“Price is what you pay. Value is what you get.” ~Warren Buffett
Like any successful business owner, I spend time thinking about profit margin, and trying to ensure that I’m maximizing my profits, both on an individual project-level and over the long run.
In order to do that, I need to have some idea of my profit on each project, and over time.
But what does profit even mean for a freelancer? Profit is gross income minus expenses, but what are your real expenses as a solo freelancer? Just a computer, a few online service subscriptions, etc? In general, those expenses are very minimal for most freelancers.
So does that mean your profit margin is like 90%?
I calculate my profit margin as a freelancer by assigning a value to my time, and using that as an expense.
So basically, if I paid someone else a wage to do the work that I do for clients, how much would that cost me? That cost is an expense, and any revenue beyond that expense (and any other expenses) is my profit.
For example, let’s say that I write a proposal for a job at $10,000, and I think it’ll take me 80 hours of work. Let’s say my time is worth $100 / hr to me, so my “expense” for this project to have a developer (me) complete the work is $8000.
You decide the value of your time
I want to emphasize that for the purposes of calculating my costs, I’m using my own price for my time. You should not be charging the client hourly.
I don’t care what other freelancers are charging for the purposes of this calculation. If the “market hourly rate” is $50, that doesn’t mean I’m obligated to sell any of my time at that price. For various reasons, I might value my time higher than that, *even if no client is willing to pay more than that.*
For my own specific situation, I value my time very highly, so I wouldn’t be willing to sell it at the “market hourly rate”.
By the way, this ignores the fact that “market hourly rate” frames my time as a low-value, endlessly-available commodity, while to me, my time is a precious, exhaustible thing. As a result, my price is usually going to be higher than the market price.
So this defines the cost of your work *to you*, but not the value to the market. The market sets the value of your work.
Your cost is the floor, but not the ceiling
Once you calculate your cost, this sets an absolute floor on what I’m willing to do a project for (but not a ceiling). If the value of my time to me is really $100 / hr, then it makes no sense to do a 40 hour job at less than $8000, as I’ll be “losing” money.
Yes, I know I won’t really be losing money, as I’d still get $6k or whatever, but in your mind, you should separate out your roles of “the-business-owner” from “the-person-getting-paid-to-do-the-work”.
Just imagine that you have an employee named Susan who is going to be doing this work, and Susan is serious about her money. She certainly isn’t going to cut her rate down to $50 / hr just because you did a shitty job negotiating with the client. That’s the business owner’s problem, not Susan’s.
How much profit should I try to make?
I don’t think there’s any way to answer this question for everyone, but my general sense from my own experience and from interacting with lots of other successful freelancers is that you should aim for at least 20-30% profit margin on each job.
So that’s the minimum. But what about the maximum?
How much is too much?
Here are questions I have when I think about things like this:
“Why not just charge the $8k? Why $10k? Can I charge $20k? What about $200k? At what point is this unethical?”
The ethics of pricing is such an interesting and complicated subject that I’m writing a much longer piece about it.
But basically, if you can sell your expertise at a high profit margin without fraud or deliberately taking advantage of someone who is desperate, you should feel OK in doing so.
So in the example above with the proposal for $10k, I think you should feel fine charging $10k if the market will bear that price, even if it only takes you an hour to fulfill that contract.
The difference between your “cost” to fulfill the contract and the $10k that the client is paying based on their perceived value of what you’re providing is your business profit. It’s a reward for your positioning, risk-taking, sales, negotiation, etc.
Remember, the $8k figure above (your “cost”) is not based on what the market will bear. It’s what you are willing to accept in order to give up the time.
But should you feel obligated to sell that time to the client at the same price that you’re willing to part with it, even if the client sees the value of that time as being higher than you do?
I don’t think so. You may choose to do so, but just as a business isn’t under an obligation to offer their goods and services “at cost”, you’re under no obligation to do so either.
In a sense, your role here is to buy raw time at one price and then convert it to value at a higher price.
As a freelancer, one of the most beneficial things you can do is to sever any connection in your mind between the time you spend on a project and the value you’re providing. If the value of your work is more than $10k and that’s a competitive price in the market, then the client will be fine paying that price.
The reason it feels icky to think about charging $10k for an hour’s worth of work is that we’ve been conditioned (primarily by the widespread use of hourly rates) to think of our time as the value we’re providing.
Again, you can read a lot more about this topic in my article on the freelance rate mistake that’s costing you millions.
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