Freelancers - Are you charging enough?

Most freelancers take a sizeable pay cut when they become their own boss, and this is at least partly down to undercharging. Freelance rates can seem extortionate, particularly to someone not used to putting such a well-defined value on their time (particularly when coupled with a British reticence towards selling oneself).

Most start by undervaluing themselves, lacking the confidence to match their peers and giving in to a desperation for work. But undercharging carries very real risks.

How do you know if you're charging enough?

Calculating your costs

The first thing any business adviser will tell you is to base your rate on your costs. Calculate how much you need. Set that against a realistic estimate of how much work you'll get – and/or how much you're capable of. Divide how much you need per month by how many jobs you'll get. Hey presto you just got yourself a day rate.

How much you need is of course subjective. But roughly, you need to factor in business costs first – costs of doing the job, as well as continuing costs (marketing, equipment) – followed by living costs: rent, food, clothes. Don't forget to include money for leisure. All work and no play makes Jack a dull boy.

One thing freelancers often forget about is pensions. It can be tough to find the money to put aside when starting out, but getting into the habit early is important. Estimates vary on how large a pot you need to provide for yourself in retirement, but they run to £300,000+ for a 'basic cost of living'.

And the earlier you start, the easier it is. Using approximate figures, if you start saving £100 per month at the age of 25 you'll end with £190,000 at retirement. If you started saving £200 per month twenty years later, you end with £90,000.

Meanwhile, two-thirds of self-employed don't pay into a pension at all. Don't be one of them. The amount of workplace benefits freelancers miss out on is the chief reason freelance rates are generally higher than wages. Take them into account.

Keeping up with competitors

Now you've got your nominal figure, you need to look at the market. You can only charge as much as the market will stand. Look at your competitors. See how much they're charging. If it's less than your figure you either need to cut costs or work more, faster.

How you define your market is important. Your competitors may not be operating in the same area or niche where budgets may be different. To take a simple example, companies in London will be used to paying higher than outside of London.

Very often it comes down to negotiation. Individual clients have different budgets. Common advice is to never be the first person to name a number – you don't want to price yourself out of a job, or miss out on a big pay day.

If you can trust someone at the company, it's perfectly acceptable to ask how much they have to spend. Sound engineer Nick Lewis says “I recently got a job through an old university friend. When it was done he asked me what my rate was. I don't usually work in that market, so I just said 'what's normal?' and we went from there.”

Valuing yourself

You know how much you want, and how much the market will stand. Now you need to realistically position yourself.

If you think you have a premium product, charge a premium price. You will be seen as premium. People can be squeamish about charging too much but your price reflects your worth. If you charge too little, you will be seen as cheap. Price is a marketing tool.

That said, until you have an established reputation you may need to charge less than you're worth to build your portfolio. Wedding singer Corrinne Williams thinks she probably under-charges for some jobs, but it helps her get work. And as she says “the more work I get, the more confident I feel to put my prices up”. And the more work she's done, the more clients feel a higher rate is justified.

Formerly freelance copywriter Oliver Barter agrees on the need to be flexible, saying “It can only take a few days work at a decent day rate to make a freelance career feasible. Supplementing it with lower paid work can sometimes be a necessary evil.”

Risks of under-charging

So you know how much you want to charge. You know where you stand in the market. But you also know you have to be flexible. Is it really possible to under-charge?

Absolutely. Even though you may have to go below your nominal rate on occasion (and most freelancers do), most also have a minimum. That's why the first step is important. There's a point at which it's more worth your time to look for, or be available for, better paying work than to take a poorly paid job. Knowing that point is key to creating a sustainable income. Working for peanuts will just leave you too exhausted to reach for better opportunities.

There is also a wider responsibility. If you routinely do underpaid work you're driving down rates for every other freelancer in your market and preventing yourself from charging more in the future as a result. And you'll want to charge more at some point, unless you really want to work well into your seventies (or beyond).

Define your rate in reference to both your needs and the market. Stick to it as much as possible, but be flexible where appropriate. Undercharge, but only do so knowingly and deliberately.

The truth is most freelancers come to this conclusion organically. Like Corrinne, the longer you do it, the more confident you get in charging a reasonable rate, and turning down jobs that don't meet it. A willingness to walk away is the strongest negotiating tool you have.