If you were selling a physical product, rather than a creative service, you would have two main options for selling: direct to consumers or wholesale to retailers. Selling direct allows you to capture the full value of your product. But wholesale pricing is almost always 50%, or less, of the full value of a product.
There is risk-versus-reward calculus in this choice. It’s much harder, and more expensive, to reach consumers directly. It involves the risk of spending resources on marketing and advertising. And so many producers are content to capture half of the value of their product, in order to leave the costs of customer acquisition to retailers.
There is a similar decision that freelancers have to make when it comes to their prices. If you primarily freelance for other agencies, then you are wholesaling your services. Your rates become a part of the agency’s cost of goods sold. As a result, your rate will always need to be at least 50% lower than their effective rates. And keep in mind, an agency’s effective rate is lower than their target billable rate. Their target rate must take into consideration all the overhead costs that go into running their business. And so wholesale freelance rates will always be limited to the $30-$60 range.
Now since every $10 per hour equates to about $20,000 a year in a comparable annual salary, you might think that a $50 freelance rate will net you a $100,000 a year income. However, freelancers rarely if ever achieve more than 60% billable utilization. And so a $50 freelance rate really equates to around $60,000, without benefits. But wholesale freelancing can be a decent living, with potentially higher income, along with freedom and flexibility.
The Risks of “Retailing” Your Practice
But if you have ambitions for “going retail” in order to charge $100-$160 per hour, like the agencies do, you’re going to have to take similar risks that they’ve had to take. You’ll have to invest time and money in marketing in order to find your own clients. Agencies make significant investments to find their own clients: marketing and sales staff, the costs of systems and strategies for marketing in the digital age, travel expenses, conference fees, and so forth.
Transitioning from wholesale freelancing to agency level pricing will require you to take risks and make investments—mostly of your time, but perhaps some cash as well. But once you’ve gotten a direct client, don’t make the mistake of extending your wholesale rate to them!
Even if you your direct client didn’t cost you anything to acquire, you should always charge them an agency level “retail” rate. Here’s why. Once you start moving away from wholesale agency work, and become independent, you will eventually need to invest in marketing in order to replace the steady stream of work an agency may have provided, with other direct clients. And when you’re independent these projects will not be so steady. And so you need the higher margins of an agency rate to cover down time, as well as to cover the extra time and costs that you’ll incur maintaining your marketing.
Is Your Reputation Based on “Wholesale’ Rates?
Another danger of offering direct clients a wholesale rate, is that you’ll too easily build up a referral network of these clients. If you do good work, it’ll be easy to find clients if you offer wholesale prices. The world is full of bargain hunters. But it can be very hard to shed that reputation later. And while discount clients might accept a $10, or even perhaps a $20 an hour increase, they’ll never accept you doubling your rate, which you must do if you’re going to take on the risks of being a retailer, rather than a wholesaler, and incur the costs of long term customer acquisition and retention.
The solution is simple. Accept the trade-offs of a wholesale rate when you’re working for an agency. But when you get a direct client, charge them an agency level rate. And bank some of the profits from that higher rate, so that you’ll be able to afford to take time for marketing. You’ll both need that profit, and you deserve that profit, for taking on the risks and costs associated with running an independent practice.