract. If they like you, and the increase is reasonable, it shouldn’t be a huge problem.
Give plenty of warning.
Don’t spring price increases on clients without warning. Give them time and numerous reminders-in writing. And, make sure they acknowledge and approve any increases before you give them.
Every client doesn’t have to be charged the same. However, setting significantly different rates for the same work with different clients is a bit unsavory. In the unlikely event they find out (the invoice gets sent to the wrong client, or you accidentally release the inaccurate payment information), you’ll have some very uncomfortable conversations. But, it also sets you up to prioritize one client over others, which isn’t good.
Keep it simple
Your client is hiring you to simplify their life, not make it more complicated. This applies to billing as much as programming. Clear, simple, straightforward, and all-inclusive pricing is easier for everyone.
Put payment terms in writing. It can be as simple as an email but as complicated as an addendum to a formal contract. Regardless, get it in writing.
Don’t let clients push you around on payment terms. Firm but consistent reminders about late, partial, or back payments are essential. If a client isn’t willing or able to pay what they agreed to at the start of the contract, nothing you do will help.
Pricing your services, adjusting your rates, and collecting payment is just as important a skill as writing code.
Most freelancers start with time-based pricing, charging by the hour, day, or even a monthly fee. This is the simplest way to get started.
But, it’s by no means the only way to do it, either.
No matter how you choose to do it, communicate clearly with your clients about your expectations.
Now, go out there and make some money!
Thanks for reading!