For any freelance consultant, setting your Average Daily Rate (ADR) may seem rather complex, as there is no universal way of calculating it. However, if you don't define it correctly, it can be difficult to find missions.
Be careful not to fall into certain traps that can disconnect you from reality!
The aim of this article is to give you some advice and tried and tested methods for determining your ADR. You'll discover how to assess your market value realistically, avoid common mistakes, and position yourself as a leading freelance consultant.
In this new episode of FocusTribes tips, Olivier HERLET, Associate Director of FocusTribes, gives us some advice on the best way to proceed when defining your ADR?
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O.H : « Setting your TJM is a question you might ask yourself every time you start a new assignment».
No one is indifferent to the essential issue of setting the average freelance rate. Ideally, we all aspire to start our business with a clear understanding of our market value.
Revaluing your ADR with each new assignment is one option, but the most complex thing is to set your very first ADR when you start out as a freelancer. The aim is to determine your market value as objectively as possible. The rate adopted must be based on real, quantifiable elements that enable any company to understand and validate it.
First of all, to calculate your average annual salary, you need to take the average annual salary that you can expect to earn as an employee, based on your level of experience and skills, by consulting labour market data. The range is then adjusted in line with the progression target you wish to achieve in relation to your previous salary, to define your desired average annual salary.
The second step is to bear in mind the various applicable charges that need to be added back into this ADR.
For example, if you want to have an annual net remuneration of €80,000, you need to calculate the various applicable charges:
- Approximately 30% management and accounting costs, i.e. €24,000
- Approximately 50% social security charges, i.e. €40,000
- Approximately 10% for additional social security costs (mutual insurance, provident fund, etc.), i.e. €8,000
- Approximately 10% for provisions for possible sick leave, i.e. €8,000
- Approximately 5% for travel expenses and professional indemnity insurance, i.e. €2,500.
This would give total expenses of €162,500, including salary.
To set the ADR, simply divide this amount by the number of days worked in the year, usually 220 days, the rest being weekends, public holidays and 30 days' leave. In this case, we end up with a rounded average daily rate of €740. You need to be careful, however, because all these calculation factors are variable and specific to each individual, so you need to be familiar with your tax regime in particular. What's more, the number of days worked may be different from 220, as there may be off-peak periods and therefore potentially fewer days worked.
Understanding how to set your ADR also enables you to know how to adjust it in the light of different events, taking into account changes in your own experience, for example, but also changes in the overall market in your industry.
O.H : "Former consultants tend to compare with the rate they had at their form, except that this is a different reality".
Here's the main mistake not to make! Setting your rate by taking as a reference the rate at which you were invoiced to clients when you were an employee of a consultancy firm. This contrast bias is very common in our society; we tend to want to compare things to past events that we ourselves have experienced. In reality, these two rates are very often different, because being self-employed and being a salaried consultant in a firm do not have the same value. A consultant going freelance no longer has the credibility that the firm could offer in the eyes of clients; he no longer has the structure that supports him and does not keep a network as extensive as that of the firm. In addition, freelancers are not subject to the same structural costs or the same challenges as the firm in terms of achieving objectives. The rate therefore needs to take these factors into account.
Overall, each case is unique, but what is certain is that few consultants keep the same Average Daily Rate when setting up their own structure. To avoid falling into this trap, it is essential to be aware of the best practices for setting your ADR.
O.H : « My advice would be to find out from other consultants who are already freelancers, ideally in the industry you want to work in. ».
Olivier's main advice is to talk to freelance consultants who have experience of working on their own, and who have therefore had to deal with this issue. This saves time, as you can learn from each other's experiences and avoid the pitfalls that can arise. Ideally, ask an experienced freelance consultant who has already dealt with different situations, and don't rely on just one person's feedback!
Olivier points out that "there are differences from one industry to another, depending on each person's skills [...] just because you have the same experience doesn't mean you have the same value on the market".
Nor should you compare yourself to just any other consultant when setting your ADR. Even if they have similar experience to you, if they work in a completely different industry to you, their rates can be very different. It is therefore very important to seek advice from independent consultants with a profile similar to yours in every respect.
To sum up, once again get close to your peers, bearing in mind all the variables that can nuance what they say. Once you have succeeded in setting your ADR, you will then need to re-evaluate it regularly, for example after each assignment, to adjust it as closely as possible to changes in the market. By adopting this proactive approach, you will optimise your future success as a freelance consultant.
To go further, click here:
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- How to prepare to become a freelancer: Expert advice