The first time I heard of the rates that freelance contractors charged, I had to pick my jaw up off the floor.
I was shocked. $50, $75, $100 an hour? It seemed astronomical compared to what I was making as a Registered Nurse employee.
But there was the catch: I was comparing it to being an employee, NOT being a business owner. And that, my peep, is a HUGE difference.
Today, we’re going to talk about why you need to start thinking of your business as a whole when you set your rates and everything that goes into that. Doing this is going to help you feel good about those rates on your services page.
A lot of new freelance service providers make this mistake – charging what they got paid as an employee. Out of fear, out of concern that we’ll appear greedy, out of simple lack of knowledge, we end up cutting short our revenue, making it harder for our business to grow and give us the flexibility and benefits we were looking for when we started freelancing.
I hope you’re not cowering in shame right now, because it’s not just you. I’m speaking from experience! Let me tell you a story that illustrates what a hard-won lesson this has been for me.
The way I started freelancing was working for free, because I didn’t realize I had a skill.
I had always done community organizing “IRL,” so when I was a member of an online blogging community, it came naturally to me. I kept volunteering to help the entrepreneur who ran the membership with community events, welcoming new members, etc.
At some point, they told me, “You realize this is a marketable skill, right?”. Then they recommended me to another business owner who could use similar help creating an online community.
I was excited and jumped at the chance. At the time, I was coming off two years at home with our daughter, looking to return to professional work but feeling my time as a critical care nurse in the hospital was complete. I was so excited to discover I had a service I could use to “work online”! It felt like a whole new world!
Not only was it my first job working as a freelancer, but it was also the first time this entrepreneur I was referred to had ever hired out work. I had never worked in a contract capacity. They had never run a paid community. If you are thinking “blind leading the blind,” you’d be right. ????
At that time, I didn’t even know where to look or have the community to ask and figure out how this should be done, contractual and compensation wise. (Side note: this is just one reason why your network is SO important, even if you’re working on your own.)
The person I was working for came up with a sort of “salary/commission” strategy for my compensation. There was no contract. There were no boundaries around how many hours I was expected to work, or what duties/tasks were contained in those expectations.
Little, urgently-waving red flags are probably popping up for many of you, but this was a whole new world to me at the time, and I had no idea how to structure anything.
As you can probably guess, over the course of a few months, this system wasn’t working well.
The crux of the issue was this: they were treating me as an employee who does whatever the boss says (jumps when they jump, depend on them for rules, expectations and boundaries) vs. a contractor who works on their own to deliver something with clear expectations, using their own expertise and resources.
At the same time, it was difficult to define my role and expectations when I did work on my own because the project kept evolving and there was no contract to lean on for definition of deliverables, so I never knew if I was fulfilling the job well.
Neither of us were happy.
Long story short, we both decided that moving to hourly compensation with a set number of hours might work better. The question was, how much to charge an hour?
I struggled to find online community manager salary references when preparing for our conversation. So I tried to let them lead the way, but they threw the ball back in my court.
“So, um, $12 an hour?” I offered, completely unsure of myself.
“Hmmmmm…let’s do $14 an hour, because you do have to pay employer taxes,” they replied.
I agreed, and we went on with our meeting.
When my husband got home that evening, I told him what had transpired. This time, his jaw dropped.
“Hon. You could make that much as a grocery store clerk AND have limited benefits,” he said incredulously. “What were you thinking? This is a skilled position in which you create value and retention in the membership, and you have your own expenses you cover on your own working for them.”
Feeling a little sheepish, I think I replied with something like, “I’m lucky I have this work! You just don’t understand the online world!”
Of course, he was right.
A few weeks later, another entrepreneur reached out to me. She had heard I did great community work and wanted to hire me for a month for an upcoming big event.
Before the interview, I steeled myself for my huge ask. It was going to be more than $14 an hour, by gosh, because I was NOT having another one of those conversations with my husband!
At a certain point in the interview, she said, “What are your rates?”
I swallowed hard, and spit out, “$19 dollars an hour.” On the inside, I felt like I had asked for a million dollars.
A strange look crossed her face.
Internally, I was starting to panic. “I’ve done it! I’m not going to get this job because I asked for a RIDICULOUS amount of money!”
She looked at me dead serious, and said, “Raina, for this kind of skilled work as a contractor, I can’t in good conscience pay you less than $25 an hour. Will that work for you?”
