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Last updated on 2/6/20

Calculate your break-even point to set your prices

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As a worker in the gig economy – and a service provider – you exchange your time and abilities for money (even if, as we shall see a little further on, it’s not always appropriate to charge for your assignments on the basis of time spent).

Knowing your break-even point means knowing the minimum turnover you need to make a living from your business.

Indeed, unlike a salaried employee whose remuneration is regular and fixed, your resources as a freelancer depend on what you bill your clients for carrying out assignments. An error in your pricing strategy could reduce your standard of living. 🧐

It’s important to know your break-even point before deciding on a price for your services. For a freelancer, calculating a break-even point comes back to calculating a minimum hourly rate, based on the number of days invoiced each year and on all of your expenses.

Calculate your minimum hourly rate

Knowing your minimum remuneration per hour worked is an advantage, especially during your prospection and negotiations. This is your compass for deciding whether to accept or turn down an assignment, and it will determine how you set your prices.

In some cases, the client will have already defined the budget for the assignment, with no possible flexibility.

Example:

Bicycle couriers who use platforms are paid according to set rates (number of rounds, mileage, time, etc.). Translation agencies pay freelance translators a fixed rate per word.

In that case, you need to know the minimum price that you could accept per day, and/or per hour to check that the client’s budget suits you. By setting your minimum hourly rate, you’ll have a sum below which you can’t accept an assignment.

For other situations, you’ll need to propose a price for your various services, which must be at least equal to or higher than your minimum hourly rate.

How do I calculate my minimum hourly rate?

Two things must be taken into account to work out your minimum hourly rate: the number of days invoiced and your expenses.

Calculate the number of days invoiced for your business

Each year comprises 250 working days (not counting weekends and public holidays). However, as a freelancer, with a few rare exceptions, you are only paid for the days invoiced.

Here’s the formula to assess your number of days invoiced per year:

Number of days invoiced = (Number of working days) - (Number of non-invoiced working days) - (Number of days holiday) - (Provisional number of sickness days)

Example:

Martin is a Manchester-based graphic artist and designer, specialising in logos. He estimates his time spent on accountancy at 10 days per year, and his time spent prospecting for clients (telephone, meetings, tender submissions, etc.) at 72 days per year. So, he has 82 non-invoiced days. He wants to take 25 days leave a year and allows for seven sick days in case of winter flu.

Martin’s number of invoiced days is (250 - 82 - 25 - 7) = 136 days.

He expects to spend 136 days working on client projects (creating logos for them).

Estimate your expenses

The expenses are all the costs the business incurs to carry out its mission. In the case of an independent worker, it means all the costs associated with providing services to the clients.

What expenses do independent workers have?

The expenses depend upon your status, the nature of your services, the remuneration you want, and all the purchases needed by your business.

Here is a non exhaustive list of all the expenses that you might have to pay: your salary, your rent if you have a professional office, raw materials, the equipment needed for your business (car, bicycle, computer, IT program subscriptions, insurance, etc.), your supplementary health insurance, and, finally, the taxes, fees and Social Security contributions on your turnover.

To calculate your expenses, i.e. the total amount of money that you need to pursue your business (including your salary), you need to take the following into account:

Expenses = (Salary and professional fees) ×1.(your tax rate)

Example:

Let’s return to the case of Martin. He wants to pay himself a salary of £2200 net each month, i.e. £26,400 a year. In order not to have to work alone, he’s joined a co-working space which costs him £250 each month (£3000 a year).

Added to this are the graphics software (£700 a year), a fairly powerful computer that he changes every three years, as well as a graphics tablet with the same lifespan (£1500 a year), professional insurance (£400 a year), his public transport season-ticket, which he mainly uses for going to meet clients (£800 a year) and his top-up health insurance (£500 a year).

This represents salaries and professional expenses of £33,300 each year.

He is self-employed, and the sum of his dues and contributions amounts to 22% of his turnover.

Martin’s annual expenses are, thus: 33,300 × 1.22 = £40,626

Martin has to achieve a turnover of £40,646 each year so that his self-employed business is profitable.

Set your minimum hourly rate

Define your minimum hourly rate to ensure that you only choose assignments that will help you secure your business in the long run.

Minimum hourly rate = {(Annual expenses) / (number of days invoiced)} / (number of hours worked per day)

Example: 

Martin needs to focus for about six hours per day when he performs a design service. His minimum hourly rate is as follows: {(£40,646) / (136 days)} / 6 hrs = approximately £50 per hour.

Like Martin, always be sure of the profitability of your business. For example, Martin knows that he needs 30 hours to create a very professional logo. So, he doesn’t accept contracts for less than £1500 (30 hrs × £50) to produce a logo.

If your rate is high, you have to be able to provide an efficient level of service, be specialised, and create a high value for your clients. In case of doubt, don’t hesitate to test different prices. If you’ve aimed too high, you can always adapt your proposal, either by bringing your rates into line with those practised by the competition or by training yourself and by improving your services so that the price and service are in tune with your client’s expectations.

Now you are ready to set the prices of your services with a clear measure of profitability! 😁

Set your prices

You’ve understood this: a clear and well-defined offer of services is the basis of your business success. Over the previous chapters, you’ve learnt to structure and validate your ideas for services, to identify your target clientele, and to calculate your break-even point. The next step is to fix the price of your services.

