Join Terry Lee Stone for an in-depth discussion in this video Determining your rate based on freelancer needs, part of Running a Design Business: Pricing and Estimating.
You can determine an hourly rate for freelance design services, in several different ways. The first way, is to calculate it based on your actual financial needs. This method doesn't factor in the value of the work to your client's business or provide a premium for your expertise. It's just based on economics. Step one, total your monthly expenses. Include all your expenses from rent, to food, to insurance, to entertainment. This is your personal operating cost. Step two, total your billable hours.
What are the total hours you have to sell in a month? A standard target figure is eight hours per day, or 40 hours per week, or 160 hours per month. I've observed, that most designers don't bill all the hours of their day. On average, about 10 to 25% of their work day is taken with non-client billable activities, such as running the business, doing self-promotion or simply downtime. Therefore, to actually build 40 hours per week. You may need to work 44 to 54 hours. Step three, get your break-even rate.
Divide your monthly expenses by your monthly billable hours. The result, is the hourly break-even rate. You must achieve this hourly rate for your planned amount of hours, in order to pay your monthly expenses. Step four, determine your published rate. To build in profit, savings and set aside money for income taxes, you need to add money to increase your break-even rate. To do this, multiply your break-even hourly rate by three for a number that can be called your published rate. I say published, because this is what you tell clients is your hourly rate, and it is what you use to calculate your project fees.
If you charge your clients on an hourly basis rather than a fixed project fee, use this published rate. Also, use the published rate to calculate any additional compensation on change orders, which are amendments to the agreed-upon fee. You'll be charging your clients for a project. Why multiply by a factor of three, to get the published rate? Because roughly speaking, 1 3rd should be used as your income, 1 3rd should be set aside for taxes. And 1 3rd should be split in half for profit and for savings to reinvest in your business or to hold for emergencies, self promotion, or just to cushion the ups and downs of being a freelancer.
Using thirds works well for taxes in the United States. Other countries may have other tax ratios that designers should use. You should have a talk with your accountant or book-keeper to figure out what they recommend you set aside for taxes. You may need far less for taxes and more for savings, for example. I offer the 1 3rd, 1 3rd, 1 3rd idea as a simple, easy to remember formula. Let's look at an example. Let's say that your monthly expenses are $4,000. You divide that by 160 billable hours and get a break-even rate of $25 an hour.
If you multiply that times 3, you get a published rate of $75 an hour. Once you've calculated your published rate, you have to ask yourself, will clients pay this? Is this what other designers with my expertise, and in my part of the world get paid? These questions are important. It's why I walk you through a few other ways to think about your hourly rate in this course. I put a worksheet to calculate an hourly rate, based on your actual needs, in your resource files. Check it out. Maybe you'll find it helpful.
- Thinking about money
- Factors to consider when pricing design
- Comparing time-based vs. component-based pricing strategies
- Scoping a project
- Determining your rate based on factors like industry standards and budget
- Creating estimates
- Communicating additional costs
- Invoicing the client