Pricing. Becoming a Contractor or Freelancer...Part 5

This is actually a difficult subject, in-fact this is my 5th total re-write of this article and the reason "Part 5" has been delayed!

On the face of it, this is easy, you need a price point where other parties are willing to buy your services but it needs to be a high enough price for the whole endeavor to be worth it ... but what is that figure? Even after almost 20 years of contracting, I still have an issue with this!

Some things to take into consideration:

• Running businesses cost money, they even cost money when there are no clients to serve!
• No clients to serve, even with the best of intentions, market demand isn't consistent throughout the year, let alone year-on-year!
• The supply through certain channels effectively sets the price!
• You need to also consider holidays & sickness.
• How do you build and replenish your "war chest".
• What could you be earning as an employee, including valuing all the benefits and not having to be the only one worrying about all these overheads.
• Risks of cashflow and non-payment / late-payment.
• Think about all that time you will be doing "un-billed" stuff.
• If an inside IR35 engagement (I know, not real freelancing or contracting but for completeness) the extra overheads you need to accommodate over outside engagement.

As I've said previously, being a contractor / freelancer is not the easy path!

Some context then.....

Many contractors have either used agencies exclusively or mostly to find work, they will usually be setting the price for an engagement based on "client budget". (Not for a value-based outcome, usually based on some weird notion of someone sitting on a seat for a period of time). The price will usually be per hour or day and will largely reflect current market conditions, in that if the rate works for the market, the requirement will be snapped up, if it doesn't, it won't!

All you are having to worry about is whether the price paid is worth it to you. (Or at times, whether you can afford to turn down the offer). Very similar to the way the permanent employment market works but you are having to factor in all the extra costs and considerations and during a single year the rate expectations go up and down.

I hardly use agencies, so what do I do?

I have several commercial models but I'll focus on T&M as this is likely to be the preferred model for new freelancers and contractors.

Time and Materials:

I have a standard rate card and it hardly changes, which sounds great but it hasn't always been rosy.

In the reseller and consultancy segments, pricing certainty allows my clients to confidently sell, without the fear that knee-jerk price changes will change the sell price and margins. (Especially when the sales cycle on an opportunity may take months).

In the "Direct to Client" segment, it's a similar consideration. Budgets are usually determined at the beginning of the financial year, so a level of pricing certainty allows for projected affordability.

My "standard rate card" is a single-day rate with conditions for qualifying discounts, the more days expected to be consumed over a period of time, the higher the discount on the day rate! (We are talking discounting up to 20%, it's a hefty discount). I take into consideration resellers and consultancy expected consumption to be an aggregate of what they are looking to supply across their clients, therefore it is easier for them to achieve the higher levels of discounting.

The day-rate on average is pretty low compared to market, for resellers and consultancies, it would be difficult to not make a decent margin on the services I provide! (As for margin, everyone in the chain needs to make money, just accept this).

My standard rate card hasn't changed since 2018, although notice has gone out to clients informing them that this is likely to change this year so they can prepare.

Non-standard rate cards

I used to maintain a number of rate cards that deviated from standard, this was usually as a "favour" and as a way to foster partnership and loyalty .... the issue is, there are extra overheads in calculation and in the vast majority of cases it doesn't work! In fact, there are only two clients I've served in the past where I believe rate-card deviation has led to greater loyalty!

The downsides

There was a point where the market rate was almost double my standard rate "over a 6 month period", clients loved that, very much in demand ... then within that 12 month period, market-rate collapsed to approximately 75% of my standard rate "over a 6 month period" which made it very difficult to attract new business. There is demand for pricing certainty until the "spot price" is substantially lower than level set for pricing certainty.

Is my way the right way? For T&M, probably not, the proof is in the pudding as they say and overall it has been a loser. (Looking to make changes). For fixed cost and outcome-based engagements, the standard rate card mechanism has been a decent part of my calculation mechanism!

Is there a conclusion then? You need to ensure the sell price is right for you! You also need to ensure its a price that clients will buy your services for and this amount can greatly differ within the year, let alone year on year! You need to ensure you can cover overheads and outages! Look to the market rates as a guide (there are some released) and try to keep the pricing simple if you are looking at predominately T&M supply to ensure this is the right path for you!