Freelancers, How do you calculate your dollar rate?

“How did you price yourself?” I have been asked this question several times now and I thought it might be a good idea to share the approach I followed and seek thoughts on it. Arriving at my dollar rate was an interesting challenge for me especially when in the last decade a large part of my time went into pricing (insurance) products — arguably one of the most difficult products to the price!

Following is the approach, which I adopted, when I started as an independent actuarial consultant about 3 years ago. This surely fits in well for anyone who is starting as a freelancer.

Cost Vs Price

While it is a simple concept many people use cost and price interchangeably. In our context, the cost would be the opportunity cost that is the amount of salary plus benefits foregone.

Okay, so what is my per hour cost?

This is the most important question to ask and you would be surprised by the results.

Your hourly cost is 2–3 times more than what you think!

Here is what I followed.

Yearly Cost = Annual Salary + Benefits^

Monthly Cost = Yearly Cost /12

Daily Cost = Monthly Cost / 19*

Hourly Cost = Daily Cost / (8 x 60%^^)

^ This includes the contribution of the employer towards pension, insurance cover, gratuity benefits, etc.

*After taking off 4 weekends, public holidays and paid leaves

^^On average, an employee is productive for 60% of the time. A chunk of time goes into meetings, town halls, and offsites (which don’t directly contribute towards work) and of course water-cooler conversations. Use a factor that applies to you!

A quick calculation, after applying the adjustments above, would reveal that Hourly Cost is 2.6 times more when calculated in the following manner

(Annual Salary + Benefits) / (365 x 8)

What should I charge then?

Here things start getting grey and there is no simple way to apply an adjustment factor to the Hourly Cost calculated above. This is where the skill of applying judgments came handy. You see actuarial training comes handy in all walks of life.

Some of the considerations I had

• How much my company pays to independent consultants with similar skills?
• Which market I would be operating in?
• What is the hourly billing rate of consultants from reputed companies like Big4?
• Would I be okay to charge less initially until I build a brand?
• What proportion of my skills would be utilized in the assignment?
• What would be the learning from the assignment?
• How reputed is the client?
• What is the likelihood of client defaulting the payments?
• How interesting is the assignment?
• What resources do I need to complete the assignment? Do I need to pay license fees for software? Or rent an office space?
• How much I incur in sourcing the business? This could very well be linked to the hit ratio i.e. the number of clients converted / number of clients approached
• And most importantly, how much value I would add to the project?

The list can surely go on and one might be tempted to go by the market rate. I don’t think that’s the right approach. Let me explain in the next section

Can I not just go by the market rate?

Well, that’s a simplistic approach and does the trick for many. But knowing the worth of your time is important for more than one reason. In my case, since I knew, what I would want to charge for a given project, I quoted what I thought was fair and then never negotiated on the price. Hence, every project I did, I did whole-heartedly as I was getting paid fairly for the value I added.

If you get paid what you deserve, the quality of the output is always top-notch. But the first step is knowing what you deserve. And hence the exercise of pricing yourself!

I look forward to your thoughts!