Walkaway Pricing: Calculate Your Minimum and Ideal Rates
Part six: Combining spending and billable hours to set content creation prices
This is part six of my guide to working out the minimum you should charge as a freelancer or content creator. Please see my introductory post for more information and links to others in this series.
It's time to work out exactly how much you should be charging to create content and run projects for your clients. We've been through a lot to get here—from adding up all of your spending through to figuring out how many hours you can bill each month.
If you've not been through the previous guides in this series, I'd invite you to do so now. the calculations below won't make much sense without them! You'll want to go through each guide in order, as follows:
Part one: Introducing costs and minimum rates for content creators.
Part two: Understanding your personal, household, and living costs.
Part three: Calculating how much money it takes to run your creative business.
Part four: Adding up what it takes to move out of survival mode.
All done? Excellent! Time to work out how much you should be charging for your freelance and creative work.
How the minimum price calculation works
The calculation we'll be using is pretty simple. For your minimum rate, we're going to:
Get the amount that you spend on essential costs.
Add the amount that you spend on running your business.
Divide that total by the number of hours you can bill in a month.
Add on a percentage for your taxes and other costs.
That will then give us the amount you need to bill per hour to meet all of your essential needs.
Move beyond the minimum and calculate your ideal price
We're not going to stop with your minimum price. You should be able to live the lifestyle you want, which is why we also figured out how much disposable income you need as part of our fourth guide.
Once we've worked out your minimum rate, we'll add in your discretionary spending to calculate where to set your rates to meet your extra lifestyle needs:
Get the amount that you spend on essential costs.
Add the amount that you spend on running your business.
Add the amount that you spend on optional, discretionary costs.
Divide that total by the number of hours you can bill in a month.
Add on a percentage for your taxes and other costs.
This will give us an ideal rate that you can use as a basis for getting paid enough to live the lifestyle you want.
Some quick notes
I've used US Dollar amounts, assumptions, and examples throughout these guides. That's because I live in the US, and understand that financial system the best. Don't let the $USD put you off. These guides should work fine in your own currency, just substitute in as required.
Not every content creator or freelancer charges by the hour. Some of you may charge by the project, by the word, by the deliverable, or via some other pricing structure. Understanding your minimum and ideal hourly rates is still important. I'll explain how to convert your hourly rates into other types of content creation pricing in a future guide.
There are a huge amount of caveats and assumptions in this and my other guides, and everyone's circumstances are different. Always speak to a professional about your financial situation, taxes, and other important areas of your life and business.
Figuring out your walkaway pricing
You'll need to gather your figures from the previous parts of these guides:
Get your monthly living costs from part two: Understanding your personal, household, and living costs - this figure is your Essential Costs.
Get your monthly business costs from part three: Calculating how much money it takes to run your creative business - this figure is your Business Costs.
Get your monthly discretionary costs from part four: Adding up what it takes to move out of survival mode - this figure is your Optional Costs.
Get the total number of hours you can bill per month from part five: Charging for your creative hours - this figure is your Chargeable Hours.
Calculating your minimum rate
To figure out your basic minimum rate:
Write down your Essential Costs.
Add your Business Costs to your Essential Costs.
Divide that total by your Chargeable Hours.
This gives you the minimum amount per hour.
We'll add in your taxes and fees on top of this later to figure out what your actual minimum rate should be.
For example, if your essential costs are $2,700 a month, your business costs are $300 a month, and you can bill 120 hours, this would work out to ($2,700 + $300) / 120 = $25 per hour.
Calculating your ideal rate
To figure out your ideal rate, we add in your optional costs as well:
Write down your Essential Costs.
Add your Business Costs to your Essential Costs.
Add your Optional costs to your Business Costs and Essential Costs.
Divide that total by your Chargeable Hours.
This gives you your ideal amount per hour.
We'll add in your taxes and fees on top of this later to figure out what your actual ideal rate should be.
For example, if your essential costs are $2,900 a month, your business costs are $400 a month, and your ideal costs are $1,500 a month, and you can bill 110 hours, this would work out to ($2,900 + $400 + $1,500) / 110 = $44 per hour.
Go ahead and calculate your minimum and ideal hourly rates now.
Meet our three great examples
To show you how this might work in practice, let's create three example freelancers and content creators.
Frugal Phil lives in a houseshare and keeps his spending to a minimum. His essential costs are $2,200 a month, his business costs are only $100 a month, and he only adds on another $500 a month for his optional costs. Phil is also dedicating as many hours as possible to begin a freelancer, and bills out for 130 hours a month.
