How to set your rate
Tim Case
directly to what kind of business you want to have. Any formula for
rate should be based on the value you deliver to your clients.
Therefore focus your business on client value and think of your rate
as a reflection of this value. This idea of rate based on value is
one that I haven't seen discussed much so let's first look at the
common ways of setting rate and why they are incomplete.
The first thing I would advise when it comes to setting a rate as a
freelancer is to not confuse freelancing with being an employee, they
are completely different. Don't do what I did initially, and ball
park my annual salary as an employee to an hourly as a freelancer.
Divorce yourself from the idea that freelancing is just being an
employee without a boss. It's not, it's about starting a business
with new rules and new costs, and new ways of thinking, you are a
business owner not an independent employee. You'll need to bill
higher than you would as an employee. How much higher?
Freelancers have been in search of the silver bullet of rate setting
and I commonly see three different ways to base your rate which I
believe are all less than optimum:
Base it on your expenses.
Base it on what others are being paid.
Base it on what the client will pay.
Base it on your expenses.
Freelance rate calculators really bother me because there is something
fundamentally wrong with the underlying idea about how rate should be
determined. The idea of taking your expenses and then adding some
arbitrary percentage on top of it is old school manufacturing thinking
at its worse. Expenses should only be factored into price if the
expenses that are incurred directly relate to the production of the
finished product. In our case the expenses we pay for lighting,
insurance, and even our computers are indirect costs. Ahh, but what
about labor you ask? Isn't our labor, the time we spend directly
working for our client, a reflection of a direct cost? No, you are
thinking like an employee again, even if you charge an hourly rate the
money you receive from your client is not your wage as an employee
it's your revenue as a business. Big difference. Also the idea of
picking some percentage out of the air as your presumed profit is
irrational.
Base it on what others are being paid
This comes in two forms; basing your rate around some industry
standard, or basing your rate by what others in your area are
charging. Basing it on industry standards is not so great because
industry standards are designed for employees and not businesses.
Industry standards are designed to make recruiters not to have to work
so hard, it allows them to fill org charts with heads at a set rate.
Standards are about corralling sheep, and as a business owner very
little of what you do is standard, most of your work reflects
creativity and only the least creative can be fit into standards.
Basing it on what others are making seems like the way to go but again
it's problematic, if another rails developer says, "I make x dollars
an hour", well it would only be helpful if you are working for the
exact same client doing the exact same work as that guy, and you too
write code exactly the same. The problem with looking over somebody
else's shoulder is that a rate represents a an agreed upon price, at a
certain point in time, for a particular client, using that particular
developer's business model, to perform some particular type of
service. That situation is different than yours.
Base it on what the client will pay
People buy what they want and not what they need. A developer friend
of mine was looking for a place to host his production rails site.
One of the potential hosts charged way more than the rest. Curious
about how this could be so, he called the expensive host and asked why
their price was so high. After the host explained what it was that
was different about them from the others, all of a sudden that
particular host's service wasn't expensive, it was worth it. The
amount he was going to spend was based on what he initially determined
was the standard, then someone offered him a new level of value at a
much higher price, and this deal was deemed worth it. Basing a rate
around what a client wants to pay is problematic because clients often
times don't know what they are willing to pay for something until
they've been convinced of value. Value or the perception thereof is
never fixed, we all are impulse shoppers and most of our purchase
decisions are not price driven but value driven.
So what should price be based on then?
A rate should be based on the value you provide your clients, there is
no silver bullet formula in rate setting. Pricing is one of the
principal challenges you have as a business owner and your goal in
growing your business is to get better at the art of the price. If
you use one of the methods described above, fine, but understand that
these are not the optimum ways to set price because they cause you to
rely on some external determinant of which you have very little
control and limit you in some way. Focus on building your business
value and as it builds charge more. Value is based on the eyes of the
client, if they perceive you as being of higher value they will be
willing to pay more. For new freelancers, the important thing is to
break out of the employee way of thinking, as you are now a business
owner, and the value you provide your clients can be so much more than
just the lines of code you are slinging. I'm hoping this is something
I get better at as time goes on, and I freely admit that it's
certainly not easy...
David
Thanks for the feedback.
I took a look at the rate calculator and I wasn't really happy with
that method of setting rates. Basing your rate/price on your cost of
doing biz + amount you want to make in income seems to be a bare
minimum approach. It doesn't seem to address any business value at
all.
I guess for now, I'll continue with my strategy of raising my rate
until clients think it's too high. Then I'll have a conversation with
them and explain why my rate is worth it.
Wow, so much to learn! :-)
______________________________
- David Lanouette
- Integrity First Software, Inc.
- David.L...@GMail.com
Excellence, then, is not an act, but a habit - Aristotle
John Moody
> no silver bullet formula in rate setting.
Exactly right, IMHO. When I started out, I set my rate using this
handy 3-step method:
1. Find out what the "average" dev was charging in my area.
2. Set your rate at about 25% higher than the "average" rate, and
tell prospective clients that it's because they'll get better code and
a better experience. (Many of my clients turned to me after being
burned by inept or unethical "developers".)
3. Make sure you deliver better code and a better experience, then
let the word of mouth fly!
Your mileage may vary, but it's working well for me.
- John Moody
MentalVelocity
jo...@mentalvelocity.com