Pricing is where most freelancers, consultants, and agencies fail.
Fail to charge what they’re worth.
Fail to price based on profit.
Fail to overcome client objections to pricing.
What’s the #1 mistake we make when pricing our services?
In this video and post, I’ll reveal the #1 mistake we make in pricing our services, and how to price your services accurately and fairly.
If you prefer to read instead, I’ve included below a summarized video transcription with supplemental notes to help you price your freelancing or consulting services right.
Expanded Video Transcription
My journey from $25 per hour to $100
When I first started freelancing, I priced my services in the most unscientific way… I took my salary as an employee, and I divided it by 2000 hours which is the number of hours a typical employee will work during the year. I came up with $25 per hour. That was the rate. It was based on reality, honesty, and what I thought I was worth.
It worked for a while, but I got smarter over time. Earning $25 per hour was only scratching the surface, and it didn’t account for…Taxes. Overhead. Internet Connection. In short, business expenses!
Working for $25 per hour was not great for me, but it was great for my clients.
Don’t treat consulting like a salaried job
Consulting has none of the benefits of a traditional job. There’s no guaranteed paycheck. No job security. No health insurance. So why charge like an employee?
As a consultant, freelancer, or agency owner, you have none of the benefits that come with holding a steady job. You need to factor all the risk and benefits you are missing out on as a salaried employee into the amount you will charge your clients for your services to make sure you’re getting paid what you are worth.
Personally, I eventually crawled my way from $25 per hour to getting paid $45 per hour doing database marketing for this company called Three Deep Marketing. That $45 per hour seemed like a lot of money to me at the time, but for them, it was quite affordable – I know this, because they eventually became my business partners and they told me years later!
The most shocking moment I had on my journey to discovering what I should charge
So, I knew this consultant who had been doing graphic design services for about ten years. He told me what he was getting paid…
$100 per hour!
I couldn’t even fathom that amount of money. I just thought it was amazing that this person was worth $100 per hour. It was surprising. I couldn’t contain myself! Then I started thinking, “Man, maybe I’m undercharging.”
This consultant I was working with was a family-friend named Eric, and he used me as a subcontractor on several projects. While we worked together, he would give me advice, and one day he said:
“Jeff, you could easily charge $100 too. Just don’t do it on the subcontracting projects I have because I’m counting on you being only $45 per hour.”
Turns out that I had what it took to get paid more and get the job done. On future projects, of course.
I could easily command $100 per hour. That was a HUGE revelation for me and a big breakthrough in my process.
To be honest, I was like HOLY SH**! I didn’t know I could charge that much. I didn’t think the market could bare me charging that much because it was a huge leap from what I had been charging. This feedback was invaluable to me.
Maybe I was doing it wrong. Maybe I was underselling. Maybe I was underselling my own personal capability. My imposter syndrome seeped through… “Am I worth this much money?”
Turns out I was!
I COULD charge that and much more. I charge $500 per hour now. But, it wasn’t an immediate thing…I started at $25 per hour, and then over the years, my rate increased.
It’s not like I just raised my price overnight based on one conversation. I had to test the waters. I had to check if the market could bear it. I had to have a pipeline. It took 6-12 months to raise my rate to $100 per hour after speaking to Eric.
Over the years I kept charging more. As I got busier, I had a pipeline of potential clients waiting to work with me.
I could increase my fee, and I didn’t get the client then it was okay because I already had money coming in. This way I could increment my pricing, and I could base it on the reality of what the market could pay.
The #1 mistake service-based businesses make when pricing their services?
Not including expenses and healthy profit-margins into the service fee.
This is what I did when I started consulting. You figure that your service fee should just be your salary divided by 2,000 hours. You don’t factor any of the risks of being a business owner. That is a HUGE mistake! I don’t want you to make that mistake.
Business is not a break-even prospect. Business is about generating a profit. It’s about having more money at the end of the day, because if you can’t have that you won’t be in business very long.
You will go into debt, and it will cost you more in the long run if you don’t make a profit.
