What is enough?
Have you ever asked yourself, “what is enough”? Do you even know what “enough” really means to you?
How about this question? Do you know how much you need to make so that your creative business can thrive for years to come?
What does financial independence look like to you? What is the number that you need to reach so you don't feel stressed about money? What would it feel like to feel good about money and have the freedom to live your artful life? Do you know how much your hourly burn rate is? How about your hourly billable rate? It's important to get specific with the answers to these questions so you know what you are working towards.
These are the tough questions that must be answered to stop taking any job that comes along to pay bills and eat. It's time to stop living to pay your rent and start getting strategic about the life you truly want to live and how your business can help get you there. If you are the captain of your ship then you need to know where you are going and then work backward to figure out how you’re going to get there. One of the key things you need to know is how much you need to make in your business so that you can always charge a profitable price to ensure the longevity of your business so you can live the life of your dreams.
I’ve spoken with so many creative business owners and freelancers who either charge time for money (the evil “hourly rate”), charge what they think is a reasonable amount to get the project, or even worse, they charge what they think they are worth (which for many creatives is not nearly as much as it should be). None of these options are beneficial to you or your clients, and inevitably the industry itself. Let me explain.
“Hourly” Rate
If you are charging an hourly rate, you are undercutting yourself as you get more efficient at your craft. For example, let’s say you are a logo designer that just started freelancing. In the first year of your business, you crank out a logo design in about five days. In the next year, you’ve gotten smarter, faster, and better at your craft (as expected) and can crank out a logo design in a day or so. If you continue to charge an hourly rate, you will be losing money for being better at your craft. You will have 5X your design process yet you would be making 1/5 of what you were making when you were not as smart, fast, or good at your craft. Does that make any sense at all? Nope. You might be thinking, “Yeah, but I’m able to move quicker from client to client and am finishing more projects". Yes, but you are missing out on the higher fees you can bill for your speed and prowess as a logo designer which means you don’t have to book as many clients. It allows you to provide more value to your clients and possibly add more services to your business offerings, like brand strategy, visual identity design, web design, print design, and more. That also allows you to enjoy more balance in your life as well as your business because you don't have to work so hard since you have fewer clients at a higher rate — which you deserve.
“What Clients Can Pay” Rate
What if you charge what you think the client can pay? Well, then you must think that you’re a fortune-teller or palm reader that can also read minds. I’m pretty sure that’s not the case. You never know how much a client has or is willing to pay for a project. It is up to you as the expert to figure out what they need and how much it will cost to provide that. Your job is to ask the best questions possible to ensure you understand their needs, challenges, vision, and goals. Then you can provide the best options to solve those problems so they get the results they are looking for because you have a clear understanding of how to get them where they want or need to go. If it hurts enough and they need to get sales, a client will figure out a way to pay to get those results.
“What You Think You’re Worth” Rate
There’s another method for billing that I’ve seen creatives do that can be even more detrimental to their revenue as well as their self-esteem — charging what you think you’re worth. How many creatives do you know that feel truly confident in their skills and charge a high price for those skills? Not as many as there should be. That’s for sure! For example, how much do you think a young freelancer fresh out of college thinks they are worth? How about a multi-hyphenate or generalist that is not a specialist and keeps hearing that they should be? Charging what we think we are worth doesn’t account for things like market value (what people are willing and able to pay), competitive pricing (what your peers in the industry are charging), and what you need to make to break even (your hourly burn rate).
In just a moment, I’m going to share some formulas that will pull back the curtain on how you can figure out what is enough. I’m going to share how you can not only break even (your burn rate) but also how to set your prices accordingly based on real-life numbers so you can thrive in your business. The goal is for you to not stress about how much others are making or how much you think you need to make. The goal is for you to know what is enough and what you are worth so your creative business can thrive and you can live the artful life you’ve always dreamed of.
I hope these formulas help you to understand your numbers and how they can help you to reach your goals. First, we’ll start with your “hourly burn rate”. This number is the break-even amount of money you need to make so you can pay yourself to cover your bills and put money in your savings and investments to support your future. This is also the amount of money you need to cover your business expenses to keep the lights on. You will need to figure out your total annual overhead for your business and yourself. If you’ve recently done your taxes this should be relatively simple to figure out because you’ve already had to pull these numbers together to submit your returns. Make sure you are pulling all of your personal and business expenses to get the comprehensive amount of annual overhead you have to cover financially. Then, you want to multiply that by the tax rate (0.30 is a safe bet to cover taxes). This number will tell you how much you will owe in taxes. Then, you add the taxes owed plus the annual overhead to get the total annual expenses you will need to make in a year. You’ll need to figure out your adjusted annual production hours so that you can work on client work specifically. What percentage of your work throughout the year is production work? Is it 75-80%? Think about all the other work you do like emails, invoicing, marketing, education & training, sales, etc., like admin work. Is that about 20%? Multiply the percentage of production hours by 2,080 hours in a year (based on a 40-hour workweek). Finally, take the total annual expenses and divide that number by the adjusted annual production hours and you’ll get the hourly burn rate that you must make to cover your expenses, savings, investments, and taxes owed.
