Step 3 in Smart Freelance Pricing?

This post is part of Free Money, the book about freelance pricing and money mindset I’m writing in public. Here are the first installments:

1. Why is freelance pricing hard?
2. Are you stuck in a freelance pricing dead-end?
3. Step 1 in Smart Freelance Pricing?
4. Step 2 in Smart Freelance Pricing?

To see future installments as I publish them, get updates in my weekly newsletter and check out the Twitter thread I’ll be updating along the way.

Find Your Dream Rate.

Freelancers don’t intentionally set the wrong prices. Who in their right mind would do that?

No, what happens is a proverbial frog boiling. A tantrum-throwing client turns up the heat. Project parameters change. Stress goes from simmer to boil, and profit disappears like steam. What happened to the fabulous lifestyles of the rich and freelance?

Putting a price on creative skills is harder than putting a price on a sandwich or an oil change. (Here are 3 reasons why.) The inherent difficulty causes the vast majority of freelancers to make the same predictable, avoidable pricing mistakes. At my last count, I have made 99.3% of them.

My hope is that you’ll build your prices on sturdy math:

• Find your own Survival Number. Don’t copy everyone else.
• Find your true availability. Don’t overestimate how many hours you’ll bill.

Once you know your Survival Number and your true availability, you’re only two calculations away from your Survival Rate, Dream Rate, and pricing that is both sustainable and exciting.

Step 3a. Find your Survival Rate.

Your Survival Rate is the minimum you must make per billable hour to cover your non-billable time, pay your bills on time, and not overspend.

Notice I used the word “make,” not “charge.” There’s more at stake here than a lesson in semantics. When you’re able to charge more than you need to survive, you start a virtuous cycle:

• You overearn.
• Budgeting gets easier.
• Your savings account grows.
• You stop living month to month.
• You start paying your “salary” at the start of the month.
• You start making progress on your long-term financial goals.

That future hinges on what you charge in the present. To build a sustainable freelance business, you cannot charge less than your Survival Rate. If you dip below that line, you risk coming up short with bills.

Plug your numbers into this Survival Rate calculation:

Annual Survival Number / Billable Hours = Survival Rate

Note: If you don’t have your Annual Survival Number or Billable Hours, adjusted for Effectiveness, go back to Step 2.

Example: My Freelance Survival Rate

My family of five living in Knoxville, Tennessee, realistically needs $9,000 each month, or $108,000 a year. $108k is my Annual Survival Number.

I will work 1,748 work hours in 12 months, but my effectiveness, or what I can realistically bill, is only about 60% of that, or 1,048 hours. My Survival Rate calculation looks something like this:

$108,000 / 1,048 billable hours = $103.05.

My Survival Rate is $103.

Whether I charge by the hour or by the project, I need to charge at least $103 per hour for 1,048 hours over a twelve-month period.

A good Survival Rate is good if it fits you.

Based on the cost of living in your city, my Survival Rate of $103 may seem ridiculously high, alarmingly low, or just right.

If you live in Cebu City, Philippines, your Survival Rate can be much lower than mine. A one-bedroom apartment in a central location would set you back $300. You’d need another $600 for monthly living costs. At the time of writing, a single freelancer could live comfortably for $1,000 per month in this metropolis with a tropical climate and close proximity to islands, beaches, diving locations, and heritage sites.

Contrast Cebu City with New York City where studio and one-bedroom apartments start around $2,000 before going to the moon.

We can’t blindly copy the freelancer who lives down the road or across the world. We can’t assume that person’s immediate needs and long-term goals match our own. Where you live affects what you must charge. Your number of dependents affects what you must charge. Your current lifestyle affects what you must charge.

So try to strip away all vanity and value judgments and find the real math at the bottom of your financial needs. (Besides, no one ever needs to know it!)

Pricing is branding, and higher prices command more respect. Always charge more if you can, because value-conscious buyers tend to make better clients.

Step 3b. Find your Dream Number.

You’ve got Survival Rate now. Whether you charge by the hour or by the project, you know what you have to make per hour to stay in the black.

Let’s look past survival though. Most of us aren’t content when our time and money is spread thinner than mustard on a cheap sandwich. Though we don’t always admit it openly, or even to ourselves, we want more. The best things in life are free, and everything else requires cash.

Now is the time to juice up your ambition. Summon your inner entrepreneur.

• Your Survival Rate is a game of limbo. How long can I go?
• Your Dream Rate is a game of Texas Hold ’Em. How much can I win?

No one gets into freelancing to break even. We want to move past surviving to truly thriving. If you’re honest with yourself, how much money would you like to make? What would you spend it on? What does the good life look like to you? Think about what you’d do with extra money from your freelance business:

1. Set a timer for 15 minutes.
2. Write down a meaningful amount of money per month for any of the categories below relevant to you:

• Debt Paydown (e.g., credit cards, student loans, car loan, mortgage)
• Short-Term Saving (e.g., emergency fund or upcoming travel)
• Long-Term Saving (e.g., car, house, or wedding)
• Investing (e.g., retirement, rental properties, stock, crypto)
• Lifestyle Goals (e.g., vacation home, RV, private school for kids)
• Giving (e.g., faith community, non-profits, causes, friends, family)
• Bucket List (e.g., restoring a vintage Airstream and visiting every national park)
• Passion Projects (e.g., recording an album, culinary school for fun, learning Spanish)

Don’t worry about creating a comprehensive list. You can create your vision board later. All you’re after is enough detail to finish this calculation:

1. Add up the numbers above. How much extra income do you need each month to make progress on your long-term financial goals?
2. Multiply that number by 12.
3. Add that annualized total to your Survival Number to get your Dream Number.

