“I’m charging twice as much per hour as I did at my pre-freelancing job and I’m working all the time. How am I bringing home so little per month?”
If you’ve ever had a thought like this, you may benefit from optimizing for your effective hourly rate.
My goal with this post is to give you a framework for…
- Understanding what effective hourly rate is and why it matters
- Determining your current effective hourly rate
- Setting good goals & making better business decisions moving forward based on this lens for looking at how you get paid
What is effective hourly rate?
In case you haven’t heard the term before, “effective hourly rate” essentially means…
How much you actually make per hour after factoring in all the crap you have to do as a freelancer but don’t get directly paid for.
= Effective Hourly Rate
Crap like…
- Replying to a million Upwork posts to get one client
- Sending invoices
- Chasing clients to get paid
- Doing prospecting calls
- Prepping your stuff for taxes
- Replying to emails
- Leveling up your skills to stay relevant in the marketplace
- Working on internal processes & systems for your business
- Working on your website / portfolio
- Managing staff
- Copying files to that new computer you just bought
BIG-ASS DISCLAIMER
The “optimization steps” I recommend at the end of this post are what I’d consider more of a “late-stage, cushy life freelancer technique.”
That is to say, most of us start our freelancing careers perpetually broke and stuck in the cycle of always needing the next client, just to get the bills paid.
If this is you, I get it. I’ve been there.
It takes a long time to break out of that.
And it f*cking sucks when you feel like you’re stuck there.
But if you stick with this freelancing thing long enough, always aiming to produce your best possible work, and trying to improve your skills with each new project…
You will break out of the cycle eventually.
But for today, that doesn’t change the fact that you’re stuck in it right now.
So when I talk in a bit about “optimization steps,” turning away certain types of work, etc. please remember to contextualize it for your situation and make the best decision for your current stage of business.
Maybe you really can’t afford to turn away any business right now, regardless of how shitty the effective hourly rate is for it.
If that’s the case, no worries.
Knowing where your time’s going and what work is most/least valuable will still helpful data for you to have.
Accept that this is where you’re at for now, and perhaps put it on your mental list to kill that shitty low-effective-hourly-rate work as soon as you can afford to do so.
When effective hourly rate matters
For newbie freelancers / currently-employed peeps who see what the contractors at their company get paid, it can be easy to go like this when they see the hourly rates: 🤑
(That’s meant to be a “envious eyes” emoji)
But they don’t consider that it’s often the case that freelancers only bill for about 1/3rd of the time their business takes them to run.
This is why an often-recommended multiple when setting a freelance hourly rate is to 3x your job’s per-hour rate.
None of this is ground-breaking, and I’ve seen it in about a million posts on Reddit and Quora.
What I really want to talk about is…
*WHY* it matters
Every freelancer that’s ever existed wants to raise their rates.
It’s straightforward enough… More $ per hour = more $ in pocket. Sorted.
But I’d argue that it’s more important (or at least as important) to target improving your effective hourly rate.
Why?
Because your life is finite, and chances are you’re doing a lot of stuff in your freelance business that you’d rather not.
If you can find optimizations that free up significant amounts of your time at little or no financial cost, you essentially get more life for free.
But optimizing for effective hourly rate can sometimes be somewhat sneaky and require more digging.
Let’s look at an example.
Which of the following scenarios sounds better to you?
Scenario 1:
- 12 separate projects this year, one per month
- Each one will take ~ 60 hours
- Each one pays $6,000 (aka $100/hr)
Scenario 2:
- 1 ongoing project contract for the whole year
- Requires 60 hours time commitment per month
- Pays $5,000 per month (aka $83.33/hr)
Which one’s better?
We’ll take a look SOLELY from an “effective hourly rate perspective.”
(Note that this example scenario is overly-simplistic and doesn’t factor in lifestyle preferences, working styles, etc.)
Let’s say you track all your time (exercise coming up) and any project you take on involves these “fixed time costs” for client acquisition:
- 20 hours — Submitting Upwork proposals
- 7 hours — Calls with prospective clients
- 3 hours — Onboarding the new client, determining project scope, invoicing them, etc.
That 30 hours has to happen for every project, no matter the size.
What this means is that in our “12 projects per year” example, we have a “fixed time cost” of 360 hrs/year (30 per project * 12 projects).
Whereas the ongoing project has just the initial 30 hours.
