103 How Do I Set My Rate For Consulting or Freelancing?

How much should I charge for consulting? What things should I think through when setting my rates for freelancing? What if I don't feel comfortable charging enough? These are the questions we are going to answer in today's episode of Dev Questions.

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SPEAKER_00 0:00

Welcome to the Dev Questions Podcast with Tim Corey. Join us each episode as we tackle the questions you are asking about a career in software development, understanding the industry, and new technology. If you're just starting out or you want to grow stronger as a developer, this is the place to get your questions answered. Now, here's your host, expert developer and online educator, Tim Corey.

SPEAKER_02 0:25

How much should I charge for freelancing? How much should I charge for consulting? Is there a specific rate I should be looking at? What are the things to think through when setting my rate? And what if I don't feel comfortable charging that amount? These are the questions that were asked on the suggestion site, and I thought it'd be a great time to address it in today's episode of DevQuestions. Now, if you have a question, go to suggestions.imtimcorey.com and ask your question there. Hopefully, you'll see it in a future episode of DevQuestions. Now, let's talk about setting your rate as a consultant. There are a lot of things to think through, but the very first thing I want to make sure you realize it should probably be higher than you're thinking. Whatever that number is, yeah, let's add some more dollars to that. We're not talking dollars today, of course, your currency of choice, but let's talk about why we should set our rate higher than you think. Now, I have done consulting on my own. I have done consulting with a company. I have worked on the side as a consultant. I've done a lot of time working as a consultant and I've learned quite a few things through that process. So the first thing I want you to think through is the fact that you should budget for earning your consulting fee 10 hours per week max. That's your budget. Now, you want to do more than that, but you want to budget for 10 hours per week, which means that when you set your rate, you need to be thinking about what's the end salary I want, and can I get that on 10 hours per week? So for instance, if you set your rate at $50 per hour, which seems like a lot, but you then budget on 10 hours per week, your end amount that you'll have earned in that year before taxes, before anything else, just your gross amount would be $25,000. Doesn't sound like a lot now, does it? And why do I say only plan on 10 hours per week? Well, because consulting isn't like working at a job. It's not like usually you have 40 hours worth of consulting every single week, especially not at first. Often what will happen is you will have some weeks where you have 80 hours of consulting to do in that week. And then you'll have weeks or even months where you have no hours of consulting. You see, as a consultant, you are not just the person doing the job of software development, whatever you're consulting in. Instead, you're also the marketer. Who goes out and finds new jobs? You do. And then you're also the salesperson who goes and talks to the customer and figures out what a job might look like and how much time it might take? You do. Who sets up contracts? Probably still you. Who works with the bookkeeping? Again, you. Now, all these things can be outsourced, and when you can, that's a great thing to do because it takes a lot of stress off of your plate. But especially when you're first starting out, that's not really a possibility. You don't have the resources usually to do that. But as you're thinking through those things, think through what do you get paid for in those? You don't get paid for doing marketing time, you don't get paid for doing sales time, you don't get paid for writing contracts, you don't get paid for following up when they don't pay. You don't get paid for doing your bookkeeping, you don't get paid for doing your taxes, you don't get paid for cleaning up your office or getting new equipment or fixing the problem in your computer that caused it to crash overnight. You don't get paid for any of those things. You get paid when you are working on the job for a customer. So all those things take time, but you don't get paid for them. Therefore, you need to budge that into your overall time. Otherwise, if you start budgeting for 20, 30 hours a week of consulting, well, now you're expecting or planning, even unintentionally, you're planning for 60, 70, 80 hours a week of actual work. That's just too much. It's overloading and it's it's going to burn you out very quickly. So I would encourage you to plan for 10 hours per week. Celebrate when you get more than that, but plan for 10 hours a week. So that's the first thing. Next, I want you to think through when you're setting a rate that you don't get every dollar of that rate. If you charge $100 per hour in the United States, you need to plan for getting $70 per hour after taxes. And you have to make sure you reserve that $30 per hour separately so you can pay your taxes when they come due. Other countries obviously are different, but you need to think through what am I going to be taxed, how much I'm going to be taxed, and then can I afford to live on the rest? So again, your hourly rate may be to the customer $100, but now you're talking about $70 to yourself. So think that