I’m a reluctant Capitalist. I didn’t grow up with a lot of money (my dad was a country preacher, and my mom was a schoolteacher), and the transition from academia to building a start-up and then running my own consulting firm has been rocky at times. The one thing I still hear almost every week is “You need to charge more,” and I preach the same message to new SEOs even as I try to remember it. This post is a reminder to myself (and to you) of why what you charge matters, and why it’s not just about greed.

1. It’s Not All Billable

Almost every new consultant, freelancer, and even agency makes a critical math error. Pay attention, because this mistake could could haunt your business for years to come. It goes something like this:

I need to make $37,000 to pay the bills, and I’d like to make $50,000. A year is about 2000 work hours (50 weeks x 40 hours), so if I can just charge $25/hour, I’ll easily pay the bills and make my $50K goal.

I sincerely commend you for doing the math – it’s important to know what you need to pay the bills and to figure out what that means on a daily and hourly basis. Here’s the problem – in a 40-hour week, especially starting out, you’re going to spend half that week pounding the pavement (or more). You need to network, build your site/portfolio, blog, make phone calls, write proposals, and on and on. Once clients come in, you’ve got administrative work to do – somebody has to send the invoices, pay the taxes, and buy the toilet paper.

So, at best, only 20 hours of your week will be billable. Now, your $25/hour just netted you $25,000. You not only fell short of your $50K goal – you didn’t even pay your bills.

2. Delivery Kills Sales

But wait, it gets worse. That 20-hour billable week assumes that all of your pavement-pounding actually gets instant results. When it does finally pay off, what happens? You get a nice, juicy contract, pour all your time into delivering it, and then realize that you didn’t actually keep selling while you were doing the work. So, after you get that check, you go a month with no work at all while you rebuild your lead pipeline. Ultimately, you’ll be working a 20-hour billable week about every other week, especially for the first year or two. So, you’re averaging 10 hours per week and your $25/hour just netted you a $12,500 bottom line.

3. You Have New Costs

This one’s mostly for the freelancers and independent consultants. Revenue does not equal salary. Even being a consultant costs money – it’s not a high-overhead profession, but everything’s coming out of your pocket now. Some things that you didn’t think twice about when you were employed will suddenly seem shockingly expensive. Want to go to an industry tradeshow? With the full-conference pass, airfare, car, hotel, and meals, that’s about $2,000-3,000. Need a copy of Photoshop? You can’t just pop down to IT anymore – Adobe CS5.5 starts at $1,299. Suddenly your old boss doesn’t seem like such a cheapskate.

That doesn’t count the perks you’ve lost. You’ll hear all about the amazing tax breaks of self-employment from your friends who dream of self-employment but don’t actually have any idea what they’re talking about. Sure, you might be able to write off half your phone bill or a corner of your condo as office space, but meanwhile you’re paying both halves of your employment taxes, your own health insurance, and you’ve got no 401K. Even if you hit that $50K revenue goal, it’s probably more like a $40K salary. The $12,500 you barely squeezed out in the realistic scenario above is more like $10K, and that assumes you skip health insurance, which will run you roughly that entire amount.

4. You Set Your Value

People are funny – when we discount our prices, we expect the buyer will understand they’ve gotten a bargain. When we pay discount prices, we think we’ve walked away with something of less value. Let’s say you go to a fancy restaurant with a 50% Groupon – a month later, do you think “I should go back to that place, since I got such a great deal last time!” No, you think – “If I go back to that place, I’ll have to pay full price. That sucks!” My wife would rather die than go to Bed, Bath and Beyond without a coupon, and it’s entirely their fault for sending us 11 a day. They’ve set their value, and the message is “We don’t have any.”

What’s worse is that you send a broader message that that discount rate is your value to the market, and you even begin to believe it. Unless there’s an amazing opportunity and you’re 100% clear that this is a one-time deal, don’t even start. The legacy of discount pricing could haunt you forever.

5. Your Time Is Finite

We tend to price future work based on past work. On the surface, that makes perfect sense, but the problem is simple – the cost of 10 hours/week when you have nothing to do is a lot less than the cost of 10 hours/week when you’ve already got 40 hours booked. You only have so many hours in the day, and as you run out, they become more valuable. Think of your time like any marketable resource – with more scarcity comes higher prices.

Your time is like MegaBus. When the bus is empty, you may be able to charge $1 for a seat, but that last seat should fetch a premium price. People naturally want to book every available hour, but there’s an opportunity cost to being left with no time at all. Once the hours start to book, it’s time to raise your prices and protect your most non-renewable resource.

6. Cheap Attracts Cheap

Some people may take offense at this, but experience has taught me over and over (and by “taught” I mean “beat with a bat and left me for dead in the alley”) that the people who fight you over price will never stop fighting you. It’s easy to think that, since you gave them a discount and gave into all their demands, they’ll appreciate you more and manage their own expectations, but that’s never happened to me in almost 15 years of working with clients.

It’s almost never about the money – there are some people who just think vendors are meant to be beaten. If you win, they lose. Unfortunately, that means they’ll never see your relationship as win-win. Learn to recognize those clients during negotiation, and get out while you can.

There’s one exception – if you really want to help an organization and you know money is an issue for them, consider doing the work pro-bono. Scope a one-time project and donate your time. There’s nothing wrong with helping people. Where you go wrong is when you start letting other people define your value.

So, How Much Is “More”?

That’s the Million-dollar question, isn’t it? According to our SEO pricing survey last month, the most common hourly rate is between $76-$200 US. That’s quite a range. I think it comes back to that math in Reason #1. The trick is to do the math realistically. Be realistic about your costs and the number of hours really left in the day after sales and marketing are done (and you need to do sales and marketing every day, even when you’re working on deliverables). Maybe more importantly, decide what you want long-term and be careful about setting your value too low just to land a few clients. Today’s discount “just to pay the bills” could set your price for years to come.