Assessing the value of your time is especially relevant when it comes to calculating how much to charge for your work.
If you are self-employed, your charge includes three different components:
Except for efficient work processes, there isn’t too much you can do about the last item, but the first two components can change a lot in a year. Your work assignments and client projects of 2021 have added a full year of experience to your portfolio.
Likewise, you probably made upgrades to your IT equipment or invested time to learn more about your software. Even if 2021 wasn’t a stellar business year for you, you probably made at least one tech purchase (headphones, software upgrade etc.).
Since your enhanced expertise and improved equipment make your time more valuable, it stands to reason that this increase in value is reflected in your charges. In other words, you need to think about raising your rates.
The very mention of a price increase frequently causes a panicked response, even from experienced freelancers: “I couldn’t POSSIBLY do that” – “Rates in my market are highly competitive” – “I will lose whatever work I am currently getting”. If you are just getting started as a freelancer, your fear of losing the small number of clients you have is completely understandable. In contrast, if you’ve acquired a steady client base over the past years, not nudging up your rates or looking for better clients is hurting your bottom line and leaving money on the table.
The situation is even more challenging for businesses now because of price increases in the general economy. According to the US Inflation Calculator, the annual inflation rate for the United States is 6.8% for the 12 months that ended in November 2021. When you think of your recent grocery bills, the cost of putting fuel in your vehicle, or your home utilities, you know that rising inflation is affecting every purchase. The Consumer Price Index, which tracks the prices paid by urban consumers for a market basket of consumer goods and services, has documented a similar increase in prices.
In simple terms, everyone’s cost of living has risen substantially, and your buying power has decreased. As a business owner who isn’t receiving a fixed salary, you need to compensate for this increase. To stay at the same (adjusted) income level, you essentially have two choices: You can either work more hours or increase your hourly rate. Here are the basic calculations for both scenarios:
Working longer hours to stay at the same (adjusted) income level
Let’s presume you work 6 billable hours a day. That’s the equivalent of 30 billable hours a week, or 1800 minutes.
Multiply the 1800 minutes by 0.068 to adjust for inflation = 122.4 minutes. That means you would have to work an additional 2 hours a week to maintain the same buying power.
Over the course of one year, with 3 weeks of vacation and holidays, you would have to work about 100 more hours to keep up with inflation.
Increasing your pay per hour to keep up with inflation
Let’s say you charge rate Z per hour (this calculation also works with any other billing unit). To calculate how much more you would have to charge to compensate for inflation,
Multiply your rate x by 0.068 = you get a number. Add this number to your current rate: Z + (Z x 0.068) to calculate your new, inflation-adjusted rate.
Both approaches will help you maintain your (adjusted) income levels, but you would have to add even more to reflect the increased value of your work. It’s a scary thought, but if you’ve recently dealt with any service providers, from auto mechanics and plumbers to dog walkers, you know they are doing the same calculations.
Here is what you can do to step up your charges:
Notify: Contact your regular clients before the end of the year and prepare them for your upcoming cost increase. You can offer a phase-in period for any new projects they order in the next 60 days, but remind them that your new prices will take effect on a specific date.
Briefly outline the reasons: Point to inflation or cost of living (see above) and emphasize your efforts to hold your prices steady for a number of years.
Express regret: Your decision is driven by rising costs. They will understand, and most likely are taking similar steps with their own customers.
Qualifications/professional development efforts: Let them know how you added to your professional value in 2021.
Emphasize: Say how much you value their business (and remind them how long you have worked together).
Don’t wait: Your rates have to keep up with the value of your time.