Pricing is foundational to your business. You sell products. And products have a price. You better get a good grasp on how it works. Hence, this blog-series on pricing.
There are roughly three ways to approach the price of your product. (1) Most logically is to base it on the value you deliver to the client. (2) To look at the price on the market for similar products. (3) And lastly, there is Cost-plus. To price your product or service based on what it costs you and put a margin on top of it.
I'll talk about the first two in later parts of this series. As a freelancer, the biggest cost is delivering a product or service is your time. It's your most valuable and only non-renewable resource.
But what should you price your time at? How can you budget time?
I'll answer questions like:
- How much work fits in a year?
- What should my rate for a day of work be?
- What fraction of my yearly hours should be billable hours?
- What should I be judging the proposed fee/hourly rate for a project on?
In part 1 (read back here), I focused on your internal budgeting of money. Making the link between your net income and your revenue.
I set an example revenue goal for the series at €40.000 per year. I left with a sketch of what a portfolio for such revenue could look like.
What fits in a year?
From Year to Working Days
A year seems like a lot of time. But there's also a lot that has to fit in it. And you can't always be productive. How many hours can you realistically work? Or how many of these gigs/projects can you realistically fit in a year?
Let's break down a year to get a better grasp on what size it is. There are 365 days in a year. 260 of those are weekdays.
The Netherlands has 9 national holidays. Or 10 in the years you include the 5th of May. Of these, on average 6 (or 7) fall on weekdays.
And of course, you want to take time off, say 25 days.
And you'll probably be ill sometimes. Hard to predict, but I'll put it at 5 days (2% is actually really low in companies).
Let's round somewhat down and assume you work on 220 days (44 full-time weeks, or 1.760 hours).
You can obviously work more by taking less holiday or working on weekends. And there is the variable of how many hours a working day consists of. It's fine to work a bit more when needed, but in these examples, I'm not going to budget for it. It's simply 8 hours a day.
That leaves us with 220 days a year of 8 hours a day to work on earning your revenue. In Part 1, we started working with a revenue goal of €40.000 per year (Read that to understand what 40k leaves you with per month). That's an average revenue of €182 per working day.
Billable vs Non-billable hours
But as you no doubt have figured, it's really unlikely to spend all those days on billable hours. If you would, you would have a job.
- The billable time is generally not the only time you spend on the project (plus general inefficiency in switching activities).
- Then there is the time spent on getting new clients (network meetings, writing proposals, marketing yourself).
- And the time spent on overhead activities (administration, trainings, planning).
That's a lot of hours that you work but don't earn you revenue directly. How many exactly really depends on your business model, what your sales funnel looks like and general success level you've had in getting the right clients.
To keep your average revenue per day at €182, the revenue on your billable working days needs to compensate for this. The lower the percentage of billable hours, the higher the hourly return needs to be in order to match with your revenue goal.
Billing only 20% of your time requires you to make your revenue in 44 days. In our example, you need to bill €900 per day. Or more likely, in 352 hours at €114 an hour spread over more than 44 days.
When it's 60% of your time (3 days out of every week), you have 132 days. Meaning €300 per day.
What is this percentage for you? Note that the exact level isn't good or bad. It simply needs to match with your revenue goal and the revenue you make on your billable days.
[NB. This is earnings per day. If you make extra costs directly on these days, the price needs to compensate for that in order to still make your profit goal.]
Building a Portfolio of activity that matches your Budget
Now your work is probably not going to be as rigid that you've either have unpaid hours and billable hours at your needed average rate. You'll have a mix; with some of your billable hours having a lower return and some a higher one.
These lower return activities are not inherently bad or too low. Not if they set up or are compensated with activity with a higher return.
What matter is that your portfolio of activities in total matches your revenue goal.
Let's look at two example cases. One for a freelance facilitator (freelancer is everyone whose business is hours-based). And one for a part-freelance/part-entrepreneur wood craftsman (an entrepreneur's business is product-based).
Example 1: The facilitator
Our facilitator wants to make €40.000 in revenue this year. Her work is quite seasonal (low in summers and around Christmas/New Year's). So, there are really only 40 good weeks. That means an average good week should earn you €1.000.
She has different activities, ranging from low-yield and stable to high-yield and unstable. Let's have a look.
- Day 1: She has a stable teaching gig that pays €200 per week for a day of work (for those 40 weeks).
- Day 2: She bills 4 hours to a client at €100 an hour for HR developmental work. €400 per week.
- Day 3a: Every other week, she organizes and hosts her own training event. On average, ticket sales earn her €200 net revenue per event.
- Day 3b: Every other week, she hosts a half-day workshop at a client. She asks €600 per workshop.
- Day 4: She actively builds her portfolio and markets her skills. No income.
- Day 5: She has meetings with potential clients and does administrative work. No income.
