We work in a highly competitive yet specialised market as a designer, which means there is rarely a set rate for each job. Prices are usually negotiated between the buyer (your clients) and the seller (yourself or your agency). The reason behind this is because no two jobs are alike. The price can depend upon a range of factors; the complexity of the task and how your client intends to use it to your level of experience as a design professional and the number of hours and research required to complete the given task. It's because of these reasons that pricing your work requires a good level of artist-client communication, periodic reviews of cost and time, and production management skills.
Making a sustainable living from what you do requires treating your agency or freelance work just the same as any other business. Before attempting to price work, you need to look at how much you want to earn as your annual living—working out the cost of living and your business expenses (overheads). You ideally want to be making a profit margin of roughly 20 - 25%. The extra margin gives you the cash flow you will require to keep running your business when unexpected costs arise or your life and working circumstances change unexpectedly. This profit also allows you to continue to push your business forward, leaving room for training costs, upgrading equipment, or potentially hiring more staff.
Many small businesses fail within the first five years due to a lack of cash flow and under capitalisation. It's all good pricing yourself below the competition, but it is not sustainable, so ideally, you should avoid doing this and focus instead on why clients should opt to use you over your competition. You can read more via the following article published by Forbes: "What Percentage Of Small Businesses Fail -- And How Can You Avoid Being One Of Them?".
Once you have figured out how much you require annually, you can divide this number to arrive at what you would need to earn per month, week, day, or even hour, depending on how much detail you require.
You can use the following calculation to give you a rough idea of what you need to be earning specific to your circumstances:
Total annual living expense + Total annual business expense = Total annual expenses
Total anual expenses x 20% (.20) = Total annual base minimum
Your total annual base minimum is the very least you should be striving to earn per year.
Calculating a Day Rate
We know that there are 365 days in a year. You aren't going to want to be working all of these days, so let's base your day rate on a five-day working week. You will also want to account for annual leave, public holidays, and sick days. Hence, as a general rule of thumb, we recommend subtracting six weeks as non-working days (again, this can be more depending on your circumstances, but we would never recommend less than this). 52 weeks - 6 weeks = 46 weeks. Multiply this by your working days (x5), and you'll arrive at 230 working days. Now complete the following calculation:
Total annual base minimum / 230 days.
Your calculation will give you your ideal day rate. From this, we can now move on to the next step - working out the ideal hourly rate.
Calculating an Hourly Rate
Now you have worked out your day rate; it's time to use this information to calculate your hourly rate. It's best to base this on a 35-hour working week. 35 hours x 46 weeks = 1,610 working hours per annum. Now complete the following equation to work out your hourly charge:
Total annual base minimum / 1,610 working hours per annum = Your hourly charge.
We recommend dividing your annual base rate by a much smaller number, though, as you need to account for non-billable working hours such as writing proposals, self-advertisement, and accounting. We recommend using the rounded figure of 1000 working hours per annum, which means the following calculation would apply:
Total annual base minimum / 1,00 working hours per annum = Your hourly charge.
The difference can be significant but don't be afraid to charge this for your hourly rate. If you don't, you will fall behind on what you need to be earning.
How to Price for Jobs
Now you've worked out the costings above; it's time to get to grip on how to price your work accordingly. There are many different approaches to pricing your work, so we will go through these below to allow for a range of other circumstances.
Charging an Hourly Rate
By now, you will know how much you need to charge hourly to make a reasonable living and meet your specific requirements for living. The most challenging aspect of charging per hour is that you need to accurately estimate the time it will take to complete a project, and because of this, you need to be very strict with client amendments and changes to the original brief. A way in which you can charge for additional items is to state in your working contract that extra hours and additional resources will be charged accordingly. The extra charges shouldn't come as a shock to your client when invoicing if you have had this open conversation before starting the project. On your invoice, break down the extra hours, costs for materials, and travel expenses. The other approach is to increase your hourly charge to incorporate these additional expenses. Sometimes, you may find clients unwilling to pay for costs that they deem unrelated to the specific project.
Another issue with charging by the hour is that although you are being paid for your time, you are not being paid for your experience. The more experienced you become, the quicker you will complete projects, so be sure to increase your hourly charge accordingly to account for this; otherwise, you will start to lose money.
Charging a Day Rate
Sometimes design professionals are hired on a day-rate basis. Day rates can be a more straightforward way to charge a client if the project takes several days rather than hours. Again, it brings with it the drawbacks that can be linked to charging per hour. Be sure to account for your value and experience, increasing day rate charges where appropriate.
Charging by the Project
Charging per project is by far one of the best ways to charge your clients. It allows you within reason to charge whatever price you want as long as it is fair. Through this method, you are not reviling an hourly or daily rate, meaning you can charge a lot easier for the value you add as the expert to the project. For example, if you design social media assets for a small local business, you would charge a lot less than creating social media assets for a large multi-national eccomerce organisation. This method can often be referred to as value-based pricing.
When sending an estimate to your clients through this charging method, a great technique is to use quantifiable reasoning. Use numbers such as: you could increase an organisations membership by 1000 people or increase the sales revenue for a product by up to 35%. In most cases, a client will be happy to pay for your expertise when they don't know how to fix a problem or arrive at a reasonable solution to an issue. It's essential to remember that everything you do as a design professional responds to fixing a client's problem. For example, they might not target a suitable customer base; their branding might not resonate with the correct audience. Their website might not allow for the sales numbers they want to achieve.
A way to work out a reasonable charge is to start by asking what their budget is. You need to work out what that break-even point is. For example, if you are designing a new website, how many sales will the customer need to make to pay for your services, and do you believe this is achievable? If you don't think it is feasible, explain why and try to upsell your services further. If you feel that what you are doing can bring them more sales than what they do, then say so - you will have the reasonable power to charge the client more for your services as long as figures and measurable statistics can back it. The client will likely agree and be more willing to pay more when their break-even point stays the same - it's a situation where it's a win-win in the end for both yourself and your client.
It's important to remember that you still need to cover your costs when using this charging method. You still need to make a profit. If what you quote is too high for the clients budget, look for alternative ways to support them. Can you use more affordable materials, get the client results with fewer hours, create fewer features, and design fewer graphical assets? If you can help, do so but never undersell yourself. Sometimes it's not an ideal fit, and there is always an alternative for the client. Remember, your aim is to stay in business and not fall behind like most startups within the first five years. If it isn't going to work, politely move on and give your client reasoning as to why.
Other Factors to Consider
There will always be other factors involved with what you do and what you are producing that should be considered when pricing a project. We will go through these now in very basic detail:
- Usage factors - Consider the usage rights of what you produce. Will you allow for your work to be copied, be publicly distributed, be publicly displayed? Charge accordingly if someone else will profit from your work by directly using, adapting, or selling it.
- International use - Will your work be used on a global scale? If there is more value in what you produce, make sure you increase your prices to compensate.
- Royalties - In very specific situations, you should consider charging royalties for the usage of your work - for example, this is a widely accepted payment method for the illustration of most children's books. Royalties arrangements often include a nonrefundable advanced payment to the artist before the launch of the produced work. Royalties are only appropriate in cases when the art is involved in a direct sale.
You now have all of the information required to start producing your basic pricing structure or revising your pricing structure in a way that works for you. Remember, the critical thing is never to undersell yourself or your business. There will always be someone willing to charge less than you, but we can guarantee that if they continue to work with a pricing model where they undersell themselves, their business will fail whilst yours succeeds, even if it is slowly.
Do you have any tips for creating the ideal pricing structure? We would love to hear them in the comments section below.