Most freelancers, agencies, and consultancies base their offers on an hourly basis. This is fine in many cases and also something that your clients understand.
However, how do you choose your rates and how do you handle them in negotiations?
There are a few things that come into my mind for the initial rate: Actual costs to pay your salary, your accountant and other operational services, and also a profit margin to create a buffer if you want to take some time off.
For me, living and working in Germany, this initial calculation ends up at around 80€/h and this is what many people charge in the web industry. If we don't take into account that there is quite a shortage of talent and we could increase or rates simply because clients have no other choice, there are more reasons why we should charge more.
The simplest reason is: If you charge more per hour, you need to work less.
This is obvious but gives you an advantage over competitors who charge less. Charging more gives you more flexibility if something goes wrong. If you stick with your rate at 80€/h and you made an incorrect estimate on something, you have to tell this your client and ask for more money. In some cases, this leads to a budget for a feature that the client had not bought before you started programming because it won't deliver a return on the investment. If you don't get more money, you'll become unprofitable and can't pay your salary. Not being able to pay your own salary is a terrible solution because your clients are usually much bigger companies than you are and so you are the last one who shouldn't get paid. Generally speaking, reducing your margin is ok but never stop paying yourself.
Your clients are usually much bigger than you are and so you are the last one who shouldn't get paid. If one of their employees makes a mistake, he still gets his monthly salary.
So a high margin gives you the flexibility to work a bit more than initially estimated and you don't even need to tell your client. You are still profitable and next time a similar feature crosses your way, you can give a better estimate at the beginning.
Charging more is also helpful to deliver things faster. At Beyond Code, we are very experienced in custom web development and consider ourselves as very fast developers. Having a lower rate would be a disadvantage as other companies, who need more time or have a massive overhead in internal review processes, need much longer for the same task and can charge more for the same result. Being fast sacrifices your earnings in case your rate is standard and based on your costs. You need more clients, more projects and can't dive deep into the problems your clients want to solve. So being good at what you do can lead to financial difficulties.
If you focus on a few well-paying clients, you can truly understand their business and be a much better supplier.
How we chose our rate? We used the cost basis and added 50%. 80€/h became 120€/h and 960€ per day. This rate does not cross the psychological border of 1000€ and makes it possible to run a two-person business very comfortably if we can sell ten days per person per month. It even works out if we sell eight days per person. If you can't sell eight days in a month regularly, even when you try hard, working for yourself or in a position that is responsible for selling these man-days, you should think if you really want to do what you are doing.
The downsides of charging a premium rate are that there will be customers who don't want to pay these rates because your competitors charge less on an hourly basis. You will get fewer projects and simply adding 50% to your current revenue won't happen. You are likely having a very similar income at the end of the month but reduced your workload and stress significantly.
The good thing is that your clients will realize your reduced workload in an instant. You are less stressed and with a deeper understanding of their business, you'll be a much better help for them as before. It's also likely that they won't pay more because you automatically get faster with your work as there are fewer distractions from other clients.
Another benefit of the lower workload is that you will get more time that you can invest in yourself. What do you do if you are two weeks into a month and have already billed ten days? Of course, you can keep working and increase your short term profit, or you can learn something new and sell this new skill to your clients. You can also take some time off, spend the time with your family, and recharge your brain. Whatever you do in the long run, it will improve your skills and you'll be in the first row if your client has more problems to solve.
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