You now know your Dream Number, or the income you want to fund your desired lifestyle. This moment is a fork in a path. To the right is a wide, well-trodden trail of fear, settling, and complacency. To the left you see narrower, steeper, risker trail. (And bear scat. That’s definitely bear scat.)

Note: If you struggled with picking categories and monthly amounts, multiply your Survival Number by 1.5. That 50% bump will enable you to save more, extend your financial runaway, and exercise your walkaway power with boring, tedious, or low-paying projects. After you reach that goal, you can set a new one.

Example: My Freelance Dream Number

To move past surviving to truly thriving, I would be making definitive progress each month on these three goals, among others:

• Emergency fund of at least 6 months’ worth of my family’s Survival Number (at least)
• Killer basement and pool. We want to have the house where our kids and their friends want to hang out. That way, we can spend more time with our kids during their adolescent years and keep closer tabs on all their hooligan friends too. Yep, we’re those parents.
• Writing cabin in our backyard

I’d need to make an extra $3,750 per month, or $45,000 per year. $90,000 (Survival Number) plus $45,000 equals $153,000 (Dream Number).

Over the years my coaching clients have shared a beautiful diversity of dreams and goals with me. May this small sample inspire you.

• “Start a furniture flipping side hustle”
• “Going to Norway to enjoy the architecture”
• “Handing out wads of cash to cashiers and servers around Christmas time or just when they look like they’re down”
• “Take horseback riding lessons”
• “Buy clothes I really love”
• “Help out nieces and nephews with college tuition”
• “Move to a new city”
• “Pursue singing and scientific research… at the same time”
• “Paying other people’s medical bills”
• “Become a digital nomad”
• “Buy original art but at higher price points (or not have to worry about which price point I am at”
• “Create a scholarship/fund of some sort for kids needing help in their artistic education endeavors”

Step 3b. Find your Dream Rate.

Now it’s time to give your rates a pep talk. To find your Dream Number, you’ll use the same easy math that produced your Survival Rate:

Annual Dream Number / Billable Hours = Dream Rate

Your Dream Rate is the what you must make per billable hour to account for your non-billable time, cover your immediate needs, and make meaningful progress on your long-term financial goals.

Draw a circle around that number.

Example: My Freelance Dream Rate

For the sake of over-clarity — is that a thing? — I’ll show you the dummy numbers and steps we’ve taken so far to arrive at this Dream Rate:

• 46 work weeks per year times 38 average work hours per week equals 1,748 work hours per year.
• 1,748 work hours times 0.60 (60% effectiveness) leaves 1,048 billable hours per year.
• A Survival Number of $108,000 per year (or, $9,000 per month) divided by 1,048 billable hours gives me a Survival Rate of $103 per hour.
• A Dream Number of an $3,750 extra per month (or, $12,750 total) comes to $153,000 per year.
• $153,000 divided by 1,048 billable hours gives me a Dream Rate of $146 per hour.

We’re in different places, literally and figuratively. As I mentioned earlier, your cost of living may be much lower or higher than mine. Your goals may differ from mine or those of your freelance friends by a Hawaii-sized margin. Fine. Prices based on sturdy math is what we’re after.

Expect discouragement at first.

How does your Dream Rate make you feel?

When I first hacked together this process in 2015, I laid eyes on my Dream Rate for the first time. My excitement at being practical and facing what I should be charging curdled into discouragement.

Sure, I had dreams about getting out of debt and buying a beach house where we could send people who need to rest. But those dreams were mountains on the northern border of Ridiculous. They were so towering their tops were shrouded in fog. I might as well sprout wings and fly to the summit of Kanchenjunga.

We were broke, and with our growing family and the cost of living in Knoxville, my business would need to consistently bring in twice as much. I didn’t see how we were going to get there.

Then, expect resolve.

Another curious thing happened to me though. Being honest about my dreams jarred me out of complacency.

What I had been charging wasn’t going to fix our steaming pile of credit card debt. Maybe I couldn’t soar up to my Dream Number tomorrow, but I could ratchet up my rates a smidge, say 10–15%.

A tiny burst of resolve followed the discouragement.

Soon, you’ll start to see what you’re looking for.

The surest way to miss a goal is to keep it hidden from yourself. No matter what your dream number is, pour a bucket of ice water over your complacency’s head. Give yourself permission to be impractical.

You increase the odds you’ll hit your goals by coloring in the fine details. What is the first dream? Perhaps not living month to month. That was mine! What is the next dream? Mine was being debt free again.

As your imagination comes out of hibernation and shakes itself like a bear, you’ll start to notice more strategies and opportunities. In his Introduction to Be Your Future Self Now, psychologist and author Benjamin Hardy explains why that is:

“Once you are clear and committed, everything will filter through your goal—what psychologists call selective attention. You see what you’re looking for. You see what you care about. What you focus on expands.”¹

We’ll talk practically about what to do with your Dream Rate in the next section. Right now, celebrate the work you’ve already done. You’ve found your key numbers:

• Survival Number & Survival Rate
• Available Weeks
• Available Hours
• Time Inventory
• Effectiveness
• Minimum Hour Rate
• Dream Number & Dream Rate

With that foundation of math, you can raise your prices and raise yourself out of the boiling pot. Knowing what you must charge will give you more peace and steel when you talk to new clients. Stay tuned.