How Much Do You NEED To Make?

This is usually one of the first questions I ask people before I start consulting with them on their pricing. Some people don't even know what they need to make before I ask that question, so it's the essential first step to determining what your goals and prices should be. Most newer freelancers just pick a price based on what they think other successful people are doing- but that's the kiss of death. You have no idea how successful those people really are, how much they're working for that price, who is actually buying that price, what kind of expenses they do or don't have, and what other sources of income they might have in order to support their price. This is why the most important question to answer for yourself is: How much do YOU need to make?

What would your annual gross salary be if you worked for someone else? $30,000? $60,0000? $120,000? $250,000? What salary amount do you need to maintain the quality of life you have right now? Just for fun, what salary would you need if you're going to live your dream life?

Once you know what you need your salary to be, you can double it to find the amount of revenue your business needs to make in a year (this is the super simple method for sole-proprieters and for the sake of keeping this easy). If you were working for someone else, everything you make can be taken home and contributed to your household income. If you're running a freelance business, it's good to aim for taking home 50% of your business revenue so that the other 50% can be reinvested, cover overhead, COGS, expenses, upgrades, emergencies, and benefits (note: income taxes may be deducted from your salary and from the business depending on how you account for it.) If you have employees or if you outsource part of your service, you may take home less than half of your revenue, which simply means you need to earn more in revenue in order to take home what you need.

If you'd like to go one step further to help you budget: consider how many weeks you'd like to work each year- so that you can make sure you're leaving time in your schedule for vacations. Do you want to work 50 weeks with 2 weeks off? 48 weeks with 4 weeks off? 26 weeks because you're only part time? Once you know how many weeks you want to work, we can find out what your business needs to make each week.

Now let's do the math... oooohhh.... calculators.... ahhh....
[Annual Salary Needed] x 2 = [Annual Revenue Goal]
[Annual Revenue Goal] / [Working Weeks per year] = [Weekly Revenue Goal]

Example:
$60,000 salary x 2 = $120,000 annual revenue goal
$120,000 / 48 weeks = $2500 weekly revenue goal

Want to go further and find out what your hourly rate should be?
[Weekly Revenue Goal] / [Weekly Working Hours] = [Hourly rate]
$2500 / 40 hours per week = $62.50 per hour

What can you do with that number?
Determine if the hours and costs you're investing into a product or service are being covered by the price you're charging. So, if it takes you one hour at $62.50 to fulfill a print order and you have a $2 print cost, $3 packaging cost, and $5 shipping cost and the client paid a total of $25 for the product & delivery, than the hour that you spent on ordering, receiving, and packaging that product just made you lose money on your sale. In order to make that print order worth YOUR time, you should have charged $72.50.

Now, you could have hired someone else to do it at a lower rate- let's say $15/hr, which means you can now just charge for the $15 hour + $2 print + $3 packaging + $5 shipping = $25, and now you've just broken even and not made a dime on that print order. As long as you weren't counting on that print sale as part of your total revenue, you're probably fine. If you count on print sales as part of your revenue to support your salary, than you need to figure out how to make them profitable and how they factor into your revenue goals. If you work with a lab who does print fulfillment, you only need to make sure you've accounted for the costs plus commission for them to produce that product- and you might even have some profit left over because you didn't need to hire someone and you didn't have to do it yourself - saving you both time and money.

Is this scary? Eye opening? Informative? Confusing? Let me know in the comments below!

Anne Ruthmann is a lifestyle & wedding photographer from Boston, MA. She spent 10 years practicing marketing & management in corporate and non-profit businesses before pursuing her passion for photography as an independent small business. She loves helping others find creative and low-cost solutions to business problems. Follow her on Twitter to see her daily adventures and thoughts.