“Your price is WHAT? You work for yourself, I thought you’d be much cheaper!”
It’s something us folks who work for ourselves hear often, especially if we charge premium rates for our products or services.
Customers and clients rarely balk at pricing from large companies, but they seem to quickly tighten their purse strings (I’m no purse expert—do purses even have strings?) if a freelancer or indie product company charges similar prices.
These customers and clients can (wrongly) assume that just because our business is small in terms of people, our prices should be equally small. But what they fail to realize is something too many freelancers and indie product creators fail to think about as well, especially at the start, and that’s the hidden cost that needs covering in a small business.
Ric Edelman (a famous financial advisor), in an interview from Million-dollar, one-person business said that most people don’t know that only about 60% of the compensation for an employee at a large company is their salary. The other 40%, which is quite a bit, is compensation in the form of paid vacation time, funding retirement investments (like 401k’s or RRSP’s), or covering health insurance.
While that math might hold for employee compensation at large companies, it doesn’t for freelancers and solo business people, not even thinking about expenses—and here’s why:
We have to run our own business as well as doing the work. So bookkeeping, dealing with vendors, administration, answering customer support, doing taxes, etc—these all take up a large chunk of time, and aren’t something we’re directly compensated for. So we have to charge more to make sure we make enough to have time to work on these unpaid tasks.
We have to cover our own insurance, which is typically much more expensive than if a large employer covers it (since they get a discounted rate based on volume). And if you’re American, the cost of health insurance can be astronomical. Even here in Canada, I pay about $160/month to cover extended medical and $37/month for basic, mandatory health coverage. A lot of people that work for themselves also get insurance to cover themselves and their families if they can’t work, temporarily or permanently.
We have to make enough to cover our own time off. While it seems on the surface that vacation time is a “luxury”, I don’t think it is. Even if it’s a day here or there to relax or recharge our own batteries, it’s important to not burn out or fill all our time with work.
We have to, hopefully, invest in our future and our own retirement. Even if it’s putting $100 automatically into a low cost index fund, planning for the future is important (that’s the podcast episode Kaleigh and I recorded on this subject)—since we can’t work forever (nor should we). The older we are when we start working for ourselves, the more we have to make sure we have money put away. I follow the Mr. Money Moustache/JL Collins view that retirement requires 25 times what we need to live on saved up, that way we can live off the interest of our investments. And, most importantly, that it’s a marathon or war of attrition to get there—it takes decades to save up that much.
We have to assume the risk of doing something on our own, with no safety net—typically because we don’t pay into unemployment insurance, so we can’t get unemployment benefits.
We have to spend a good deal of our time to seek out, court and acquire new clients or customers. Unless that’s your full-time job at a company (doing sales), it’s not required that every employee at a big company do this. But when you work for yourself, you’ve got to actually find the people who are going to pay you, and that takes a decent amount of time each month to do.
With all of this in mind, even if we run a lean and mean small business with very little overhead or expenses, there are still all of the above that need to be factored into how we price what we offer. Otherwise, we won’t be able to keep working for ourselves for very long. Not to mention, for companies of one or small businesses, probably more than 60% of our compensation goes towards non-salary.
As you can see, it ain’t cheap running your own business, even if it’s small. Costs need to be factored in, and definitely have an impact on your bottom line. A lot of new freelancers or entrepreneurs make the mistake of thinking they can afford to charge less than their competition.
So next time you’re considering how much to charge for a service or a product you’re offering, make sure you factor everything into your price. If you’re considering taking a leap to working for yourself from a large employer, you can’t just aim to make the same as your salary, you’ve got to aim much higher.
And if a person complains about your rates or prices, make sure they understand how big an undertaking it is to run a business full-time for the long term. You’re able to pass savings along to them, by having less overhead, but still, you’ve got to run your business, and it helps both them and you that you make enough to stay in business for a long time.
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