Are You Charging Enough? Part 2

Just about one year ago I posted an article from Forbes on professional providers and their fee schedules.  (Click HERE to read the earlier post and link to the Forbes article) It really was looking at how many service providers actually are under charging and lacked the confidence to increase fees. That post, from the feedback I received, was one of the more popular posts on the AW blog and Jane and I had actually incorporated it into our Good, Better, Best Appraiser Workshops discussions in our last workshop in November.

Yesterday I was skimming through Lifehacker and came upon a post about charging by freelancers. The Lifehacker post was called Take the Fear Out of Raising Your Freelance Rates by Knowing the Market, is a good follow-up to the earlier Forbes article from one year ago.  While the article is written for freelance software providers, much can and should be applied to the appraisal profession and how we structure our services and fees.

It discusses the fear in raising rates, and I think we can find many parallels to appraisal fees, and, for those professional practices, excellent rationalizations and discussion for raising fees. There is more to being a professional appraiser than product knowledge, market trends, appraisal theory and methodology.  It is a business, and if you wish to be professional and successful, you need to run your practice like a business.

Lifehacker (through the Andy Adams blog) reported
Dear freelancer,

I want to talk about how much you’re charging. I bet you could charge more. Life-changing amounts more.

Like most, I wanted to make more money. But first, I had to convince someone that I was worth a rate increase. It wasn’t my clients.

I had to convince myself.

If I told you about freelancers charging $20,000/week or $350/hour, what would you say? I know what I said: “Sure, they can get away with that, but I couldn’t because…”. It drove my wife crazy.

Why don’t you charge like they do? You’re doing basically the same thing, right?

The answer? I’m insecure. If you’re like me, you may have a bit of Impostor Syndrome. You can’t justify those rates to your clients. But more importantly, you can’t justify those rates to yourself.

So, you may have trouble raising your prices. We can fix that.

But instead of trying to find your maximum rate, let’s start with a very basic question:

What’s the minimum price you can justify?

I’m writing this because I wish someone had explained it to me when I started freelancing.

Warning: By the end of this article, you may have no reason to keep your rates where they are.

The big, crushing pricing failure
For 1.5 years, my process for picking a rate was:

Pick a number between $50 and $80 per hour
Send that number to a prospective client
Cross fingers and hope for the best
That worked to keep me afloat, until a single (massive) pricing mistake made me question my entire career choice.

I was on the tail end of a project that took twice as long as expected. I had done this project fixed-bid, which meant my longer hours didn’t make me any more money.

It was nearly the end of my career. I started doubting everything.

I don’t know what I’m doing. Why in the heck don’t I take a regular job?

I had eaten through my savings, and the final payment of the project was barely enough to pay the bills. My back was against the wall.

I had been reading Pat McKenzie and Brennan Dunn. Their advice sounded lovely: Raise your rates, Andy. Charge more!

But I couldn’t. I had a mental block. Sure, others could charge that much, but I doubted my ability to finish a project – let alone charge more.

I started looking for “regular” jobs. The thought of working for someone else wasn’t ideal, but the salaries were more than I was making. But then it struck me – an absolute facepalming moment:

If I can make this much as a full-time employee, why am I not charging at least this much as a contractor?

My hand was forced
After realizing I was making less than a full-time job – while bearing the risk of being a freelancer – a huge weight came off my shoulders. I had to charge more.

So I raised my rates. I was nervous, but I stuck to my guns. After all: in my mind, there was no choice. It was illogical for me to continue at current rates.

It worked. I lost some clients, kept a few old ones, and got some new ones. The clients changed, but my business became a lot more stable. But enough about my rates.

Let’s talk about your rates
Can you charge more? I think so. But you may have some objections. Your objections may even be subconscious, but we need to destroy them before we can start figuring out how much you’d be crazy not to charge.

Objection 1: Maybe you’re not worth that much?
For some clients, you’re not worth that much. The little old lady who wants a website for her dog walking business? You’re too expensive for her, even at $15/hour.

But for the majority of businesses looking to hire a freelancer, you’re worth it. You have the ability to expand and optimize their business, and they wouldn’t be talking to you if that weren’t the case.

Objection 2: Nobody can afford that rate
When I was starting one of my (many, failed) software businesses, I was worried that my business name was too close to a similar product. I called up a local lawyer, who was happy to help me look into trademarks – for $250/hour.

Whoa, buddy! $250 was too rich for my blood – I decided to change the name to something less “conflicty” and skip the lawyer.

Now, I live in northern Idaho, where the cost of living is largely determined by how many potatoes you eat per year. Lawyers cost more in other places. They’re expensive. And they work all the time. Someone, somewhere is paying $250+/hour for their services.

And that’s the point: There are businesses, nonprofits and even individuals who can and will pay $250 and beyond for an hour of the right person’s time.

Internalize this: Businesses can afford you. Other people are charging more than you, and they’re not necessarily doing more than you. There are programmers/designers/writers out there charging rates that would make your head explode. If they can do it, what’s stopping you?

