stevenclark.com.au

In an article a few days ago I brought up the subject of transaction costs. The main reason is that many freelancers out there really have no idea how to charge clients or quote for work because they don’t really understand the costs associated with the job. And, quite seriously, understanding transaction costs can also improve your interface design and user experience outcomes.

In short, transaction costs are all those costs of doing business. But there are other costs you should be able to put figures to in a pinch – what are your fixed costs and your variable costs? If you had no business at all this week your fixed costs would include things like the rent (because rent doesn’t change) or mortgage payments. They don’t change whether or not you have work. Whereas your variable costs change with the quantity of work you do – you might use more power, more ink, higher wages to outsourced contractors.

Another cost you should be able to get your head around is the marginal cost of a project. Marginal cost is the cost of doing one more thing. So when someone asks you to design a poster or build a website you can work out quite easily the fixed costs you have to meet in your day to day business, the variable costs that might fluctuate with the influx and outflow of workload, and the marginal cost and marginal benefit (which should be bigger) of taking on the job.

Next you have to figure out the opportunity cost of taking on the job. What is the best other thing you could have spent your time doing? Other work, going to the beach, or whatever? The benefits the job brings to your business needs to outweigh your opportunity costs. Why? Because otherwise you’ll either go broke, be unhappy, or both at the same time. If there’s a more lucrative contract you’ve foregone then you need to justify to yourself on paper how it affects your business.

A major problem with being a web design freelancer / contractor is that a great deal of the industry at the lower end (approaching budget) runs out of a small room somewhere. They often have no idea of costing or even their true cost of business, yet their business strategy is to compete on price. For example, say you worked for AUD$20 per hour on a job – that sounds reasonable, right? You’re just starting out? But you’re not factoring in your software, the meetings, the phone calls, contract negotiation, the extra power you use for staying up late, or even the money you could have made doing something else. So, if you don’t know any of that, how are you going to make money?

Even worse, if you don’t know what your costs are you can’t be sure that the cash coming in is doing anything more than purchasing food until you go broke from your overheads.

Also, fellow freelancers, don’t underestimate the ability of companies to exploit you if you’re not aware of your cost of doing business. They get to hire you dirt cheap as though you were an in-house employee – but you cover your own overheads, your own insurance, your own software and hardware requirements. If you’re not prepared to look at finance at that simple level then I’d suggest getting a paid office job with someone else. Understanding basic finance is essential to doing business.

What should you be charging as a base rate? I’d suggest anybody working from home and calling themselves a professional should charge at least AUD$75 per hour. Minimum. End of story.

This entry was posted on Wednesday, September 23rd, 2009 at 9:55 am and is filed under business. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.