Why understanding your contribution margin is critical to breaking even as a freelance web designer

The number one question freelance web designers always ask is: how do I determine prices for clients and decide what my rate should be? It would be really easy to throw out a random number based on what you think your worth is or base your pricing model off of what your competitors are doing, but are you really breaking even when it comes down to it? Determining your break even point is critical to not only surviving, but thriving as a freelancer. Here are some tips on how to find out if you’re breaking even: 

Understand your fixed costs
Fixed costs are any items that are always going to be present, regardless of how many projects you’re working on. Some examples of these are: design programs (Adobe Creative Suite), your internet, your laptop and even what you want to get paid (designers can’t live off just coffee). 

Understand your variable costs
Variable costs are costs that change with each project that you take on. These types of costs are: web hosting for clients and image or plugin licensing for your projects.

Contribution Margin = Price – Variable Costs
Your contribution margin is the amount that you make on your sales once your variable costs are factored out. This number is key in figuring out your break even point because whatever is left here after taking out your variable costs will cover your fixed costs. 

Here’s an example on how to find your contribution margin: 

Let’s say you’re a freelance web designer who’s been hired to create a small website for a client. You charge your client $2,000 for a 2-page site and your variable cost for this project is $800. You subtract your variable costs ($800) from your price ($2,000), for a contribution margin of $1,200. 

Find your break even point
The break even point is going to tell you how many projects you need to do in order to cover all of your costs (fixed and variable) and anything above that point is a profit. You find your break even point by dividing your fixed cost by your contribution margin. 

Here’s an example of break even calculations: 

Let’s say your fixed costs are $30,000. We take that number, divided by your contribution margin we found above ($1,200), to discover that you would need to create 25 websites at that price point to break even and cover your expenses. 

Being a freelancer can afford a person with tons of freedom that the traditional 9-5 doesn’t offer. However, with that freedom, comes the responsibility of looking at your bottom line and making sure that you have enough money to pay your bills. You are responsible for your own success and can’t expect someone else to worry about keeping the lights on now. Taking a closer look at your costs and break even point is a great first step in deciding what your rate should be and ensuring your pricing model is sustainable long-term.