You thought of everything when you came up with your hourly charge or your product’s price. You thought about:
- all of the time and supplies that went into it
- how much you need to make in sales plus taxes to make your desired yearly income
- how many you’d be able to sell
But you forget to factor in the benefits. I bet you’re thinking, “But if I’m a freelancer, I’m setting my own hours and I’m my own boss. Aren’t those my benefits?”
Nah, girl, I’m talking about paid leave like vacation and sick days, and health and life insurance, and a retirement fund.
Wait, my pricing needs to reflect my insurance costs, retirement funds, and my days off?
It sure does. You know those great benefits those working a traditional job get? You’re entitled to those, too.
- Vacation days
- Sick days
- 401K contributions
- Health insurance coverage
- Life insurance
Starting to feel scared? Don’t worry, I’ve created this worksheet and walked through the steps in this post to help you create a pricing strategy that includes the benefits you need as a freelancer or smaller business owner.
If you don’t add benefits into your pricing strategy you’ll end up broke or burned out.
Let’s look at how differently you calculate pricing when you include your benefits.
In this scenario, a Jen is a brand new freelancer trying to figure out what hourly rate she should charge for her work. In the past, her 9-5 paid her a salary of $52, 000, and she’d like to increase that to a net salary of $60,000. She has estimated about 5% of her business income will go to covering business expenses and 20% go to taxes.
The traditional pricing formula: Salary+ (Goal * tax) + (Goal * costs) / (30 hours per week * 52 weeks) = hourly rate.
In plain terms, the traditional pricing formula takes your salary and all business expenses and divides it by how many hours in a year you’ll work.
- Desired salary: $60,000/yr
- Costs: 20% tax, 5% business expenses
- Hours worked: 30 paid hours per week + 10 unpaid hours per week working on your own business
In this case, her hourly rate would be $60,000 + $12,000 + $3,000 / 1,560 hours in a year = $48/hr. That’s $5,760 a month.
But that’s not really covering it all, is it? There’s so much more to life than hustling 24/7 until we’re dead. ? We have a life to live! So what happens to Jen when she has to live her life?
Jen goes on vacation.
Jen saved up for a big, 11-day vacation traveling Europe. Jen now is missing out on up to 9 days of pay. So if she still wants to hit her $60,000 salary goal:
- she’ll need to put in an extra 38 hours to make up that vacation
- or accept the loss of $1,800
Jen has to pay for her insurance out of pocket.
Jen made plans to pay for her own insurance. She was surprised to find it was about $300 month—she didn’t realize how much her former company subsidized her health insurance.
- She’d have to work an extra 6.25 hours per month to make up the cost
- or accept the loss of $3,600 of her salary
Jen wants to retire in 25 years.
Jen wants to retire in 25 years. She already has some money in her 401K from her previous job, and plans to roll into in a Roth and continue contributions. She needs to hit a certain amount by her 55th birthday for her to retire. At her current rate, she’d need to put in $1,000 per month.
- She’d need to work an additional 20 hours per month to make up the cost
- or accept the loss of 12,000 of her salary
So let’s take a look at Jen’s pricing strategy in light of retirement funds, insurance costs, and a short summer vacation.
- Jen’s salary goal: $60,000
- Jen’s work goal: 30 paid hours per week, 10 unpaid hours = 40hr/week
If Jen took a pay cut for everything above her salary would be $42,600. If she increased her hours she’d be working an additional 133 hours per year.
What A Balanced Worklife Pricing Strategy Looks Like
In this scenario, a Jen is a brand new freelancer trying to figure out what hourly rate she should charge for her work. In the past, her 9-5 paid her a salary of $52, 000, and she’d like to increase that to a net salary of $60,000. She has estimated about 5% of her business income will go to covering business expenses and 20% go to taxes. She’s decided she’d like to be able to take up to 6 sick days a year, and 14 vacation days. She’d also like to use her business’ income to make retirement fund contributions alongside her own. She plans on having her business cover her health insurance and to deduct those costs from her taxes.
The balanced worklife pricing formula: Salary + (Salary * tax) + (Salary * costs) / ( ( 30 hours per week * (52 weeks – (days off/7 days a week)) = hourly rate.
In plain terms, the formula takes all of your expenses and divides it by the number of hours you’ll be working in a year, minus the days you won’t be working due to illness or vacation.
- Desired salary: $60,000/yr
- Costs: 20% tax, 5% business expenses, $3,600 insurance, $12,000 retirement fund
- Hours worked: 30 paid hours per week + 10 unpaid hours per week working on your own business + 7sick days + 14 vacation days
In this case, her hourly rate would be $60,000 + $12,000 + $3,000 + 3,600 +12,000 / (30 * ( 52- (20/7)) = $60/hr. That’s $7,200 a month.
For those who aren’t so great at order of operations, I broke it up for you:
- Total income the business needs: $60,000 + $12,000 + $3,000 + $3,600 +$12,000 = $87,600
- How many days off : 21 days off/7 days a week = 3 weeks
- How many weeks you’re working: 52 weeks a year – 3 vacation weeks = 49 weeks
- 30 hours per week * 49 weeks = 1,470 hours
- $87,600 / 1,470 hours = $60/hr
Do you see why the benefits are important?
In the traditional pricing strategy, Jen would have to work 10% more paid hours or take a 30% pay cut. Poor Jen! She’s strapped for cash and burned out on extra work. She thought freelancing would be better for her, but she wound up more stressed out than she was at the job she left.
In the balanced worklife pricing strategy, Jen has all of the benefits her old job offered her, plus the benefits of setting her own hours and having extra vacation days. Jen is finding that being an independent freelancer is everything she dreamed of.