From the corporate honchos at Walmart to the farmer selling pumpkins out of his pickup at your local farmers’ market, anyone who sells a product or service must grapple with the question of how much to charge his customers. The question is easier to answer when you’re dealing with products than services. Product costs are largely determined by hard figures: the cost of raw materials, production, labor, transportation, distribution, marketing, overhead, etc. Add a profit margin that keeps your prices in line with your competitors and you’re in business.

Deciding how much to charge is a little trickier when you’re a freelancer or consultant. When you are selling your time and expertise and the only hard figures you’ve got are minimal overhead for office supplies and internet service, how do you determine your hourly rate?  Obviously, your goal is to make money so you want to set a rate that is low enough to attract customers but high enough to adequately compensate you for your time and effort.

Many freelancers tend to price their services too low, especially when they are starting out and are working to build a reputation and clientele. Undercutting the competition’s price is one way to draw business, but the strategy can backfire if you go too low. Unless you are already well-known in your field of expertise, you probably don’t have the chops to demand top dollar; but in determining your hourly rates it pays to remember two important business truths:

  1. Price affects consumers’ concept of value. People tend to associate greater value with higher prices. Setting too low an hourly rate can undercut your perceived value and prevent you from obtaining the high-quality clients you want to attract.
  2. You are working to make money. If you wanted to give away your time and talents, you’d be volunteering at a worthy nonprofit. If you do not feel that you are being fairly compensated for your time and effort, you will begin to resent the work and your clients and you will have only yourself to blame!

Next time: Step-by-step guide to setting freelancing rates