One benefit of running a freelance or service-based business is that you can price your services in several ways.
There isn’t an objectively correct way to set your prices. Each one works best for different businesses and different circumstances.
Below, we’ll cover the multitude of ways freelancers and service businesses can charge for their services. But first, you must calculate your shop rate to have a baseline number to know what to charge.
First, Calculate Shop Rate
Shop rate is an hourly rate you use to calculate your pricing under the various methods of charging clients. It represents the value of a “unit” of your time.
You don’t have to disclose your shop rate to clients — it’s merely your basis for calculating pricing when quoting or invoicing.
To calculate the shop rate, figure the cost of running your business each month, add in whatever profit you need, then divide by the number of hours you plan on working. Here’s a formula:
(Expenses+desired profits)/total number of hours = shop rate
A quick example:
Imagine you’re a freelancer. Running your business costs $1,000/month.
Additionally, you reinvest $200/month and take home $3,800 for yourself pre-tax — meaning $4,000 in profits.
You’ll need to earn $5,000/month to maintain this situation.
Now, say you work 100 billable hours/month. Divide $5,000 by 120 to arrive at a $50/hour shop rate.
In other words, you use that $50/hour figure to make all your pricing decisions.
How to Charge For Your Services
Project-based pricing — often called “flat-fee” pricing — is one of the simplest and most common pricing models.
It’s simple. Your client needs a project done, and you quote them at a fixed price. There’s a clear start date, end date, and a set of deliverables.
For example, a graphic designer might charge a flat fee of $200 to design a company logo. In theory, they could take one hour or 10 hours to complete the job and earn the same $200.
Now, you can split up the fee in a few ways:
- 100% upfront
- Split: a portion (usually 25% or 50%) paid upfront with the rest due upon invoicing
- Milestones (for bigger projects)
- 100% after project completion (not recommended)
- Easy to sell: Fixed prices are predictable and straightforward for clients.
- Earn before completing work: You can earn some of your money immediately by collecting deposits, boosting your cash flows.
- Unstable: You have to be out there regularly selling to continue generating income.
- Determining pricing: Estimating the time and effort involved ahead of time is tough and could result in overpricing or underpricing. Software like ZarMoney can help to mitigate this issue by maximizing work efficiency with productivity tools.
- Scope creep potential: Your client may try to sneak in more work as part of the fixed fee as the project carries on.
- Client delays: Slow clients mean longer projects. Longer projects mean waiting for pay. Highly skilled freelancers/businesses with enough proof of success can often mitigate this by collecting 100% upfront.
Who Should Use It
Newer agencies and freelancers should use fixed pricing due to its simplicity and ease of selling clients. Get your foot in the door, wow the client, and score some referrals.
Now, almost every freelancer and service business will have fixed pricing in some capacity. Whenever a client approaches you with a one-off need, quoting them a fixed price is a good solution.
Hourly billing is the other ultra-simple billing model. You set an hourly rate, then charge that rate per hour you work. So if your hourly rate is $70/hour, and your client has you work 10 hours this week, you’d bill them $700.
Since you already calculated your shop rate, you don’t have to do any additional work here.
That said, you can reel in better clients and ensure more work stability by setting minimums. For example, you could charge $70/hour with a five-hour minimum. That means clients have to book you for at least five hours, or they can’t have you.
- Work = pay: You get paid for your time no matter what. If you work five extra hours, you get five extra hours of pay.
- Charging for other activities: You can charge clients for activities like meetings and calls.
- Unpredictable cash flows: You generally have to seek out more work. Even with regular clients, you’re never sure when they’ll have more work for you.
- Not scalable: There’s only so much time in the day. You can raise your rates to earn more, but many clients aren’t willing to start paying you more.
- Client scrutiny: Clients will make you justify each hour to try and keep costs low. There’s the potential for lower trust between you and them.