The same question arises for all freelancers, whether beginners or experienced, in all lines of business:

How much should I charge?

You’ll learn to set the price of your services:

  1. By choosing a pricing strategy from among the financial models most frequently used by freelancers;

  2. By adding a basis for calculation to assess the total sum for the service provided.

Be careful to keep your minimum hourly rate in mind so you only propose fees that will be profitable for your business.

Choose a pricing strategy for your services

Adopting a strategy will allow you to find a method of calculation relevant to the assignment and the ability to explain your rates if necessary.

There are several pricing strategies:

  • Cost-based pricing

  • Matching the market price

  • Value created 

Strategy linked to the cost of the service provision

This method consists of evaluating the resources needed to deliver a service. The client will be invoiced on that basis.

Pricing according to the cost of the service comes back to time spent using your minimum hourly rate. This is ideal for freelancers starting out with new services.

Strategy linked to market prices

Identify the costs of competitor solutions and align yourself with those provisions to set your price. This could involve the average market salary according to your skills, or the price charged by other freelancers for identical services.

This technique is sometimes necessary for standardised services in a fairly competitive sector.

Strategy linked to value provided to the client

This technique is used by well known freelancers who offer very specialised services (rare in their sector), or who can demonstrate previous results (references, portfolio, priced results obtained for clients, etc.).

Example:

Helen, an expert in digital marketing, knows the value she brings thanks to previous work. On average, she increases the annual turnover achieved by her clients, on the Internet, by 10%. She only works with businesses having a turnover of between £1 million and £5 million a year. So, she knows that she can help her clients earn between £100,000 and £500,000. Helen's annual fee for this support service is £20,000 per year. She spends about two days a month on each client, which is well above her minimum hourly rate of £60 per hour. The clients are delighted, because Helen is an expert and gives them extraordinary results compared to the investment of £20,000.

With this strategy, the client needs to be aware of their requirements and concerned only with the results (the resources required to get there being of minor importance). Beginners can try this out using the figures (studies).

To determine which strategy to select, ask potential clients lots of questions to assess their needs and what they see as important.

Add a basis for calculation to your pricing strategy

You now have an idea of the strategy to adopt. But how should you calculate the overall price of a service? To do this, you need to add a basis for calculation to the selected strategy.

The basis for calculation is a tool that allows you to represent the service in a tangible way. What is the client buying from you? A turnkey solution? Your presence during a given period? Remote work? 

Here are several examples of basis for calculation for your business:

Basis for calculation of pricing

Definition

In what cases should it be used?

Example

Hourly/Daily

Pricing mainly relies upon an exchange of time and skills.

Short-term assignment. Transparent to the client (price + services shown in advance)

Naturopath paid per consultation (one hour).

Weekly/Monthly

Pricing mainly relies upon an exchange of time and skills.

Long-term assignment. Transparent to the client (price + services shown in advance)

Support by an IT consultant over several months.

On commission

Remuneration is a percentage of performance achieved. No remuneration in the case of failure.

Ideal to convince the client (no risk) and ideal for the freelancer on very large budgets.

Headhunter charging 20% of the annual salary of the person they recruit for a business.

Lump sum

Firm, fixed budget for a final service provision.

Provision of a turnkey solution. Transparency for the client and the freelancer.

Creation of a logo by a graphic artist for £1600 excluding tax.

Fee (by time spent)

The time spent by the freelancer is recorded during the assignment and invoiced in full at the end.

The amount of work to be provided is not known in advance.

A commercial lawyer charges £180 excluding tax per hour and bills for time spent at the end of the assignment.

By task

A fixed sum is allocated to each task performed.

Need for transparency for the client, and need for the freelancer to be motivated to work quickly.

Cycle couriers (remuneration by round).

By unit

Each unit processed is payable.

In the event of assignments not being uniform, with an average value applied.

A translator paid per word.

Budget based

The client has a specific budget. The freelancer makes a proposal according to that budget.

The client has limited and inflexible financial resources.

A client has a budget of £1500 to produce a website. Their freelance developer offers them three simple pages for that price.

If the difference between strategy and basis for calculation seems hazy to you, the following examples will help you:

Example 1. A coach for entrepreneurs prices their consultation by the hour (basis for calculation), but taking into account the value of the transformation they will achieve for their client (strategy). Some charge £50 per hour and others £5000 per hour according to how well-known they are, the type of client and the perceived quality of service provided.

Example 2. A remote secretary can price her services by the hour (basis for calculation) according to the hours when she provides cover for telephone calls and email. Her strategy is certainly based on market competition (strategy), because clients are used to paying a certain price for these well-defined services.

Example 3. An IT repair person working for individual clients might choose to charge according to type of repair (basis for calculation), taking into account their labour and equipment costs (strategy).

The basis for calculation is generally what is shown on your invoice (the unit of measurement), and the strategy is the explanation of the sum due (the rate), your price being equal to a unit of measurement multiplied by a rate (e.g. the number of hours spent, multiplied by your hourly rate).

Try to experiment by making a list of all possible options for rates for your services, putting together each strategy element with each basis for calculation element.

Good price setting contributes to a win-win strategy for you and your client. Take care over this stage, so that it is in line with the conditions of your future assignments and so that, during them, you remain motivated and enthusiastic.

Let's recap!

The next stage is to give shape to this set of data with the presentation of your business proposal.

Example of certificate of achievement
Example of certificate of achievement