Believe it or not, pricing your value is one of the most important financial decisions you will make.
I am not implying that working is selling yourself as a slave to your job, although many may think that way. I simply want to point out the fact that often times we have the opportunity to influence how much income we make. Nevertheless, we don’t always know how to give our value a price.
Think about the last time you had a salary negotiation. Did you simply accept what was offered and took that as what you are worth? Or had you done a proper evaluation of your skills and the job market and knew what you were worth?
Or perhaps you are self-employed, selling your service to businesses or consumers. Did you struggle with how to set your hourly rate, or decide on the fee you’d charge for a project?
Whether you are an employee or your own boss, you are selling your labor. You are the “supply” side of the labor market. You have human capital that others desire, or “demand”. Economics 101 teaches us that in a free market, supply and demand set the price. It’s time to take your part of the responsibility in the pricing decision.
The following concept that I’m about to introduce applies to both those working for others or working for themselves. It will help you negotiate the salary for a new job, decide how much to charge for your service, decide whether to make a career move, or even whether to start your own business. If these are the situations you are in, read on.
Before you decide how much to price your labor, there are three data points you should gather: what is your current worth, what price is worth your while, and the going market rate. The first two you are able to calculate, and the last is out of your control. So I am going to focus on explaining the first two, and give you a strategy to obtain the third.
What is your worth
I’d like to say upfront that I believe every person on this earth has intrinsic value, and your value does not depend on your career. For this article, my definition of your “worth” is simply how much you are getting paid for your labor now on an annual basis.
Also, here I assume that you are currently or recently employed, so you have an estimate of what your worth is. The longer you are unemployed, the less likely that you are able to justify your worth based on history.
The important thing to note here is that your worth is not just your salary. In fact, you should take into account your total compensation and the actual hours you work.
Your total compensation is the monetary value of everything that you receive from your employer in exchange for your labor. It includes salary, stocks granted, insurance provided, retirement contributions, payroll tax, pensions, and perhaps free food if you work for a tech startup. If a benefit is provided but you do not use it, then you shouldn’t count it toward compensation for the calculation here. For instance, if your company gives you access to a gym on site, but you never go, then it’s not a benefit for you.
The actual hours worked should reflect your workload and time spent providing your labor. For example, if you have use it or lose it PTO and you don’t use it, then your actual hours are higher than your co-worker who took all the leave she could. Also, if you constantly work after hours but are not eligible for over-time, you should add those hours in.
Dividing total compensation by actual hours worked yields your true hourly rate. This is your current worth. If you are considering changing jobs, ideally you should make sure your actual hourly rate increases, or at least stays the same. Otherwise you are lessening your worth. I’m not saying you should never do it. It’s possible that you may want to switch to a career that is more meaningful to you but pays less. That is okay as long as you understand the actual cost of making this move.
What is worth your while
On the other hand, what is “worth your while” is the real opportunity cost that makes providing your labor for monetary return worth it. Theoretically, you shouldn’t work in a job that doesn’t pay enough to be worth your while.
For example, if daycare costs you the equivalent of $30 an hour, but you only make $25 per hour after-tax, then you are in effect choosing to do a monetarily less worthwhile job. The hourly rate that is worth your while should be greater than $30 per hour.
For those switching from one job to another, the opportunity cost may come from the move itself. You may like the current job and a new job the same, but the latter requires you to drive 20 miles extra to work. The new hourly rate that is worth your while should take into account the extra commute time.
In effect, this data point tells you objectively how much your time is worth to you. If you are currently unemployed and have nothing to do, you may be willing to take any job that gives you income. Or if you do not have financial pressure, you may not take any job that pays you less than $1,000 an hour if the job itself does not interest you.
Lastly, no matter how much you are currently priced and want to price yourself, there is the other side of the equation – what others are willing to pay. We all hope that someone will pay us good money to do whatever we want to do, but that’s not how the market works. Your skills and knowledge may be in demand, and maybe not. It’s important to understand how others like you have priced their values.