I have no idea what my own face must have looked like. I’m sure it took me a moment to recover.
Obviously, I quickly agreed.
And that meeting planted a seed.
Not only did it help me realize that my rates were way too low, but I began to realize that I had costs I had to pay in order to do this work I needed to include too. Several different kinds of software, training, and in the case of my first job, I was also storing multiple large boxes of gifts and shipping material in our small house at no charge.
Slowly I was realizing, these were all costs I was bearing as a contractor, but they were not factored into my hourly rate. I was only thinking of my own, direct compensation when I came up with a rate.
And that’s the thing about being an entrepreneur, the CEO of your own company, the captain of your own ship: if you don’t do it, no one else is going to. That includes passing along completely appropriate business costs and a margin for profit (that IS the ultimate purpose here right? Not only for you to pay your rent, but to actually grow a business that makes a profit over and above paying just paying yourself. 😉
Shortly after that, I raised my rates. I began to use an adapted version of Profit First (article on this coming soon) in my own business. Shortly after that, I changed my services and moved to packages. It’s vastly improved my business, my bottom line and my clients’ satisfaction.
Here is the mental shift I learned the hard way:
The rates you charge are not the rate of you, the person, the worker.
It is the rate of a business.
People are NOT paying you. They pay your business. Then your business pays you.
Just like a business has more expenses than employee wages, your rates need to cover everything your business does, not just your paycheck. If you aren’t charging enough to cover all the expenses, taxes, and profit, you won’t end up with a thriving business in the end.
Here are just some of the costs you may need to factor into your business rate:
- Paying the person who does the work an hourly wage (What would it cost to hire someone else to do this?)
- Paying for any tools you need for your business to do this job (Software? Supplies?)
- Taxes (higher than for an employee, since you are also the employer)
- Time off (Yes, this is a cost, unless you are going to work 365 days a year. When you’re employed, your employer is covering that cost. You are now the employer.)
- Ongoing training in your craft
- Workspace (depending on your service)
- Office supplies
- Insurance, both for you and your business (again, depending on your service)
- Other-Special-Thing-I’m-Not-Thinking-of-Here
When you put all these costs together and think about how you must pass these on to your customers or you won’t have a profitable business, there may be part of you thinking “OMG, who is going to pay that?!?”.
But here’s the thing. Your clients aren’t just paying for your work. When they choose to hire a freelancer instead of an employee, they get several specific benefits out of that deal.
When business owners choose to use contractors, they may pay more per hour, but they get several distinct money-saving advantages:
- The Flexibility. They are able to pay for a service on a limited basis and for exactly what they need, no more or less, without committing to an ongoing engagement with an employee. Especially in the early stages of business, this really is valuable.
- The Time. When they pay you to do a job that they can’t or don’t want to do, they get more time to work on other profitable aspects of their business, increasing their cash flow.
- Employer Responsibilities. With an employee, you have to think about training, workflows, scheduling, as well as benefits, taxes, vacation time and turnover. By paying you more, they opt out of all those expensive, time-consuming problems.
- Shortcut to Expertise. Contracting out is a way to buy expertise quickly and easily, expertise that would take years to build up and might not make sense to do.
All of those items are worth a lot on their own! Put together, there’s tremendous value in every hour of work that a contractor puts in, beyond the actual man-hour.
The bottom line: the work your business offers creates tremendous value to your clients, and your rates should reflect that.
So, how do you go about deciding how much to charge? Unfortunately, that’s beyond the scope of this article, as business costs vary greatly from industry to industry and service to service.
If you want to dive into this further, I recommend the book Profit First by Mike Michalowicz. Although I don’t agree with him on every detail, I love the system overall. It’s good at helping you break things down as a new business owner and how to manage and divide money flowing in. In a future article, I’ll talk about what this system looks like in my own business.
The main takeaway: it’s time to shift your perspective from seeing what you charge as your hourly pay for the work, to representing everything that goes into your business being able to provide the work to your client – all the training and coaching you’ve ever paid for, all the experience and expertise it’s taken you years to build.
Now, those awkward conversations I talked about earlier (including the one with my husband) don’t happen anymore.
Why? Because taking the time to think through WHY I charge what I charge, what it gets me and the value it creates for my clients has melted most of that weirdness away (At least at that moment – new things are always popping up! ????)
You own a business now. You’re gonna wanna charge like it. ????
Go Get ‘Em!
Warmly,
Raina