Speaking solely in terms of fixed time costs for client acquisition, here’s how the total time commitment looks:
Scenario 1:
- 12 separate projects this year, one per month
- Each one will take ~ 60 hours
- Total gross paid for the year: $72,000 ($6k * 12)
- Total time spent on the actual work over the year: 720 hrs (60 * 12)
- Fixed client acquisition time costs for the year: 360 hrs (30 * 12)
- Total hours: 1,080
- Effective hourly rate: $66.67/hr
Scenario 2:
- 1 ongoing project contract for the whole year
- Requires 60 hours time commitment per month
- Pays $60,000 per year ($5k * 12)
- Total time spent on the actual work over the year: 720 hrs (60 * 12)
- Fixed client acquisition time costs for the year: 30 hrs (30 * 1)
- Total hours: 750 hrs
- Effective hourly rate: $80/hr
So even though from the outset, the first scenario appeared to pay better, when factoring in the effective hourly rate, the second scenario pays better.
Considerations & disclaimers
“ZaCh, YoU’rE sO sTuPiD! What about if the client’s a pain and time consuming for the second project, or the multiple projects don’t take so much time to acquire, or […]”
— Upset Reader
Before you behead me, remember I disclaimed this was an overly-simplistic example.
My goal here isn’t to give you a guide on whether “more or less projects is better.”
That’s a whole can of worms and depends largely on what goals you’re most trying to target.
(More money, more time, more freedom, less stress, etc.)
My goal here for you: A new lens for decision-making
With an eye on your effective hourly rate, you can make better decisions about what the true cost is to you to take on a project.
Some examples…
👉 If every new client you work with takes 3 unpaid hours to onboard, work with, etc., what would you need to charge for a 2-hours-worked project to be worth it?
👉 If a certain type of work requires 3x more un-billed communication time and only pays slightly better than a different type of work, is it still worth pursuing?
👉 If you really hate prospecting and you can either burn 6 hrs per client or spend a couple hundred dollars per client acquired via paid ads linking to blog posts you wrote, which is better?
👉 Finally feeling comfortable firing or charging more to that super high-maintenance client that takes unfair advantage of your time, after calculating how much per hour you’re actually making from their work.
Action steps:
If you want to calculate your effective hourly rate and optimize your business, here are the steps that have worked well for me…
⏳ 1. Track ALL of your time & calculate your EHR
HOW: You can track however you want; on paper, with a time tracking app, whatever.
HOW LONG: Depending on your project pacing and schedule, it’s up to you how long it makes sense do this “track all your time” experiment for.
As a rule of thumb, tracking all of your time for one month is probably a good place to start.
The most important thing is that you categorize it appropriately into useful “buckets.”
(It’s going to be a bit of a pain to track all this if you’re not used to it, and it would suck if you had too few clearly-defined categories and missed out on some useful data.)
Here are some ideas; feel free to pick and choose what makes sense for your biz and add your own:
- Billable work — Time you spend directly working on a project. I also like to sometimes break this down into subtypes to see where my hours go. (As a designer+dev, I might do “initial design,” “design revisions,” “coding,” “bug squashing,” “testing,” etc.)
- Prospecting – Outreach — This would include cold email, Upwork proposals, etc.
- Prospecting – Sales calls — I like to track this independently from the outreach time.
- Marketing — If you do content marketing, I recommend breaking down into subtypes like writing, editing, etc.
- Existing client management / project management — Talking/chatting with clients to keep projects moving along.
- Employee / contractor management — All the time you spend managing your staff.
- Financial / Legal — Doing your bookkeeping, etc.
- Administrative — Answering random emails and whatnot. Sort of a generic catch-all.
- Misc — The O.G. generic catch-all.
Note that if you’re a toggl user like me, I DO NOT recommend using tags for these buckets, because you can’t generate pretty pie chart reports broken down by tag. (I learned this the hard way)
Instead, for toggl users, I recommend that you create a new client for yourself, and then new projects for each of these “buckets” that belong to that client.
I like to preface each of the project names with “ZS – ” (my initials) to group them and make them easier to pull up amidst all the client projects in there.
Example setups of mine you can look at for reference:
- Here’s how I set up the buckets for my blog (client and project style)
- Here’s how I set up the buckets for my web design freelancing (tag style; do not replicate)
- This was before I learned the hard way about tags — Your setup should structurally look more like the one I did for my blog if you’re using toggl.
