In addition to my day job, I've been freelancing design and web work in my SpareTime™ for about a year now. Not a huge amount of work, but enough to have stirred the ever present spectre of pricing and the two main questions that scurry around after it:
How to charge?
There are a couple of different ways to apply charges for a piece of work:
Time & Materials
Here you charge for time blocks of effort (such as an hourly or daily rate). It has the advantage that you should always get paid for the work that you do, but can be less attractive for clients because it is not linked to an outcome and shares the risk of budget and schedule blowout with the client. Hourly rates can seem proportionally high as they must take into account all of the standard and ongoing costs of doing your business (insurance, superannuation, sick leave etc.) and may require a minimum period of engagement to ensure that you don't lose money on ramp up costs for small jobs.
Here you agree to a goal or deliverable and set a fixed price. This is obviously more attractive to clients as they can get a good idea of how much a particular unit of value to them will cost. It less attractive for freelancers as it puts most of the risk and cost of scope and schedule blowout onto them.
What to charge?
Coming up with a rate ultimately comes down to one question—“How much is your time worth?”
Worth to You
Takes into account both your business related costs (insurance, superannuation, accountant, electricity, travel, hardware, software etc.) and personal considerations (spending time with family, quality of life etc.) and provides a baseline amount that you must earn to simply meet your costs.
Worth to Your Client
How much is your client happy to pay for your work? If the amount is less than the amount you arrived at in the previous step, then you have a problem, otherwise any positive difference between the two becomes your profit. This is not necessarily a fixed amount either. When charging time and materials your rate might slide lower for certain non-profits or regular customers, and higher for rush or our of hours work. When charging fixed price you can calculate your charge based on your effort, but you may also factor in the value of the outcome to the client.
There are a lot of moving parts to the pricing equation and different models can work for different people in different situations. I've barely scratched the surface here, but if you're interested in some excellent further reading on the subject Jessica Hische's wonderful Dark Art of Pricing is a must read, as is Jason Blumer's Pricing Strategy for Creatives at A List Apart.