through when you're thinking through how much you want to make at the end of the year. Next up, I want you to think through the idea of not having work. How scary is that? You don't want to be constantly stressed out at work. You don't want to be thinking about how you can't afford to pay for food for your kids. You don't want to be thinking through how you can't afford to live if you don't have one more job coming up right now. So you want to have some buffer. You want to have the ability to go a month or two or three without a customer. So what I want you to do is think through saving up six months worth of income. Whatever you decide this is the income I need, make sure it's a little more than that. Make sure you have some wants covered and some uh emergencies covered in there as well. But six months in the bank that you don't touch. Make sure that you have that money set aside so that if anything goes wrong, you can still pay the bills and you can still move forward. I have three employees currently that I employ. And as a business, I need to think through how do I make sure that just not just my bills are covered, but theirs are as well. So what I do is I have six months or more, usually a year, worth of expenses in the bank that I don't touch. So I have money set aside so that if a rainy day happens, if our payment processor tomorrow says, sorry, you can't get paid anymore. If YouTube goes down, we have nobody that knows about me. Six months for at least six months, we can be just fine. And what that does is it provides me with a level of comfort. It provides me with a lot less stress. People say all the time, you run your own business, you have employees, I bet you're stressed out all the time. And I'm like, no, this is great. I love it. And the reason why is because I am not worried. And one of the ways I do that is by removing the worry of money. So I make sure that I have that savings set aside. That way, if we have a bad month, not the end of the world. We learn, we adjust, we grow. And that way, if things don't go right or have a big expense come up, it's okay. We can do this. And we intentionally make decisions about our finances based upon reserving that money. So there are things that we could do as an organization that we don't do yet because we can't afford it. And yes, we could afford to write the check tomorrow to do that, but by doing so, we endanger the reserve. And if we endanger the reserve, well, now I have more stress. And if a bad month happens, we have even more stress. So take that stress away, make sure to save up. I recommend six months worth of the income you need, plus emergencies, and keep that, don't spend it. And you may say, well, Tim, I want to grow and it takes money to grow, and I need to invest that money. Don't do that. Grow slower. Take your time. Because even though you might grow faster by using that money, if you do, you're also putting more worry on your shoulders. You're risking more. Don't do those risks. Take the time to set aside that money, grow more slowly, and ensure that you have less worries going forward. Next up, don't forget to save for vacations. Often, when you get into consulting, you think through, I have 52 weeks. I have 52 weeks in this year, and if I earn $50 an hour and it's 10 hours, and you start thinking that through, it's $26,000 over the whole year. Don't think that way. Think through, I'm gonna take some time off for Christmas. I'm gonna take some time off in the summer to spend time with my family. I'm going to go on a trip. I'm gonna have some days where I don't feel well. Think through those things and make sure you build that into the schedule. It helps that you're only playing on 10 hours per week, but still think through maybe 50 weeks a year, not 52, or maybe 48 weeks a year, not 52. Because that way you can build in some buffer where maybe you feel great and you don't have anything you want to do, you want to push through to get something done, that's fine. But then other times you say, you know what, I need a break. I am stressed out or I'm sick or whatever. You can take the time you need and again not have that worry on your shoulders, not have that concern that, oh no, I'm not getting paid while I'm sick. And that that can be stressful. Not having a regular paycheck can be difficult, but by setting some things in place that will reduce those worries, it will go a long way towards making your time as a consultant more long-term viable, not just a short-term thing. Now, when you set a price, and let's say you set a price of $200 an hour, always make sure you set it high. Don't compromise. Don't say, well, I could get by with. Allow room for growth. So if you say, you know what, I want to make at least $100,000 this year, that means I need to charge $200 an hour and I need to do at least 10 hours per week of consulting that I get paid for. When you set that, make sure you set it where it needs to be. But then there may be people that come to you and say, Well, can I get a discount? I would hesitate to ever give a discount. People love to have a discount and it makes you feel good, it makes you feel like, hey, I'm helping you out, and it's still a lot of money. Be careful. Unless they're going to give you a significant amount of work, I would not give a discount. But let's say a company comes to you and says, hey, we want you to work 20 hours a week for us for the next six months. Will you give us a discount? Well, start thinking through. You have less marketing to do, you have less