📄 2. Make a list of your core values, along with work goals, likes, & dislikes
Draw lines on a piece of paper to divide it into 4 quadrants. (Or print and fill out this worksheet I made)
Quadrant 1: Core values
What are the fundamental things you value that your goals are oriented around?
These would be zoomed-out things like freedom, comfort, security, etc.
Quadrant 2: Goals
Specific long-term goals with your business.
Things like scaling it to be huge, or getting paid a lot and working part time to leave more time for underwater basket weaving, etc.
Determine if it’s more important for you to make as much money as possible, or re-claim as much time & freedom as possible.
If you value time & freedom more than money, I’d challenge you to do some budgeting and reflecting on your cost of living to determine your target annual income.
(For me personally, as an expat living in a low-cost-of-living country with no kids, I target around $60-80k for my cost of living, savings, and investment goals. My #1 priority is time freedom, so having that $60k number in mind helps me decide what client work to take on vs. skip.)
Quadrant 3: Work likes
What are the specific tasks you most enjoy in your day-to-day work?
For me it’s the actual deep work like coding new features, designing, etc.
Quadrant 4: Work dislikes
What are the things you’d love to never do again if it were magically possible?
For me, it’d be prospecting, sales calls, bug squashing, billing, and convincing clients that my designs don’t actually need to go through another round of revision. 😉
🔧 3. Optimize
Once you’ve tracked all your time for long enough and have lots of juicy data, it’s time to review that data alongside your lists from step 2.
How much of your time is un-billable and goes toward aspects of the job you don’t like?
Is there a way that you can apply some creativity to your situation to minimize how much time you spend there?
Are there certain types of projects you should or shouldn’t keep taking on?
Certain structures in your business setup that should be changed?
Going through this exercise repeatedly over the years has been really valuable for me and has resulted in some dramatic changes in my business structure.
A few changes I’ve made / wins I’ve personally had over the years as a result of this style of optimization (maybe they’ll give you some ideas)…
Doing barely any sales calls
Young Zach used to spend hooooouuuuurrrsss on sales calls trying to convince people that…
- Websites are good things to have, in general
- You should have me make yours
- You should pay me more than a pittance to do it
These days, I only jump on the phone once someone’s already seen a price estimate via email AND expressed interest in paying the amount quoted.
This means that by the time I jump on the phone with someone, they’re already pretty dang sure they want to work with me.
My conversion rate for “sales calls” (if you can call them that) at this point is upwards of 90%.
Do I lose some business by quoting my price via email?
Yes, I’m sure of it.
But do I loathe spending 90 minutes on a Thursday night talking to someone who doesn’t convert simply because my services are out of budget?
You betcha; I loathe the shit out of it.
Quadrant Motivations: 4
Down-scaling my agency
After evaluating how much time I was spending on project management and staff management – two of my least favorite types of work, btw – I made the decision to scale down my agency.
I chose to go from a 3-person agency grossing in the $100-200k area to a solo-freelancer earning around $60-80k.
Could I have maybe made it work it eventually and grown it to a multi-million-a-year agency?
Sure, maybe.
But yaknow what, I really just don’t like managing people.
Most of the time, it seems like if you want a $1m digital agency, you need to employ like 30 or 40 people.
Whereas there are plenty of entrepreneurs who run $1m product businesses with just themselves and a couple VAs. (I’ve worked with a few of them as their designer+dev)
I’ll take that one, please!
I decided I’d rather optimize for time freedom so that I can try to grow a product business, rather than try to grow a business reliant on managing a bunch of humans, which I really don’t enjoy.
Quadrant motivations: 1, 2, 3, 4
Turning away most clients
Earlier this year, I went from working with a client every few months to doing ongoing work with one client.
It was a similar move to the agency down-scaling — another tweak to minimize un-billed prospecting time and onboarding time.
By working with this one client and doing little updates for past clients every so often, I can earn my same targeted ~$60k a year working an average of 10 or so hours a week.
The client’s happy because it’s cheaper than hiring me at my regular rates for all that time spent, and I’m happy because I don’t have to do much outside of the work itself.
Quadrant motivations: 1, 2, 3, 4
HBU?
Go forth! Track! Tweak! Come back and tell me if you spot any cool optimizations or have any successes (or challenges) raising your effective hourly rate.
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