Market value under pressure - The Freelancer Effect
A strategy being used by new freelancers is that of broad undercutting to generate a client base. This means that they come into a market and sell their services at less than market value in order to generate interest in their abilities. They also are trying to develop a client base that can be used for follow up projects and thus further revenues. I intend to sway some of those using this strategy for the betterment of their own businesses as well as those of the fellow freelancers in the same market.
This strategy is appropriate for young freelancers who have decided to put their skills to work on a part time basis – as most can understand it being hard to convince higher budget clients that you provide quality just the same as other emerging entrepreneurs. However, this strategy is only appropriate for the first stages of a freelancer’s career as over-use of this strategy can devalue the market for the rest of the pool of entrepreneurs.
For example, a freelancer comes into a market where the going rate of PHP programming is $40 per hour and decides to undercut this price for the basis of generating clients. He/she sets their value at $20 or even $15 per hour and by doing this it will detract from the average market value within the market this freelancer is participating in. Also it will inevitably have a lasting effect on market value if this pressure is held on the pricing for an extended period of time (under the assumption quality of service is similar if not on par to average quality across the market).
If a freelancer were to apply this strategy for the first three to four projects (as this period cannot be expressed in time due to the fact that projects could last for days or even months) it would allow for you to create a client base that will more than likely generate at least one return project as well as puts you in a position to utilize the work you have done to pitch other clients (e.g. your portfolio base has been established).
Following this period you must re-evaluate your pricing; however, you cannot alienate previous clients. Keeping in mind that you want to raise pricing for your own benefit as well as the benefit of the trade’s market value itself you will want to assess your time and what overhead charges you incur and factor those into your rate.
For example, if you started out by charging $20 per hour for PHP programming and are now re-evaluating you must look at whether you have incurred any rent, hardware costs, hosting/server costs, or miscellaneous costs – such as your mood setting fancy double latte each time you code (yes, this means you will have to get a piece of paper, your receipts and do the math). On top of factoring these values in you should assess at least a 35-45% base rate increase.
For instance if you average out that your overhead costs you $2.46 for every hour you program then you should be considering raising your rate to $31.46 (if you so-choose you can round this up or down considering how strong the market is).
A good approach, to not alienate current clients, I have found to be very good in increasing repeat business is that once these calculations have been made you should draft a notice to your current client base. This notice should indicate the rate change and explain that their current rates will be locked in (grandfathered, if you will) for any future projects given there is no drastic increase in market value. What this does is saves you from dealing with word-of-mouth clients who feel they should get the previous rate (as now your clients will be mentioning your new rates rather than their discounted rate). This also generates good will towards your business from those clients making them more likely to select you for a project you’re qualified to complete.
How does this relate back to market value? Although there is a long list of other factors that come into play to create this average market value what this strategic rate change does is relieve the pressure put on the overall market price to decrease and actually eases it into a more stable position or and increasing position. This results in higher value for you as well as those around you and if the whole developer community is keeping market value in mind and how that plays into future revenues then what goes around will come around.