I've been working full time in the field (software) for about 5-6 years. However, I've never done any freelancing work before and am new to this entire process. At my job, pay is easy, since it's usually hourly or salaried, but freelancing is different.
How do I calculate pay rate in a freelancing gig if I've never freelanced before?
When you are self-employed or working a freelancing job, there's more to your compensation than simply take-home pay. If you work in a non-freelancing position, you most likely receive health and dental benefits, vacation time, retirement contributions, and your employer pays taxes for employing you.
As a freelancer, all of these benefits are items of compensation that you must supply. What's more, there's administrative tasks you're responsible for that will involve your time and expense, such as tracking hours, billing, filing taxes, marketing costs, advertising costs, and more.
When I first started freelancing, I spoke with some colleagues who also did freelancing on the side. They suggested I ask for 3 to 4 times more than I would normally receive. This has worked out quite well, and these clients have approached me with more problems they've needed help solving.
Every job is different though, so be sure to include any costs in the rate so that you cover your expenses and bring in enough income to survive the slow periods when there isn't a lot of work.
Two businessmen at a meeting. One says, "Let's imagine you have named your price, I have named mine, and we both laughed enough. Let's get to the business now and discuss the real price."
As @jmort253 has said,
...and be prepared to be offered as low as they can.
You are selling either your time (Time-and-Materials projects) or a final product (Fixed Price projects).
Whatever it is, it may be a good thing, or maybe not, but anyways, everything has its price.
The initial level can be found on freelance sites. For I.T., it's oDesk, Guru, and many others. Just go to Completed Projects section and see for yourself.
See for yourself at what price you are having enough workload.
Occasionally, request prices much higher than at your level. Be prepared to the fact that higher price may require higher quality comparing to what you normally deliver. It may pull quality of your products to a higher level, but requires more work.
Plus, the price considers your willingness to sell:
Note, this is an answer modified from one I gave on the workplace stackexchange.
You need to find out the market rate for an equivalent employee first, then your costs.
The following costs must be accounted for accurately in order to compute an hourly rate just to keep you on par with the salaried employee
G & A (this is accounting speak for computers, software costs, office space, electricity, rent, travel, professional development; things you cannot charge a client for directly)
Overhead (this is mostly labor that you cannot charge to a client, but sometimes includes things I stuck in G & A above)
Fringe benefits (this is retirement, health insurance, liability insurance, workman's comp, taxes, paid time off)
Profit (you need a little of this, you are taking on some risk by not being permanently employed)
Furthermore, the G & A + overhead costs for a contractor are high because contractors typically only work between 20 and 30 hours per week. If you are billing by the hour, you can only bill the actual hours worked for a client.
I recently finished a contract where the scope of the work which I was hired for was equivalent to an engineer in the $115-135,000 annual salary range. I just happened to pick $125,000 as my break even calculation number. Note that I live in the USA.
For this calculation I lumped G & A and Overhead costs together, since for me they are really the same thing when working out of my home office, and I don't have any other employees.
My annualized costs were :
G & A + Overhead : $23,000 (note that this is with no rent, but includes computer upkeep and software licensing, travel, phone, accountant, invoicing software, and other test hardware)
Fringe Benefits : $43,000 (this includes heath, all taxes, liability insurance, etc.)
The above were actual costs. You will need to use your own costs in your calculations.
Now I need to calculate the hourly rate. To accomplish this task, I need to compute how many hours per week that I work on an annualized basis.
I actually worked about 30-32 hours per week on the contract, the rest of the time I was working on billing, accounting, hour tracking, task reports, etc. (all unbillable to the client).
I also need to remember vacation for this calculation, and I'll use 6 weeks of paid time off.
My total annualized billable hours were (52 - 6) weeks*32 hours/week = 1472 hours.
My total costs were $23,000 + $43,000 + $125,000 = $191,000.
This means that my hourly rate must be $191,000/1472 hours = $129.76/hour, just to break even!
This is the no profit rate.
If you want a bit of profit, you need to add that to this rate. For example, to have a profit rate of 10% I would need a hourly rate of 1.10*$129.76/hour = $142.74/hour.
Note that the way I computed the hourly rate here implicitly accounts for paid time off and non-billable overhead labor, if you need or want explicit numbers you can do that as well.
The break-even rate ($129.76/hour) is 2.16 times the 40 hour equivalent of $125,000 per year ($60.10/hour).
Before contracting and setting a rate, you need to figure out all of these costs for yourself, then do the above break even calculation.
Some things you must pay for in the US are :
but other costs are up to you. I refuse to go without health insurance, for instance.
If you cannot close contracts at more than the break even number (for hourly billing), then you should attempt to obtain a regular salaried position.
If you choose to not include benefits, retirement costs, etc. in your calculations, you are effectively working for below market rate.
Charge the highest price you can think of. I will explain it with my personal story below:
I once had to sell clothes on a flea market for a friend while he was out. He didn't tell me how much the clothes cost him or for how much I should sell it. It could have cost him 50 cents and I would sell it for 5 euros, or it could have cost him 10 euros while I was selling for 2.
I had no idea, so I just said the first reasonable price to my first costumer... And the costumer immediately took it!
At this time I saw my mistake: I didn't properly use all of the willingness of the costumer to pay. I just wasted it!
I decided that next time I would use all of the costumers readiness to pay by watching his emotional resistance to the prices I was offering. If he immediately accepted (no resistance), then of course I was too low. If he immediately left the selling site, it was too high and I would improve my estimate on my next costumer. This worked quite well! And it means that if the readiness to pay is lower than your cost to produce, you should: either quit trading this good, or find a market which is willing to pay more for it.
Some years ago I was looking for a new job and when they asked which salary I wanted, I gave a value and they accepted immediately. When I saw how silly I was, I asked them to change it, but no chance. They gave me all the excuses they could think of!
Luckily life surprised me in a way that I was not allowed to take the job, and some months later I had another chance to get another job. I applied the technique of probing for the highest price someone is willing to pay for, and it worked!!!
Now I have my life long increased pay just because I applied this technique in the second they asked me for my bid
as many people have said here already, there is no 'correct' rate for a given piece of work. I've often been amazed by how much freelance rates vary. I've literally been paid a difference of 300% for the same kind of work, by clients that were of a similar size and had their offices less than 500m from each other.
While in the long run you can essentially charge whatever you want, this is very difficult when you're first starting out - and you ask about how to calculate your rate when you've never started freelancing before.
What has worked really well for me is to calculate the lowest possible rate you need to earn to still put food on the table.
This gives you your minimum rate.
Then go out and find clients. If they pay you more than the minimum, you're winning. You will make mistakes and you will undercharge, however that can be adjusted upwards as you go. It's more important that you learn the business of freelancing than make a killing right from the outset.
Calculation taken from http://freelance-survivor.com/conquer-your-freelance-pricing-anxiety-in-just-5-minutes/
Marketing research. When you're a freelancer you're selling yourself. You're marketing yourself. The first thing you have to learn is how to evaluate your own self worth. For that, you need to do research and you need to know how to do research otherwise you'll be dependent on other people to guess for you. In evaluating yourself and your market worth you need to know what you yourself can and can't do. Then you evaluate yourself against others who do the same. Then you research the market. There is usually a range of numbers that includes skill level, age, relevance of skill, etc. There's many things you need to do. The bottom line is if you want to be a freelancer you are your own boss, your own marketing agent, your own accountant, etc.
