A Gig isn't completed until the job is done and the payment has cleared. But how do you ensure consistent timely payments and set competitive prices? In this post we'll share a few pointers.
The Price is right
There's a couple of ways to set your hourly rate/price which you should consider. If you're in a very homogeneous market, like "C# Developers", you can have a quick look at what the competition is charging and match that, adding or subtracting a little based on your experience.
There's a little math exercise that'll help make sure that you're not getting underpaid. A danish mid-level developer will in regular employment get paid approximately 6.000€ /mo. By no coincidence this is the exact limit where our highest tax-bracket of 60% kicks in.
That developer will by law get an additional 12.5% as holiday-compensation, also paid by his company. Almost all developers will also get an addition 8% (on average) pension added.
Adding it all up, that comes to 7.450€/mo or 47€/hour.
If you charge that in this market, you'll be very competitive because although that is the number on the pay check, the company typically has additional costs tied to this employee:
- His Boss (divided by number of reports)
- Project management
So by coming in at 50€/hour you'd still be a lot cheaper to the company - And much easier to deal with.
Don't be afraid to share these considerations with potential clients. Quite often when I consult, I get asked if I'm interested in full-time employment and I typically answer by listing the above saying "This is a good way for us to get to know each other before getting married". It's not exactly funny, but it's the best I can do.
How I believe you should set your hourly
Based on your age, energy and social status (single|married|kids) figure out what the optimal number of hours for you to work is.
This is one way to look at it. That would give you 10 hours of work every day for 30 days straight which is way too much, so I only mention it to hammer on this point:
As a freelancer you can live a very healthy, active, free life without ever being short on time for work
Instead get a sense of how much concentrated work you can put in and still feel great the rest of the day. Most people arrive at something between 5 and 8 hours/day.
Lets say 6 is your sweet spot, then you'll typically need about 20% extra to sell those 6 hours, meaning your total work-day is 7 hours +/- 15 minutes, where the last 75 minutes are sales/follow-ups.
The next question is then, how much money to you need to live comfortably? This number isn't
Income = Rent + Food
It's closer to
Income = Rent + Food + Fun + Sports + Equipment + Taxes + Holidays + Sickleave + Savings
As a freelancer, it's all on you and I recommend that you always save for a rainy day. Ideally there's so far between rainy days that you are accumulating wealth every month.
So based off our C# developer earlier, his total costs were (hopefully) covered by a total expense of 7.450€/mo. If we then work 6 billable hours 20 days per week, we get an
Hourly rate = 62€
That's a competitive hourly rate which is sure to cover your costs and then some. Now you adjust that based on your experience and perhaps the type of task you're working on, but don't go below that.
Stick to your guns
Once you've arrived at the optimal hourly rate for you, I strongly recommend that you never go below it since you'll end up paying in other areas. If your local market is accustomed to negotiating hourly rates, add 10€/hour and let that slip in a negotiation - Or as a bargaining chip for something else.
Once in a while you get proposed "Revenue share" or "Equity sharing" models. In the former you add a minimum to avoid simply giving a discount that never materializes.
In "Equity" partnerships I recommend that you find other ways to add value than to drop your hourly rate significantly. Especially with start-ups you can't count the shares to be of much value because 1) The business is unproven, and 2) The founder is holding all the cards. Keep your hourly rate, but join monthly advisory board meetings pro bono. That can add a ton of value of a start-up and leaves your hourly unaffected.
If I can only convince you of one thing on pricing, it's this:
Don't enter into any agreement that's not sustainable for you.
It will end up hurting all parties involved. If the conclusion is that the client simply can't afford expert assistance at this point, that's not your problem, but in a negotiation you risk making it your problem.
Rules are Rules
So now we've set our price and we've already learned how to pad that correctly in this post: Expert level time mangement. All that's left is to set some clear rules for clearing payments.
For projects of a total estimated value below 15.000€ I always ask for full payment up-front, before work starts, for any new client. For existing clients where I feel payment is guaranteed I always find some model that works well for both parties.
If I am confident that the client has the ability to pay, I will allow a 60/40 split where 60% fall before work starts and 40% when we reach some mid-way marker. I don't accept payments after full delivery as that would place 100% of the risk on me.
For larger projects I either do a 40/30/30 split or a month-by-month payment, where I total all hours spent on the last of every month. Shameless plug: ZimTik makes this very easy.
Don't sell your services too cheap, although your hourly rate is higher than regular employees you don't come with any of the costs
Protect yourself in every contract. Contracts should provide maximum clarity and protection for both parties, but your job is looking after you.
If you don't have a standard contract yet, please review this post: A freelancers contract.
About the author
Lau B. Jensen is a Danish Freelancer / Tech entrepreneur. He's worked mostly with Software Development and management consulting all across Europe. In 2015 he took a 5 year break from freelancing to be the CEO of a VC funded SaaS start-up.