sales to do, you have less contract work to do, and you have a more consistent income. That makes sense for you, and it makes sense for you to say, yes, I can give you a discount because you're counting on 10 hours per week, not 20. Now, don't give a discount down to the 10-hour rate. So don't say, oh, it's $100 an hour now, because then you're breaking even. That's not a great thing. Also, when you have a long-term customer like that, that can very easily hurt you in the very long term. Because maybe you stop doing any kind of sales work. I've got enough work already. I need to just do this and not do anything else. Well, what happens when after four months they say, yeah, we need to cancel the contract? Well, first of all, you should have some things in your contract that say you still get paid for the six months. But second of all, even if you wait till the six months are over and they say, Yeah, we're done, well, now you have nothing. Now you have to start over again getting new customers. Hopefully you've kept some customers in the pipeline. Hopefully, you've been doing other things besides that one customer. Otherwise, you get dependent on them in a way that can hurt you long term. But let's say they come to you and say, we want 20 hours a week, we want it for six months, we're gonna put it in writing and guarantee you this much. Well, I would probably give them a discount to let's say 165 or 175 per hour, not $100 per hour, because otherwise, what you're doing is saying, my rate is not that important. It's overly inflated. Instead, what you say is my rate is very valuable, but so is a long-term relationship. So I will give you a discount, but that discount is going to be a percentage, a smaller percentage of my overall fee. So maybe your percentage is 10% off or 15% off. Well, 15% isn't that big a deal on $200. That's that's $30 per hour. And yet it seems like a significant amount to the person that is purchasing because you have made a concession. You said, yes, I understand the value of what you're offering, and so I will offer you some value back. So it becomes a win-win because now you are getting more than your $200 at 10 hours a week. You're getting $170 at 20 hours a week, and so you're making significantly more than you would with other customers, and you're having less stress because you're doing one customer, not multiple, and so on. So there are some value to giving a discounted rate, but do not slash your prices. Do not give a discount to every customer who asks. Have a set amount. Say, if you can guarantee me 12 hours, 15 hours, whatever that hour number is per week, set it high, let's say 15 hours. If you can guarantee me 15 hours or more per week, I will give you 5% off. If you can guarantee me 20 hours per week or more, I will give you 10% off. And if you can guarantee me 30 hours per week or more, I will give you 15% off. Something like that where you have set rules in place. Otherwise, every customer will ask, and every customer will have a different rate, and then you have to track it and make sure that you pay attention to that long term. Now, that's how you set your rate and make sure you set it high. But then you need to think through long term. Let's say two years, three years down the road, what are you doing with your rate? Well, your rate should change. Your rate should not be the same. For one, inflation happens, but then for two, your skills have improved. You have two, three more years of experience as a consultant. Your rates should reflect that. So don't be afraid to set your rates. Be upfront about it. My rates change every year. So in January, my rates will go up. And maybe tell your customers that. And so when they sign a contract, you could say, hey, if you want to sign a two-year contract and lock in your rate, we can do that. That way, you're giving a discount without giving a discount. Because you're setting your rate and saying, this is what it's at. Now, don't do that for 10 years, 20 years. Lock your rates in for short periods of time, not very long periods of time. But now, with that locked-in rate, the customer can feel comfortable saying, I'm getting a discount or a deal by locking in now and having a long-term experience with this consultant. So don't be afraid to raise those rates and use that as a benefit or a bonus, not just a bad thing. Tell them right up front, this is my rate for this year. It will go up in January. Set that expectation right up front. And then you can have contracts where you say this rate is locked in for the length of this contract, which is one year, two years, three years, whatever that contract length wants to be. All right. So that's how I would go about setting rates for being a consultant or a freelancer. I hope that answers your question. If you have more questions, feel free to go to suggestions.imtimcorey.com and ask them there. Thanks for listening. As always, I am Tim Corey.

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Thank you for joining us for this episode of Def Questions. Tim is committed to making it easier for you to become a developer. If you would like to help make more content like this possible, please like, subscribe, rate, and share Deaf Questions. You can also send your questions to questions at IamTimcore.com. Until next time, remember, you are too smart and your time too valuable to waste it making all the mistakes Tim did. When you're ready to learn to think and code like a professional developer, head over to imtimcore.com and enroll in a course.