Setting your pricing - Understanding your value vs your time is essential, explains Dave Smyth

Setting your pricing can be hard.

It’s difficult because there are so many factors that can impact what someone charges or can charge:

• Their expertise and skillset (how in-demand and/or unique that is)
• Systemic issues
• Confidence in their rate
• Client sector/needs/expectations/budget
• How expertise is communicated
• Internal struggles/pressures (can I charge this much? am I leaving money on the table? is it ok to leave money on the table? how desperate am I for work right now?)

The whole thing is complex, it takes some trial-and-error to settle on what works for you.

… among other things. And these variables all have a part to play.

Then there’s the complexity of trying to understand what a current ‘standard’ rate is.

Even when rates are published, it may not be that helpful:

• Another freelancer with a similar level of experience might have a completely different process or be influenced by the sector they work in
• Freelance rate surveys often lack nuance/detail, making it difficult for individuals to take anything beyond an average from it

So, the whole thing is complex, and I think it takes some trial-and-error to settle on rate that works for you.

Getting to your number

Over the years, I’d read a great deal about setting rates, but I’d noticed that a lot of advice didn’t feel particularly relatable.

It might be focusing on a certain sector, method of charging or maximising income.

These things are useful are in the right context, but I thought it might be helpful to approach it in a different way: how do I work out the minimum I need to charge to earn X?

This is something everyone needs to know, whether they’re charging hourly, by project or using value-based pricing.

A common mistake which many make, especially newer freelancers, is basing their rate on an annual salary.

This typically results in incredibly low rates that don’t account for the variability and costs of working for yourself.

Charging for time, versus charging for work

I charged project rates for the best part of nine years and switched to charging on a time and materials basis two years ago.

In theory, the clear benefit of a project rate is that the client gets an upfront fixed-cost quote that they can approve and won’t change.

Clients inherently understand a day rate - it’s easier to understand “X will take Y days” rather than “A will cost B”

In practice, found there were several drawbacks of charging in this way:

• A fixed cost requires a fixed scope, which means a lot of work upfront. I’d often find that the needs and understanding of how to solve a project’s challenges evolve, meaning we either need to rescope the project or skip something that might be helpful in the project.

• For longer projects or engagements with less defined needs (i.e. we’d like your availability to work on a range of things), it’s difficult to scope these and arrive at a fixed price.

• Estimating is just plain difficult: I think I lost money on almost every fixed-cost project I took on

• I got the impression clients found it hard to understand how a project price comes together – even when the quote is well-structured.

• Clients might also consider the quote to be negotiable without removing elements of the quote (e.g. “can we agree on £XX,XXX). This also made it difficult to effectively communicate when rates are being discounted.

• Cashflow can be unpredictable if things get delayed (even with well-defined/paced payment cadences)

Charging by time solves some of these issues right off the bat:

• We can start work immediately without worrying about fixing a scope – and there are lots of ways we can do this: retainer, time banks, agreeing an initial small spring etc

• I’m paid for every second I work

I’ve found clients inherently understand a day rate: it’s somehow easier to understand “X will take Y days” rather than “A will cost B” Cashflow is much easier to predict: I’m paid every month

But it requires a different way of thinking and working. The biggest difference is that this is inherently a more flexible method of charging/working, so clients have to be (or become) comfortable with that approach.

There are two commonly-cited downsides of time-based pricing that I’ve found to be non-issues:

1/ Time-based pricing penalises efficiency: This can be handled partly by the rate, but I’m not convinced that everything becomes quicker with experience: some things take longer as you learn there are more possible solutions to a problem.

Charging in this way has been a revelation to me, but it’s no panacea – there are trade-offs in every method of charging.

2/ Hourly pricing doesn’t let you charge more for bigger clients (or less for small ones): It’s definitely possible to have different rates for different clients and, if you publish a rate, it’s easier to communicate a discount. For larger clients, there are plenty of legitimate reasons to increase a rate or day estimate: additional bureaucracy/processes, usage rights, extra validation work, etc

Charging in this way has been a revelation to me, but it’s no panacea – there are trade-offs in every method of charging.

But stay open to learning about different methods of pricing.

Much of the web’s discourse on rates hails value-pricing as the ultimate freelance goal, but lots of people make a good living charging by project or hour.

It’s possible that value-pricing is a perfect fit for you and your clients – if not, you may be able to make hourly or project rates work well.

What advice does Dave give to first time freelancers thinking about their pricing?

There’s lots to consider, but I’d start by working out the minimum you need to make to cover all of your living and business expenses, factoring in time-off, sick pay, pension, how many hours per day you can practically bill etc. This gives you an absolute baseline to start from.

If you know freelancers working in the same field and sector, it’s worth having a chat about how they work: what have they found to be effective methods of charging, how do they manage admin time, etc.

I’d also try not to worry too much about the approach you take to charging: time, project or value. Pick something you feel comfortable with it and try it – if it doesn’t work, you can always change the way you work later.