Objection 3: You want people to like you
I had a friend who said the most he’d ever charge anyone he “liked” is $75/hour. He set a price ceiling based on how much he enjoyed someone’s company.

Maybe I’m needy. I want everyone to like me, and I carry that into my negotiations. Rejection hurts. Even more so when you like the client personally.

But sometimes, clients say no. You cost too much for them right now. That feels crappy.

Maybe if you came down just a teensy bit, they could afford you? Then you could be friends!

Stop. Stop it now!

Think back to the last time you thought about buying something beyond your budget. You thought “Hmmmm…not this time”, and walked away. You weren’t upset – you just decided not to buy. No hard feelings.

You’re a business. You have a price. You’ve (hopefully) given thought to that price. If someone can’t afford it, they really won’t be mad. Besides: If they are mad about your price, do you really want them as a client?

Let’s figure out your minimum rate
I floated along freelancing at market rates (who knows what that means) until I nearly went out of business, and then finally did a little bit of math.

You’re probably doing the math wrong. If you cover expenses (mortgage, groceries, and utilities) you can keep going…right?

Maybe for this month, but what about

The inevitable slow period?
The extra taxes or expenses you pay being self-employed?
Next month?
Let’s answer the original question you asked yourself:

What’s the minimum price you can justify?

Remember, we’re not looking for ideal or maximum right now. We’re looking for the bare minimum you can justify charging. After all, you’re not so sure about this, right? Baby steps!

Here’s how we’ll calculate your Minimum Possible Rate:

Minimum Rate = (Potential Salary * 1.25 – Freedom Tax) / 1000

Let’s break this down a little bit:

Potential Salary

Do a survey of your industry. Try to find jobs you’re an excellent fit for – something you’d almost certainly get if you tried. Try to find job postings with salary ranges included. Get a feel for the “average”. Use tools like Glassdoor to get estimates for company salaries for similar positions. Assuming you’re working from home, finding remote job postings is an even better approximation.

All you’re looking for is a range – a gut feel for a salary you have a great chance at getting.

Why multiply by 1.25?

25% is an estimate of the monetary “extras” included in full-time employment. That includes 401k matching, health benefits, bonuses, and reduced taxes. So, we multiply our potential salary by 1.25 to adjust for these.

25% is an extremely low estimate. It’s probably more like 50-100%. But we’re looking for a baseline, not complete accuracy.

Why divide by 1000?

1000 is the approximate number of billable hours per year you can work as a consultant/freelancer. The equation is roughly:

50 weeks/year x 20 hours/week = 1000 hours/year

Why only 20 hours a week?

Because of all of the non-billable time you spend as a freelancer: Business development, education, invoicing, accounting, research, etc. You don’t get paid for that – but you wouldn’t have those costs if you were employed full-time.

If you think you can bill for more than 20 hours/week, just tweak the numbers.

Freedom Tax

Freedom. How do you value freedom? How do you put a price on being able to run errands in the middle of the day? On picking up your kids every day from school? On not having a boss or a commute?

You need to calculate Freedom Tax for yourself. What amount of money (annually) would you be willing to sacrifice to keep your independence?

For me, this is pretty high. If you don’t mind commutes, fixed hours, and company politics, then this may be lower. You make the call.

How much would I charge?
Let’s do the math for my situation. I’m a competent Ruby on Rails and WordPress programmer with an eye for business and some project management skills. A lead developer for a software company or a large agency isn’t out of reach.

Salary ranges from 70k – 120k for software developers at the moment. I’d feel very confident asking for $85k annual salary (and probably much more), but let’s establish our baseline.

What’s my Freedom Tax? How much money would I sacrifice annually to keep my independence? As I mentioned before, the answer is quite a bit. $18,000 is a good approximation.

Let’s use our equation from above:

Hourly Rate = (Potential Salary * 1.25 – Freedom Tax) / 1000

Hourly Rate = (85,000 * 1.25 – 18,000) / 1000

Hourly Rate = (106,250 – 18,000) / 1000

Hourly Rate = 88,250 / 1000

Hourly Rate = $88.25

So, you charge $88.25, right?

No, my rate is higher; but what this number tells me is that I should really never take on work less than $88.25/hour under normal circumstances. If I’m working for less, I might as well take a full-time job and enjoy the stability it provides.

$88.25 is more than I was charging when I made my pricing failure, but it should’ve been the minimum. Crazy how a little math & planning changes things, huh?

Let’s get even simpler
You can follow some simple logic to convince yourself to up your rate.

How much would a full-time employee cost for your client?
You don’t have the security of a full-time employee.
Are you charging *at least* as much as that employee?
If not, you need to raise your rates.
Plug your numbers into the equation above. Are you charging the bare minimum? If not, you now have enough justifications to charge more. I hope this helps if you’re feeling a little anxious about a rate increase.

I realize that the decision to stay/become a freelancer depends on a lot more than the money. Also, you can’t charge premium rates if you’re not doing a good job and finishing your work. Still, it doesn’t hurt to understand what you’re worth and how much you can make. Otherwise, you’re leaving money on the table.
Andy Adams Blog

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