For whatever reason, I find many freelancers don’t actually have a justification for charging the fees they do. I’ll admit I started out the same way. I thought about fees in terms of “What can I get?” and “What do I have to do to get that?”
Turns out there is a great deal of information from the business community about how to set your professional fees. I just hadn’t looked into it.
Product or Service
I’m going to start right out by saying that some of what we do is product and not service. By product, I mean something you might get off an assembly line. For writers, that means bulk SEO articles. Selling these is entirely based on how many you can do, at what price, and to a minimum standard. It’s like selling nails or bricks. A brick from one supplier is going to meet a buyer’s needs just as well as a brick from any other competent, if untalented, provider. Getting that brick (or article, or logo, or web template) for the cheapest price is of primary concern to buyers.
Services, on the other hand, come with talent and are one-offs. Every time I go to the doctor or a lawyer, I go with my own unique problems. Even in these realms, there are cut-and-paste things that have fixed prices – an uncontested divorce, a will, an ear infection (maybe). But overall, we think of professionals as deliverers of custom services. And because I do not buy a lot of lawyering or medical care, I actually have no idea what things should sell for.
In this second area, price is less important than my interactions with the client. In fact, charging more is actually perceived as offering more value. This is especially so when a buyer is naïve and hasn’t purchased the service before. One clear indicator to clients that you offer more quality is that you charge more -- even better when you can demonstrate others have paid more for your services.
Other concepts from the business side
Think of your fees as a kind of dial you can turn up or turn down. They are adjustable, depending on the client and the marketplace. You can turn the dial up and get fewer clients at a higher rate, or you can turn the dial down and get more clients at a lower rate. Now we are talking math.
The formula from economics says that firms wishing to maximize profits should set their hourly rates so that the marginal revenue brought in for the last hour billed just equals the marginal cost of doing that last hour of work. (Ha! I slipped in some of the lingo to give you an appreciation of the sharks I have been swimming with to write this article.)
While that framing is correct, I’m going to stick with my dial analogy. It has the benefit of not requiring a glossary of economics terms. You turn the dial up and down and bounce between more work and higher fees. The rule of thumb is to look for about a 25% rejection rate. In other words, if you are getting more than 75% of the work you are bidding on, you are charging too little.
“Wait, wait!” Comes the cry from the balcony. “I’m not getting even half the work I’m bidding on!”
Well now young Jedi, you have to determine whether that’s based on price or something else. Plus, I left something out. What might make it clearer is not the number of projects you do, but how many billable hours you have. So, no matter how many projects you win as a percentage, if you’ve filled up your time, you’ve dead-ended and need to turn that dial up again.
Conversely, if you aren’t winning enough work to fill your time – and this just means the time you want to spend at it, not any set time – then your prices are too high.
“Too high? But I’ve always heard we should increase our prices to standard professional rates.”
True. What I should have said there was, “too high for the marketplace you are in.” There’s an easy remedy for this as well… move.
That recommendation assumes you’ve already done all you can with the other metrics. In other words, you are at least on par with everyone else you are competing with in that marketplace. Improving other dimensions and upping your game might work without moving, but once you hit the ceiling you really have no choice but to find a better pasture where the grass is sweeter.
To restate: Set your prices to a level where you are getting rejected on price alone for about 25% of the work you would get if your prices were substantially lower. You still have to bid enough to fill your time and you still have to look up-market and improve your offerings. The goal in the “maximize profit” model is that happy balance where you’ve got full hours at the highest possible fee.
(Note: I titled this #1 because the topic turned out to be too big to fit in any reasonable blog post and also to give me an incentive to write more on the subject. By implying there is more to come, I’ve given myself a much needed anti-procrastination obligation.)
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Reviewed by sibusisoJune 26, 2011
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Nice stuff, Bill, and very timely thoughts for me. Very helpful rule of thumb...now if only you'll tell me how to work out when I'm getting rejected on price...
| Overall rating: | 5.0 |
The only part that needs clarification I think is that for writers Bill is likely right it is a product. For the higher skilled areas of web and programming it defently a service because part of what the client is paying for is our background and experience.
Reading this will pay off at some point
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Reviewed by LucySpencerJune 07, 2011
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I like this - it's not like most of the articles out there. You're not only talking about setting fees, you're talking about how to THINK about setting fees. That's really where newbies get stuck (I know I did). Bring on Part Deux.