Right away in the service business, you should aim for a profit.
The Only Exception To The Profit Rule
You should only sacrifice these ideals if you need experience. Take a little bit less than your standard rate – even work for free – if you want that valuable experience. It’s okay to sacrifice revenue for long-term revenue, relationships, and long-term prospects for your business. But that is the only time you should make that exception.
Don’t underprice yourself every time. At some point, the tables need to turn, and you need to flip that switch and say:
“Hey, I’m good enough to charge X. This is the rate I deserve, and I’m busy enough I don’t need to take this business.”
It might take you 6 to 12 months until you can get to the point to charge what you’re worth.
Maybe you need more confidence.
Maybe you need to conquer your imposter syndrome.
Maybe you need to do the math you haven’t done to include your business expenses and target profit margin into your service fee.
How to include expenses and profit-margins into your service fee
Now, I’d like to give you an example of how to calculate your service fee by taking into account expenses, and profit margins.
Assume you are an in-house SEO who just recently quit from Morty’s Inc. to start his own SEO agency called SEORick. At your previous job, you were getting paid $65,000 per year, and you had free health insurance, a $2,000 education budget, and unlimited vacation. If you divide $65,000 (annual salary) by 2,000 (hours), you get $32.50 as the per-hour rate that Morty’s Inc. paid you as an in-house SEO.
In your first month, a potential prospect Unity Legal Inc. requests an SEO proposal for their website. You scope the SEO project and estimate that it will take you 15 hours per week to implement an SEO strategy for them.
What should the monthly retainer fee be? Should you just take your previous hourly rate of $32.50 and use that?
Awwwww hell no.
SEORick needs to factor much more into his service fee.
Calculating SEORick’s Business Expenses
Step 1 – Calculate Labor Cost
In our example, we know that SEORick’s previous hourly rate was $32.50. We’ll use this as our base labor cost per hour to render the SEO service. Remember this is what Morty Inc. paid SEORick per hour, that was their labor cost to perform SEO services by using Rick as a labor resource on an hourly basis.
Step 2 – Determine your Material Cost
SEORick will use the following software tools to render services for Unity Legal Inc.
Ahrefs – $179 per month
Moz – $149 per month
Screaming Frog – $17 per month
Buzzsumo – $139 per month
SEMRush – $199 per month
Total per month: $683 per month
Step 3 – Calculate Cost of Revenue
Cost of Revenue is all the direct expenses associated with rendering a service.
A. Monthly Labor Expense
The total number of hours to render SEO services is going to be 15 hours per week for a total of 60 hours per month.
$32.50 (labor cost per hour) x 60 hours = $1,950 labor expense per month.
B. Monthly Material Expense
$683 per month (from step 3 above).
C. Total Cost of Revenue Per Month
Monthly Cost of Revenue = Monthly Labor Expense + Monthly Material Expense
$1,950 + $683 = $2,633
So for SEORick to render SEO services to Unity Legal Inc. It will cost him at least $2,633 – that is his cost of revenue. Most freelancers, consultants, and agencies don’t know this number. Don’t be the average freelancer. Do the work to calculate how much it costs you to deliver your service.
Okay, SEORick still does not have any profit margin built into his service fee or overhead costs. Let’s do that next.
Step 4 – Define Your Gross Profit Percentage
Gross Margin or Gross Profit is defined as:
Revenue – Cost of Revenue
As is, we don’t know the actual revenue yet that SEORick will charge Unity Legal Inc. However we can determine the exact profit percentage we would like to earn from the sale. In this example, I’m going to set the gross profit percentage to be 30%.
So, to earn 30% of gross profit percentage SEORick needs to sell his SEO services to Unity Legal Inc. at $3,761 per month.
$3,761 (revenue) – $2,633 (cost of revenue) = $1,128.43 gross profit
$1,128.43/ $3,761 = approximately 30%
So, SEORick decides to charge Unity Legal Inc $3,800 per month for SEO services, that’s going to be his revenue. What happens when you divide $3,800 by 60 hours? You get $63.33 per hour. That’s the per hour rate SEORick would be charging Unity Legal Inc. for SEO services. That number is based on accurately taking into account legitimate business expenses to render the service. If SEORick just charged the previous hourly rate of $32.50 then SEORick would have been operating at a loss.