Example 2: The wood craftsman
Let's use a wood craftsman as an example. He makes design furniture. Tables, closets and the like. He has a workshop (which costs him a bit more than the freelancer) and he has materials to buy for every product. In total his revenue target is €60.000 a year.
Half his revenue comes from selling 'generic' furniture products of €60 a piece. So wants to sell 500 a year generic products a year. Or 10 a week on average. The other half of his revenue comes from building custom-made furniture with a much higher margin. He can do about 10 of these special products a year. Thus, needing to gross €3.000 each.
His week may look something like this:
- Day 1 + 2: Production.
- Day 3: Selling on market + Delivery.
- Day 4: Talking to clients to discuss specifications + Innovating/Automating.
- Day 5: Marketing + Finding new sales partners.
How to judge a price
When judging a pricing proposal from an internal budgeting perspective, you obviously will look at the price. But that's not the whole story.
It might be good business to do work that's lower than what you need to have to earn on average. And there are good reasons not to accept work that is priced higher.
You can do this by scoring the proposal 4 variable. To gauge the true value (besides money) of the proposal, score it on Stability, Enability (totally a word).
To get a sense of the true costs, score it on Real Size and Prime Timeness (again, I'm not making this up).
Side note: Whether or not it's fulfilling is not a reason on its own on to lower your price. That you like doing something doesn't mean you shouldn't earn money with it.
How stable is the gig? Is it a long term commitment with a stable income? Or a one-off gig of a few days?
Stability is fancy-talk for "how many hours does it save you in finding new clients".
For example - you earn your revenue by billing 3 days a week at €300 a day and spending one day a week on PR/branding. Then, getting a gig for 2 days for half a year might leave you with 1,5 day a week to take on other projects since you need less PR/branding time. Meaning that 2 days a week is still half your time and only needs to bring in 50% of your revenue (instead of 67%)
Plus, how much is certainty of income worth to you? Besides peace of mind, by having a very stable gig, you might be willing to lower the 10% "rainy day fund" I mentioned in Part 1. This, in turn, lowering your revenue goal slightly.
What does this gig enable you to do?
This means getting very clear on why you are doing this gig.
Will it develop your sales funnel? Will it allow you to meet potential new clients?
Will it get you in the room with the right people and allow you to make new connections?
Is it high-margin work that allows you to spend time on other low-margins work in which you want to take part (volunteer work) or want to develop (your learning budget)?
Is it a form of development? Meaning, do you build up knowledge/skills/network that you can use for another project later on.
This also applies to your own activities that you do to get new clients. These are things at the beginning of your sales funnel and might not yield much - if any - revenue. For example, network events, "Professional Picture for €20 Saturday" at the local market or aggressively priced open introduction workshop to get people to know your work.
The opposite of enability is opportunity cost. What does accepting work prevent you from doing? Maybe the project is not aligned with your strategy but you're tempted by the revenue. If so, it's a distraction and your time might be better spent on finding better clients.
[More on this in Part 4 of this series: "Should you work for free".]
There are the hours that are defined in the project. But how much extra time will it take you to perform the work?
Which hours can you add to your invoice? Is it purely the direct and productive time? Or is time for preparation included?
What other time do you have to spend on the project? Things like travel time. Or the time before and after the start of the talk, that you're expected to be available for questions. If you're not paying attention, a 1-hour talk quickly takes 5 hours in total.
And, less relevant but I'll include it, what costs you'll be making to do the work are they willing to cover (travel expenses, hotel, space for workshop, printing etc)?
Perhaps you've discovered that you're most creative during certain parts of the day. Maybe it's mornings, maybe it's late evenings. But that is when you do your best deep work (whether it's writing, designing or coming up with good ideas).
Requests for gigs during prime time should come at a premium. The opportunity costs are simply higher. That's why, if I can help it, I don't schedule meetings in the morning.
I hope this gives more insight in how to judge a prince or an hourly rate from the perspective of what it costs you.
The next step I want to suggest to you is: plot out your portfolio of activities.
- What activities/projects did you do in the last 12 months?
- Which were high and which were low yield? How much time did you spend on each and how much did you earn through them?
- How did they score on the criteria of Stability, Enability, Real Time and Prime Timeness?
- Where is the room to move to higher yielding and more fulfilling work? Are there some activities that you need to cut in order to create space for "better" work?
Next up: How to price your product based on the value you bring, how you are perceived and the market you play in.
PS: I realize it might seem like positioning yourself from a place of scarcity. Using words like, "have to", "compensate" and "in order to make revenue". However, I think it's about being pro-active. It's about being honest and transparent to yourself about the financial consequences of your prices.
Or you might feel it seems spoiled to dare to ask for high rates. Perhaps. But I'm more concerned with a trend that's pointing the other way. Namely working for way too little. It's about saying, this is the income I need and working for less is a line I won't cross.