Determining Target Revenue

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Determining Target Revenue

When you argue for your limitations, you get to keep them.Jim Kwik

If you want to make proper money as a freelancer, it’s important to not avert your gaze and say “Uuuuhhhhhh” when someone asks you how much you charge.

Professionals know how to field this question: with a calm smile, they say, “Sure, tell me more about what you need and I’ll get you a quote by noon tomorrow.”

To do this, professional creatives need a fast, bulletproof method for calculating a quote. There are two ways to create that method:

If you’re an experienced freelancer, take the total amount of money you made last year (or whatever was your best year to date) and divide it by 2,080 (the number of business hours in a year). This is now the minimum value of one hour of your time. This can serve not only as your starting point for pricing out jobs, but also—and I’m going to get a little philosophical here—it’s your measuring stick for how you should be spending your time in general.

Let’s say, hypothetically, that you made $88 per hour last year. You want to improve this year, so now your baseline is $100 per hour.

Think about what that means. It means that from now on, whenever you spend an hour on something that could have been outsourced for less than $100 (or not done at all), you are throwing away money. Instead of throwing away money, I humbly recommend that you channel that time into your art. When you show yourself that level of respect, it’s easier to expect your clients to do the same.

Now let’s get back to pricing.

If you don’t already know your target revenue for the year, no problem. Let’s create it right now.

Years ago, one of my mentors (previously a CEO and now a successful investor) broke down for me the basics of how to price freelance services. I listened carefully and took notes furiously, because A) he’s an intimidatingly smart man who would shout when teaching me business fundamentals, and B) he had used these fundamentals to earn himself some of the same things I wanted out of life (control of his own time and a vintage Ferrari collection, to name a few).

So, I put those basics into an Excel model which spits out a quote based on the answers to a few simple questions:

  1. What would your annual income be if you were employed, at your current level of experience, by a healthy sized company? (If you’re unsure, I’d skip most of the online articles about this, and instead make friends with a recruiter and ask them). Add 50% to that number, for reasons outlined in The Benefits of Freelancing.

  2. What are your fixed and variable monthly expenses related to your freelance work?

  3. Do you have anyone working for you and what do you pay them?

Toss the above numbers, along with an estimate of hours you plan to spend on a given project, into this Excel model and out comes a cost.

Here’s what that looks like, using made-up numbers for illustrative purposes:

  • You’re a copywriter who made $75K in your last full-time role.

  • $75K plus 50% is $112,500 per year. Your deductible rent is $6K per year (you can consult an accountant to find this number, or estimate how much you can deduct), you spend roughly $7K on hourly assistant help, and you have $8K in additional business expenses, so your annual overhead is $21K.

  • Your new total target revenue is $133,500.

  • There are 2080 business hours in the year. Your base hourly rate is $133,500 divided by 2080, or roughly $64 per hour.

Now you know that it costs at least $64 for you to do work for an hour.

importantThis is not your quote. It’s your starting point. It’s the minimum amount of money you’d need to charge in order to pay yourself, your people, and your expenses. If you take less than this price, you are either discounting your hourly value, or worse, losing money. Think carefully about what a client thinks of a freelancer who jumps at the chance to lose money. Think carefully about yourself, your training, and the quality of your work. Remember that you may not actually be collecting money for every single one of those 2080 hours you have available to work.

Determining Retail Value

The next thing to determine is the retail value of the work you are going to deliver. You can do this by Googling, knowing your industry, talking regularly with your peers, reflecting on your past experience, understanding your client’s financial goals, and consulting with mentors.

Graphic designers have the Pricing and Ethical Guidelines to reference; your industry might offer something similar. As you gather data on other peoples’ rates and salaries, keep in mind that some people may not be paid fairly, so some data may be more noise than signal.

Part of the beauty of freelance work is that you get to decide what’s fair. On the flip side, the market will keep you honest. If a client is asking you to create a logo, for example, chances are they’ve asked others to quote the same job, and their reaction to your quote will give you an indication of whether it’s over or under the market. This is just another data point of course, not an absolute truth, but after a few failed attempts at charging $10K for a branding job, you might learn that charging $7K is actually more lucrative for you, because at this price you’ll actually be working.

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