How to Calculate and Negotiate Your Hourly and Project-Based Pricing
by Caron_Beesley, Community Moderator
- Created: March 12, 2012, 10:21 am
- Updated: March 12, 2012, 10:21 am
If you’re a consultant, freelancer or any business that charges by the hour, you are going to have to determine and continuously review your pricing structure. For example, do you charge by the hour? What’s a reasonable rate to ask? Are you better off charging clients on a project basis?
Here are some tips for calculating your hourly and project rates and how to negotiate pricing with your client.
1. Determining Your Worth
Deciding what to charge clients is a balancing act between market factors, business costs, and the value you bring to your clients. Before you quote any work, ask yourself these questions:
- What is the market rate for work like yours in your industry and location?
- How experienced are you? Not just in your line of work, but as a business owner? Being good at a skill is one thing, but being able to manage deadlines, meet expectations and above all, being dependable, are essential qualities for freelancers and consultants.
- What rate are you willing to accept and will it cover your costs?
2. Calculating an Hourly Rate
If you’ve been a salaried employee all your life, making the switch to self-employment requires a change of thinking. Some companies may be tempted to coerce you into a rate that reflects what they’d be willing to pay a salaried employee. But self-employment brings its costs and credit to you. Your rate should reflect this, as well as your expertise.
If you are used to being a salaried employee, here’s a good rule of thumb to follow when determining an hourly rate:
- Divide your former salary by 52 (work weeks); then divide that number by 40 (the number of work hours in a week). Then mark it up 25-30%.
Your mark-up covers both your value and experience, but also takes care of our business costs such as networking, selling, and other administration, not forgetting your self-employment tax obligations and healthcare insurance costs.
3. Calculating Project Rates
Many clients will prefer to manage their costs and ask for you to price your work as a fixed project fee. This can also work to your benefit, if you price it right. However, it can also work against you, especially if your client is new and the project scope creeps beyond your original expectations.
The best way to calculate project rates is to spend some time scoping out what you’ll deliver. For example, if you are a freelance copywriter and a client wants you to price out a two-page white paper, use your knowledge of your own work methods and familiarity with the subject matter to structure your time commitment, for example:
- Research: 2 Hours
- Interview subject matter expert: 1 Hour
- Produce First Draft: 4 Hours
- Two rounds of edits: 2 Hours
Total: 9 Hours @ $x hourly rate = $x
Remember, you don’t have to put this calculation in front of your client, but it gives you a useful framework for covering your costs and delivering within scope. Don’t forget to add a caveat to address that any work done over and above this scope of work will be charged at an hourly rate
4. Negotiating Your Rate
Negotiation is hard to avoid and can often shed light on whether this is a client that you really want to work with. If you are confident that your pricing reflects your value and the market rate, being haggled hard on price can get a relationship off on the wrong foot. Likewise, being locked in at a low rate can quickly devalue the relationship from your perspective.
So, when it comes to negotiating, be prepared to stand your ground but be willing to compromise. If you foresee further business here, try to be flexible. For example, could you deliver a one-page white paper, instead of two or cut back on the review cycles?
5. What About Retainers?
If a client starts to send a lot of volume your way, retainer-based pricing can be advantageous, even if it’s at a lower hourly rate than your advertised price.
A retainer is a fee paid for a pre-determined amount of time or work (usually within a month) and is often paid up-front. A retainer agreement can deliver the benefit of predictable work and income while giving your client the reassurance of having you on “stand-by” and a clear view of monthly costs.
Many consultants charge the full retainer fee, even if they don’t work the entire hours allocated. If you value the relationship, steer clear of this; instead, roll unused hours over to next month.
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