Adapted from Talent Is Not Enough: Business Secrets For Designers, 2nd Edition
by Shel Perkins
Copyright © 2012. New Riders. Used with permission of Pearson Education, Inc. and New Riders.
Many designers spend part of their careers as freelancers — it’s a great way to gain experience, build relationships, and develop a diverse portfolio. Some independent designers work directly with business clients, submitting fixed-fee proposals for specific projects. However, others prefer to work behind the scenes as an additional resource for established creative firms. If you are working behind the scenes, how should you go about calculating a fair price for your services?
Most design firms and agencies cope with temporary increases in their workload by bringing in outside designers on a subcontractor basis. A freelancer with very specific skills is brought in to help with a particular phase or aspect of a project, and the freelancer is usually paid a negotiated hourly rate (and reimbursed for any necessary project materials). The rate that you receive will be a gross amount — that is to say that no taxes will be withheld. As a self-employed worker, you are responsible for all of your own taxes and business expenses. For that reason, it’s important to calculate an hourly rate that is based on your own situation. The process is not complicated — just follow these simple steps:
Add Up Your Expenses
Start by adding up all of your annual business expenses (see the illustration below for an overview). If you’ve been freelancing for a couple of years, this is easy — just look at Schedule C from the federal income tax return that you filed last year. However, if you’re new to freelancing, you’ll need to prepare a worksheet with estimated amounts. Do some research to make the estimates as realistic as possible, and be sure to include a reasonable salary for yourself — one that honestly reflects your skills and your level of experience. (As a reference, look at the annual survey of design salaries published by AIGA, the professional association for design.) A complete list of your annual business expenses will look something like this:
- Office rent and utilities (If you work from a home office, these will be prorated amounts.)
- Office telephone and Internet access
- Office supplies
- Liability insurance
- Advertising and marketing expenses
- Business travel and client entertainment
- Legal and accounting services
- Business taxes and licenses
- Depreciation (If you purchased any furniture, fixtures, or equipment during the year, add just one year’s worth of depreciation to the list, rather than the full purchase price.)
- Salary (This must be a competitive wage that is adequate to cover your personal expenses such as home rent or mortgage — the portion that does not relate to your home office — food and clothing, personal travel, and recreation.)
- Health insurance
- Other employee benefits
- Employer taxes
This calculation includes all of your general business expenses — it does not include the purchase of outside services or materials that relate to just one project. If you buy printing, photography, or special materials for a specific project, those expenses would not be factored into your hourly rate. Instead, the costs would be marked up and then billed to the client separately.
Start to think of the business as being larger than yourself as an individual. It will have many expenses
in addition to the living wage paid to you as an employee.
Estimate Your Billable Hours
The next step involves estimating how many billable hours you might be able to produce during the year. No matter how diligent you are, you can’t be billable every waking moment. Out of a full-time work schedule, most designers range between 50% and 80% billable. The illustration below shows a format for estimating your potential for billable hours. Why is this example on the low end of the scale? In a large firm, staff designers have the potential to produce lots of billable hours because other employees are there to take care of non-billable tasks such as marketing. As an entrepreneur, however, you’ll be doing everything yourself. New business development activities may take up a significant portion of your time, particularly when you are first starting out.
Be conservative in estimating the number of billable hours that you will be
able to produce during the year.
Know Your Break-even Rate
At this point in the process, you know how much money is needed each year to keep your business afloat, and you know how many hours are available to produce that money. The next step is simply to divide the total expenses by the total billable hours available. This gives you a break-even rate, meaning that you have to charge at least that much per hour in order to keep the doors open.
Bump it Up to a Billing Rate
However, you want your business to do more than just break even — you want it to produce a profit. To make sure that happens, you must decide on a target profit margin and build that margin into your billing rate. This is an important management decision for you. The typical profit margin varies by design discipline, but it is usually somewhere between 10% and 20%.
Look for Industry Comparisons
Now that you’ve calculated your personal billing rate, it would be very helpful to compare it to the rates that other freelancers use for similar work. Ask around within your community and check for recent surveys. A junior production specialist may bill for as little as $35 an hour while a creative director may bill for $75 or more per hour, so it’s important to find comparative information that is a close match to your own skills. Most advertising agencies and design firms use lots of different freelancers. This means that they know what the typical rates are, although in conversations with you they may be tempted to understate them a bit as a negotiating strategy. If you are asking to be paid more than the going rate, you will have to be able to explain why that is appropriate.
You may want to adjust your own billing rate in response to the industry comparisons that you have found, but you should never sell your services at less than your break-even rate. If you are a freelancer with modest expenses but a high number of billable hours, then you may have the luxury of adjusting your billing rate upward. However, if you find that you need to adjust your rate downward in order to be competitive, then you need to go back over your calculations very carefully. As a businessperson, you must find ways to cut costs and/or increase your billable hours. You might also consider lowering your target profit margin, but you should never eliminate it altogether.
Finally, you should keep in mind that calculating an hourly rate is not a one-time process. You need to update your hourly rate periodically because costs change, your skills change, and overall client demand changes as well. Because of this, it’s a good idea to recalculate your standard rate once or twice each year to make sure that it remains as current and competitive as possible.