Phil's minimum rate, before taxes and extras, is $18 an hour, and his ideal rate is $24.
Average Alex has higher essential costs ($2,800), spends a bit more on their business ($300), and is saving what they can for the future ($1,000). Alex is able to commit 115 hours a month to freelancing.
Alex's minimum rate, before taxes and extras, is $27 an hour and their ideal rate is $36.
Costly Clare has a more demanding lifestyle, childcare costs, and lots of other expenses. Her essential costs work out to $4,200 a month, her business costs are $450, and her optional costs are another $2,000. She only has enough time to bill for 100 hours a month.
Clare's minimum rate, before taxes and extras, is $47 an hour, and her ideal rate is $67 an hour.
Adding in taxes and other fees
Now that you have your minimum and ideal rates, you'll need to add in a percentage for taxes and other areas.
Planning for taxes
We need to add taxes to your rates because we've based your rates on your spending, and your spending comes from your after-tax income. The government is still going to want to get their cut of your earnings—you'll need to increase your rates so you can put enough aside to pay your taxes.
For example, in the US, freelancers are taxed roughly as follows:
15% of their profits are taxed as self-employment tax
Between 10% and 20% of their profits are taxed as income tax, from federal and state governments
So, for every $100 a freelancer might charge, up to $35 of that might be taken in taxes.
Now, this doesn't take into account things like standard deductions, business expenses, retirement contributions, etc—all of which can help to lower your taxes. You should definitely speak to your accountant about those areas. But, a good rule of thumb might be to increase your minimum and ideal rates by around 25% to 35% so you have enough to pay taxes.
Emergency fees
There's one more thing we haven't accounted for—the unexpected. These are the surprise costs and bills that end up blindsiding you. They're the extra business expense you didn't plan for, or the emergency spending that's not in your budget.
I recommend increasing your rates a bit further to account for these areas as well. That way, you won't be panicking if you have a quiet month and a surprise bill comes in. I'd recommend adding another 10% - 15% to your rates to cover those unexpected costs and surprise periods.
So, in total, with taxes and other fees, you might increase your rates by 35% to 50%.
To do this, just multiply your minimum and ideal rates by a figure between 1.35 and 1.5 to come up with your final amount.
Here's how that might look for our three example freelancers:
Frugal Phil sets his minimum rates between $24 and $27 per hour, and his ideal rates between $32 and $36 per hour.
Average Alex sets their minimum rates between $37 and $41 per hour, and their ideal rates between $49 and $54 per hour.
Costly Clare sets her minimum rates between $64 and $70 per hour, and her ideal rates between $90 and $110 per hour.
The impact of additional income on minimum and ideal rates
There's one area that we haven't covered in these guides so far—income that you get from sources other than your freelancing or content creation. For example, you might be freelancing part-time and have a salary from a regular job. Or you might have a partner who contributes to your household income and expenses.
If you want to include this extra income in your rates, it's fairly easy to do. Just deduct the total monthly, take-home income from your essential, business, and optional costs. Then, divide the remaining amount by your chargeable hours. This will give you minimum and ideal rates that include the extra income.
Always try and charge more than your walkway price
Remember that your walkway price isn't a target, it's a minimum. We based it on the least amount you need to earn to meet all of your financial commitments. So, every dollar you earn above your minimum rate helps you to survive more easily, grow your business, spend on optional costs, and save money for the future.
If you're like Phil, and your minimum rate is $27 per hour, why not try charging $35? You can put that extra $8 an hour towards treating yourself or saving for quieter periods.
Your ideal rate is not a maximum
Just like you should never charge less than your minimum rate, you can always try charging more than your ideal one. There are lots of areas that go into content creation and pricing decisions, including:
Creative services required
Content creator experience and expertise
Niches and specialization
Competition in the marketplace
If your services are in demand and you have the skills and experience to deliver high-quality content, this can significantly increase your prices.
For example, Clare is a very experienced, specialized freelancer with deep expertise and without much competition. Although her ideal rate is $100 per hour, she normally charges $150 due to her specialist skills.
Just bear in mind that as your rates increase, your tax burden will as well. Make sure you speak to an accountant to ensure you're putting enough away to pay your taxes.
Now you know your walkaway and ideal prices
We finally got there, and you have an hourly amount that you can charge for your freelance and creative services. In the next and final guide in this series, I'll summarize and wrap everything up. See you then!
Please note that I am not a qualified professional and I do not provide tax, legal, accounting, or similar advice. These guides are provided for informational purposes only. Always consult with a qualified professional on your unique circumstances.