Hourly Burn Rate Formula
Total annual overhead x 0.30 (tax rate) = Taxes owed
(Overhead = Annual Personal and Professional expenses)
Then
Taxes owed + Overhead = Total annual expenses
Then
Percentage of production hours x 2,080 = Adjusted annual production hours
Then
Total annual expenses / Adjusted annual production hours = $XX Burn Rate
(The break-even amount you MUST make)
Now that you have your hourly burn rate, you can use the formula below for fixed bid pricing on projects which is the preferred method for several reasons. For example, you know exactly how much you’ll make on a project and will be rewarded for working quickly (especially as you get smarter, faster, and better — which you will over time). Clients will know what they are getting as far as the project and their costs so they can budget accordingly. There are some things to watch out for with fixed-bid pricing. Make sure to have a detailed scope of work in the project plan so everyone is aware of the work that will be done for the engagement. It’s up to you to keep the scope in check and to check in with clients before hitting capacity. That way you can address any additions or edits that need to be made as far as payment and schedule if there is a need to expand the scope of work.
When you are ready to develop your fixed bid pricing for a project, take your hourly burn rate and multiply that by the production hours you’re expecting to work on the project. Then add that number to any hard costs (ie. materials, subcontractors needed, equipment/studio rentals, location/permit fees, etc.). That number will give you your production costs. This price is the amount you will need to charge to cover your expenses as well as the expenses of the project itself. However, this price does not cover any profit for your business. Make sure to add your profit margin to the final number before submitting it to the client so you are making a profit on top of the break-even rate for hours worked + hard costs. You have wiggle room with the profit margin depending on the client, their needs/budget, market cost, and competitive pricing. You have to make sure you are making more than the production costs so you are staying profitable and not just breaking even. Then you won't be profitable and businesses that aren't profiting don't stay in business. The final bid price you send to clients will be based on your production costs, market value, and the client’s budget, which are concrete numbers you can send with confidence.
Fixed-Bid Pricing Formula
Hourly Burn Rate x Production Hours (per project) + Hard Costs = Fixed-Bid Pricing for Production costs
You’ll want to make sure that you've researched the market value for similar creative work in your field so that you are aware of what people are paying for the service you provide. This will provide the data to speak to clients confidently when they ask why you are charging “so much” for a logo design when they’ve seen going prices on Fiverr that are as cheap as a Starbucks latte. Tip: Reach out to friends and peers you know and trust in the industry to see what they are charging so you know where you fit in the market. You might be able to find a gap that you can fill with your services. Knowing your numbers allows you to feel confident when speaking with clients about their projects and the budget they are willing to spend on them. You won't be guessing how much they can spend or how much you are worth. You will be a professional and a business owner just like your clients. Many companies generally take the lowest rate they can get for work that solves their needs. That’s what most of us do when we purchase products or services that we know, like, and trust. We want to get the best deal we can that solves our problem. Sometimes you may have to say no to a client because they don’t have the budget to cover your production costs relative to their project scope. And that is okay too. You won't be the right answer for everyone and every client is not the best for you. Everybody wins when there is a good fit with the client, the project, and the budget. The goal is knowing what is enough so that you can ensure that a good fit happens as often as possible. The more you know the more you can make good decisions about the clients you are working with, the projects you are spending your time working on, and the rate you are earning for your time — which is the only true currency in life.
You need to know your worth and then ask for it. Let the numbers help guide the conversation with clients and their projects rather than guessing or charging an hourly rate because it’s what you’ve been doing to survive. Charging what you are worth will also help to weed out the low-paying clients and set you up to only work with ideal clients willing to pay for you and your expertise. The goal is to spend your time doing the great work that matters and less time doing the good and even bad work so you have joy, fulfillment, and freedom in your business and life. I hope this information helps you know what is enough for you so you can do exactly that! As always, keep being ärtful!
