Deciding how much to charge is both the first and the toughest issue that freelancers face. Economists will tell you that the correct price is always the highest amount that the market will pay, and business experts will tell you that you can figure that out by looking at your competitors’ price lists. But what no one will tell you is who your competitors are. When you pitch for a job, are you competing with other freelancers in your town? Or with other freelancers anywhere with similar skills? When you’re looking to pitch your own fees, whose prices should you be looking at?
The difference is important. Now that virtual companies can create virtual teams made up of qualified people in parts of the world you might never have heard of, identifying competitors isn’t always easy. It’s tempting, for example, to dismiss entirely a competing bid from a programmer in Mumbai whose price demands are half of yours. If they’re charging so much less, then their qualifications and experience must be that much lower. But if their living expenses are a quarter of yours, then in fact, they’re asking for twice as much – and a client could be paying half the amount you charge for someone twice as good.
How Much Does a Big Mac Cost to You?
It’s a question of purchasing power parity (PPP), an issue that few freelancers or their clients are likely to have considered but one which we all increasingly need to bear in mind as we make bids and assess offers. Telecommuting means that equally qualified people can be submitting bids from areas with very unequal economies.
The principle of PPP is that in a perfectly efficient market, identical products will have just one price. Exchange rates then should move towards the rate at which those products reflect that price. The Economist famously uses the Big Mac to represent an identical product sold in 120 countries because the burgers largely use local ingredients: bread, beef, cheese, tomatoes, advertising, packaging etc. Comparing the prices of Big Macs in various parts of the world with the official exchange rates should reveal whether a currency is over- or undervalued. According to the latest compilation of the Big Mac index, the iconic double-burger cost an average of $3.54 in the US but $5.60 in Switzerland and $1.74 in Indonesia. Because the exchange rates alone didn’t reflect those differences, the Swiss Franc was described as 58 percent overvalued and the Indonesian Rupiah 51 percent undervalued.
That’s nice to know if you’re hungry in Indonesia or Switzerland (and have a steel stomach and no taste buds) but what does it mean for freelancers? A report conducted by UBS recently provided a slightly more useful take. It offered an alternative Big Mac index that looked at the number of hours it takes to earn the money needed to buy a Big Mac in 73 cities. In Chicago, Tokyo and Toronto, a typical worker only has to sweat for twelve minutes to afford the burger; in Nairobi, they’d still be going hungry two-and-a-half hours later.
Of course, the Big Mac isn’t a perfect model. In Chicago, it’s poor man’s food; in Nairobi, McDonalds is where the foreigners and the nouveau riche hang out. But the principle should be clear: when it comes to setting a price, it’s not the figure that matters, but what you can do with that figure when you receive it.
World Quality Demands a World Price
For example, a buyer might find himself considering bids from two freelance designers charging $30 an hour. The first freelancer lives in Chicago; the second in Sao Paulo. To the buyer, the price isn’t an issue — whichever supplier he chooses the cost will be the same. But a glance at the alternative Big Mac index shows that in PPP terms, the Brazilian designer is more than three times as expensive. If he’s not three times better, then the buyer will be paying more than the real value of the supplier’s work. Of course, if that Brazilian designer is better at all than the Chicagoan, then to the buyer, that extra value has arrived for free.
Buyers then need to be aware not just of the amounts they’re being asked to pay but what they should expect in return for that money. For sellers, it’s a little more complex. Clearly, freelancers working in low-cost economies and selling to higher-priced economies should have an advantage. Charge a US buyer a rate that conforms to PPP — a price equal to the one charged by an American supplier — and they’re giving up an advantage. If they charge less, they can undercut competition in the buyer’s local market and still earn more than their cost of living demands. But if a buyer is prepared to pay a certain rate for a set quality of work then accepting less for that service means that they’re selling themselves cheap.
In practice, when things get this complex, simple economics takes over. Freelancers, wherever they may be, tend to look at the quality of the service they offer and consider the competition on a global scale. When they believe the quality they offer is truly world-class — and hard to find anywhere in the world — they feel free to charge the highest rates a buyer is willing to pay. When they feel their work falls short of that level, they use their price advantage to bring in work.
And for buyers too, things become much simpler when they stop comparing prices and start comparing portfolios. When they know what they’re willing to pay and can see what they can get for that money then how many Big Macs their supplier is buying when the job is done soon becomes irrelevant.
The bottom line is that the ease of telecommuting and the ability to work virtually from anywhere in the world has been good news for buyers who now have a greater range of suppliers to choose from. And it’s been good news too for freelancers who can now pitch their services anywhere and charge the highest possible rates for the highest quality work wherever they may be.
The only losers, in fact, are low-quality suppliers pitching in countries with expensive Big Macs.