I don’t pretend to be a career expert. There are plenty of sources available regarding how to find a new job and negotiate favorable offers. From most of what I read, range of market rate is an important data point to have before you go into any negotiation.
Of course, the range of market rate is equally important if you are self-employed and need to price your service. You don’t want to price yourself too high so no one will buy, or too low so you don’t charge enough.
For positions in mid to large corporations, you may research Glassdoor or Salary.com for compensation packages that others have gotten recently. If you are trying to price your service, you will need to do some market research on your competitors. Look for the people who are already doing what you plan to do, and find out how they charge, either through public disclosures or through personal connections.
What if your new position is so unique that there is no precedence? Then the customer or the employer will also have the same issue of deciding on what is fair. It’s up to you to assess the real value you will bring to the client and persuade them that it’s worth it.
Which data point to use?
Now you have the three data points. What price should you charge?
The short answer is the highest of the three. If potential employers and customers are willing to pay you more than what you currently earn and what is worth your time, why not? This means your human capital is in demand and you should definitely take advantage of it.
If what is worth your time is higher than both the market rate and your current pay, you should really think about making a career change into a profession that will allow you to invest your time in it.
If your current pay is highest, then you know that you have hit the jackpot, but your good luck may not last forever. I worked with someone who was paid a lot of money to do an obsolete job. If he were to find a similar job, he would either have to retrain himself, or take a pay cut. This proves that you need to invest in your human capital even if you currently have a high income.
For most people, these three data points may line up like below:
What is worth your while < What is your current worth < Market Rate
Ideally, you are already working at an hourly rate that is worth your while, which is why you chose to work in the first place. If your skill actually has higher demand, you may expect to get a raise, either when you switch jobs or when you use the new job offer to negotiate higher compensation.
How to price yourself to go freelancing
Lastly, I’d like to show an example of how these data points may help you decide whether to remain an employee or become a freelancer.
Let’s say you’ve done the research that many people with your experience or credentials are charging the equivalent of $100 per hour for projects. It may come in the form of a flat fee – to complete a product, you charge $3,000 total, which you estimated would take you about 30 hours, including the time it took you to identify, pitch, and complete the project.
Right now you have a stable job with long hours. After taking into account all compensation, you make $100,000 a year, but also devote 2,000 actual working hours a year to your job. This means your current hourly rate is only $50.
In this case, it might be very tempting for you to want to become a freelancer so you have more control of your hours. Nevertheless, there are two more things you need to consider.
First, when you become a freelancer, you have more expenses, such as self-employment tax, administrative expense, equipment, higher electricity bill if you work from home, etc.. To compare apples to apples, your real hourly rate after expenses may be only $80 an hour, assuming your expense is only around 12.35% of your income and you pay employer half of the payroll tax.
$100 *(1-7.65% -12.35%) = $80
Second, you will need to bring in the business yourself to make up the number of hours you wish to work. For example, if you wish to make at least the same as your previous total compensation, you need to find around 42 projects that pay you $3,000 total.
( $100,000 / $80 ) / 30 hours = 41.6
But the good thing here is that you only need to work 30×42 = 1,260 hours. So if your goal is to work fewer hours so you have more free time with your family, switching to freelance work may work for you.
Note that in this example, freelancing provides a greater upside because the market rate is in your favor. Your skill is in demand enough that you can actually charge more for your time. However, this is also highly dependent on your sales skills and network. You are taking the risk of not being able to get paid for 42 projects. If you do not, then you in effect are getting paid a higher hourly rate, but working fewer hours, which may work in your circumstance if that’s what you prefer.
Lastly, as a new freelancer, you may not be able to charge $100 like others you’ve seen. So how much should you charge to make it worth your while? You already know that your current worth is $50 per hour. After taking expenses into account, the real benchmark is $50 / (1-20%) = $62.5. Anything above this number is an improvement.
I hope this framework helps you evaluate your human capital and career decisions. Still have questions about pricing your value? Share with me below.