Can you see why calculating business expenses and incorporating them into your service fee is critical?
So, we’re not done yet. That’s only gross profit. What about net profit? That’s the number you should care about in the end.
Step 5 – Define your Overhead Costs
To calculate net profit, we need to define our overhead costs and calculate taxes due from the revenue earned.
SEORick is just starting his business so he will be working from home using his extra room as a home office so for the moment there is no rent expense. However, SEORick has to pay taxes and health insurance.
Health Insurance: $250 per month
Office Space: $150 per month
Let’s calculate total business expenses:
Total Business Expenses = Cost of Revenue + Overhead
$2,633 + $250 + $150 = $3,033
Step 6 – Calculate Your Net Profit Percentage and deduct taxes
Net Profit = Revenue – Total Business Expenses
$3,800 – $3,033 = $767 net profit. But when you take out taxes (30% or $230.10), SEORick is left with only $536.90 for all that hard work.
Not much, right?
SEORick decides he would like more profits but still be competitive. He knows that SEO monthly retainers range from $2,000 – $5,000 per month. SEORick decides to charge $4,600, so he can make a net profit percentage of 25% which is still priced competitively in the SEO industry – and profitable too.
If you divide $4,600 (SEORick’s new monthly retainer fee) by 60 hours you get $76 per hour as the hourly rate when taking all business expenses into account.
If SEORick didn’t calculate his total business expenses, he would have just charged his previous hourly rate of $32.50, leading him to incur a net financial loss instead of a net profit.
So, in the end, because SEORick built-in expenses and profits into his SEO service fee, he accurately and fairly quotes a monthly retainer fee of $4,600 to Unity Legal Inc. with a built-in 25% net profit percentage. Now all SEORick needs to do is justify his monthly retainer fee to Unity Legal Inc. and close the deal (more on that some other time).
Don’t be like most freelancers, consultants, and agencies and just quote a random price.
Do the math.
Numbers are your best friend in business.
- The #1 mistake agencies make when pricing their services is not taking into account business expenses into their service fees.
- Profit is the number one metric all freelancers, consultants, and agencies should care about.
- To earn a healthy profit, you need to calculate your business expenses, and taxes.
- The only exception to sacrificing profits is to build relationships and gain experience.
Are you factoring in your actual expenses and making a profit?
Or are you having trouble pricing your services accurately?
Leave a comment on the blog and let us know.
This post and video was episode 20 in our 90 Day Challenge digital marketing series.
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Thanks for interesting post. I just have a question: this math is for one client. How about having 2-3 clients? Of course, the charge can be different between clients, depending on the works. But let’s assume that he can do the same amount of works for each client. Can he just charge $4600 / month for each?
Yes, the numbers work if you add more clients. Your fixed expenses will be spread out over the clients (i.e. subscriptions to tools), but you may also have other costs. So your pricing and profit margins will definitely change with each customer you add. But the overall math works, assuming you incorporate the additional revenue/expenses into your profit model. We go very in-depth in these financial statements inside of Agency Course.
Thanks for answering.
I am not in the US, so I am not sure, but I thought the tax should be on profit, not on the revenue? So, his tax should be (3800 – 2633) * 15.3% = $ 178.55, instead of $ 581 as above?
The one thing I would add to the hourly/daily rate calculation (based on 20+ years as a software implementation consultant) is that companies I’ve worked for usually calculate the rate based on a 70% utilisation rate. That is their estimation of how often the consultant will be out on fee paying work – typically about 180 days (1440 hours) per annum.
This accounts for things like holidays, sick days, gaps between when one project ends and another begins, and times when there is no work available.
Hi Simon – definitely a good point to bring in. We tried to keep the example super simple, with concepts like utilization rate being a topic discussed within the full agency jumpstart course.