Who Should Use It
Businesses dealing with unclear deliverables or potential scope changes should use hourly pricing to cover associated costs.
Hourly billing works well for businesses doing highly technical work as well. This work can often run into roadblocks and require additional time.
Under a retainer agreement, a client pays you a fixed monthly fee in exchange for a defined amount of work or time.
It’s a lot like a paycheck, but you remain a freelancer.
Imagine you’re a freelance writer with a $50/hour shop rate. You offer two blog posts per week to a client — but instead of charging hourly or per post, you ask for a monthly retainer fee of $2,000.
Alternatively, you could offer, say, 10 hours/week for a $2,000 monthly fee.
In either case, your client is paying you the same amount every month for a fixed amount of your capacity.
Now, retainers have a “use it or lose it” nature for the client. They may be hesitant to go forward with a retainer. To make a retainer more attractive, you could offer a small discount.
Returning to our previous example, your $50/hour shop rate would normally set you at the $2,000 mark. You give your hesitant client a nudge by offering them a 5% discount on a retainer.
You still earn $1,900 a month, but you have a stable income stream.
- Stable revenue: Retainers provide steady revenue flow. You can use this to smooth over periods where the business is slow.
- Helps build relationships with clients: You learn the client and their business inside-and-out. They’ll give you a glowing testimonial, and you’ll gain access to their network for referral gigs.
- Increased flexibility: Some freelancers book a few long-term retainers, earn a full-time income, yet retain the relative time and location flexibility of freelancing.
- Scalable: Retainers offer steady cash flows. You can then hire people to work on clients (if you want to build a business with employees), take on more clients, raise your rates, and boost revenues.
- Scope creep potential: Clients may fit more work in without a fee increase. You can avoid this with an ironclad contract that clarifies pricing for extra work.
- Client justifying your cost: The client pays you a substantial amount every month, so they will need to continually rejustify the retainer fee.
Who Should Use It
Retainers work well for freelancers that want freelance flexibility but miss the steady paycheck of a job.
It’s also great for freelancers who don’t want to worry about handling a ton of invoices. Thanks to software like Freshbooks, you can streamline retainers even more with recurring invoices.
With these things in mind, many freelancers establish one or two retainers as a “baseline” level of income. That leaves enough room in their schedule for one-off projects to keep things interesting and sharpen their skills.
Lastly, agencies (or freelancers building an agency) who want to scale can make use of retainers.
Results-based pricing works as a commission-based sales job — you earn based on the money your work brings the business.
This is common in copywriting. A copywriter can create a single sales letter that brings in, say, $1 million in revenue for their client over a year. A said copywriter could strike a deal for 2% of revenue in royalties and earn an easy $20,000 in that year.
- Massive payday potential: Highly skilled freelancers that can bring results for their clients can earn a ton of income this way.
- Passive income: Do the project once, and you could, in theory, earn passive income for a long-time without many changes.
- Motivating: This billing method can inspire you to bust your tail and innovate, helping you better your skills.
- Relationship-building: Few clients won’t love you if you can bring them a lot of revenue.
- Fair: Many clients are happy to pay you only when you bring results. You only get paid when they do.
- No results = no pay: If you can’t perform, you won’t make money. Some people charge fixed fees plus results-based pricing, but the fixed fee can’t be too high.
- Tough sell: These contracts are more complicated, so they may be a tough sell.
- May not apply to every industry: Copywriting and sales lend themselves well to results-based pricing, but some skills don’t have the same amount of opportunity.
Who Should Use It
Highly skilled service providers with reputations for results in their industry can make a killing with results-based pricing. It offers excellent passive income to supplement other work.
As mentioned, businesses and freelancers can charge flat fees plus results-based earnings for the predictability.
Pick the Method That’s Best For You
Each freelancer and service business has different circumstances, so some ways will work better than others. In fact, you can often mix and match, depending on your clients.
To evaluate your business, your clients, and your goals, and pick the method(s) that work for you.