The Opportunity Cost of Freelancing

In the March 2015 issue of the ATA Chronicle, Jonathan Hine wrote an instructive article about what he calls setting a “fair price” for translation and interpreting services. He doesn’t describe a price that is actually fair, in terms of being just compensation for services rendered. Instead, he means the amount that an independent contractor (i.e. freelancer) would be willing to accept for services, based upon the contractor’s own needs and desires. This is a useful exercise for any self-employed professional, but it is only the first step in a larger process.

Determining one’s own “fair price” is helpful in a few ways. The most important of which, from an economic standpoint, is the ability to compare it against opportunity costs. For those not familiar with this term, this is the cost of doing one thing instead of another. For example, if an interpreter chooses to accept a job for client X, then she cannot take a job for client Y at the same time. This decision has a cost. The cost is the money forgone by not taking the job for client Y.

Some numbers here might help illustrate this point.

Let’s say that client X and client Y both need four hours of interpreting services. If an interpreter charges $300 for these four hours of work at client X, then this amount must not only cover her preparation, travel time, and cost of services rendered, but also the money that she did not make by accepting a job for client Y during that same period of time. If client Y was willing to pay $350 for those same four hours of work, then the opportunity cost of taking the job with client X would be $50.

This calculation is important. Freelancers should regularly analyze their opportunity costs from job to job and client to client, to make sure that the work they are doing is financially worth it[1]. They can do so by running through the following exercise.

First, freelancers need to analyze their status quo. How many hours per day, week, month and year are they working? How much money are they making during each of these time frames? What costs and expenses are incurred with this work?

Answering these questions will provide a baseline for further analysis.

Second, they should determine what the market will bear for their services. This step is the opposite of calculating a “fair price”. Rather than looking at what a freelancer would like to make (as Jonathan Hine suggests), they should look to the market to find out how much they could make. It is more complicated. For the individual, it is a trial-and-error process that requires researching price information and then attempting to charge as much as the market will allow.

From a practical standpoint, this means that with each potential job that comes in, the freelancer should offer an hourly or per-word rate (depending on the type of work) that is as high as they think that the client will be willing to pay. At first, this process begins with an educated guess. Perhaps the freelancer has talked to colleagues or seen rates online charged by other professionals in their language pair. If the client accepts the estimate without hesitation, then there is a good chance that the freelancer’s price was too low, and the next job that they get offered, they should attempt to push their rates up higher. This trial-and-error process continues until the freelancer finds that their clients are either not giving them work (because the freelancer’s price is far beyond the market rate) or they want to negotiate, because the freelancer’s rate is close enough to what the market will bear.

The important thing to be aware of is that in a competitive industry, like language services, individuals aren’t able to set the upper boundary of their own prices; the market sets it for them. If a translator tries to charge more than the market price for his services, clients will simply look elsewhere for similar services at the going rate. There is some wiggle room here, of course. The market accepts a range of prices that vary with a person’s background, experience, skill set, etc. However, there is a maximum fee beyond which no client will be willing to pay, and this top rate is what the market will bear. Thus, the freelancer’s financial goal should be to test (and try to reach) that upper limit.

Freelancers are individuals in a competitive marketplace, and as such, they have what economists call limited market power. This limited power means that any single translator or interpreter will not be able to affect the average prices charged on the market, because there is too much competition. In this situation, the market determines the upper boundary, while the individual determines his or her own lower boundary. And this lower boundary is the freelancer’s own opportunity cost, as described in more detail below.

Again, to maximize income, and thus ensure that the opportunity cost is covered, a freelancer needs to constantly test that upper limit of what the market will bear. Testing that limit involves another economic concept: price elasticity of demand. In simple terms, elasticity measures how much variation there is in the demand for products or services, given a change in the price for said products and services. In a market that has elastic demand, when prices are low, there will be plenty of demand; but when the market price is high, demand will fall.

This price fluctuation is not an individual’s decision[2], but individuals can keep track of how demand for their services change when they adjust their own fees. By recognizing how much work they gain or lose with different prices, they gain an understanding of their market’s relative elasticity.

Each language pair has its own market price. Some are higher than others. The factors that determine these prices include the number of qualified translators or interpreters available in that market; the relative demand for that language pair; the technical nature of the work being done, among many other aspects. Thus, opportunities, and opportunity costs, will vary from one language pair to another.

In any case, through trial and error, over time, a translator or interpreter will get a sense of how much they can charge for their services. Once they have a sense of this range, then they will know roughly how much money they can make in a day, week, month and year, given their individual productivity[3].

Third, once a freelancer is charging what the market will bear, she can then calculate her opportunity cost to figure out whether her current professional situation is worth it. Another example here might help elucidate this concept.

Let’s say that an interpreter is currently working as a freelancer, but this interpreter might be able to get a job working in-house for an organization. This is a classic case of opportunity cost on the labor market. The in-house job will have information about hours, salary, benefits, vacations, retirement plans, etc. If the organization is properly run, the salary should be considerably lower than what a freelancer would make doing the same amount of work, because the in-house professional will also earn benefits, vacation time, retirement, and most importantly, have job stability.

By working in-house, a language professional is giving up the extra income that can be made by charging the market price as a freelancer. In the opposite direction, by working as a freelancer, the individual’s opportunity cost is the amount forgone as salary, benefits, etc. One of these positions will be more financially advantageous, but it necessarily varies from person to person, depending on their background, skills, experience, and aversion to risk.

This same analysis can likewise be done across industries. For example, let’s say that a freelance translator might also be able to work as a foreign-language teacher. The wages (and possible benefits) that could be earned as a teacher are the opportunity cost of being a translator; and vice versa. The same analysis described above can be done to determine the opportunity cost of working in one profession compared to the other.

The key to this economic analysis is recognizing that every decision has a cost. Each job taken or rejected has a cost. Working as a freelancer or in-house has a cost. Being a language service professional rather than working in another industry has a cost. And these opportunity costs vary from person to person, depending on their background, skills and professional goals.

By examining their own situation, freelancers can use opportunity-cost analysis to help them decide whether they are charging enough for their services; whether they are making enough on one job compared to another; and whether their chosen profession as translators and/or interpreters is financially worth it, in comparison to other work that they might be able or interested in doing.

[1] There might be other non-financial reasons that make a job worth it, but that is an economic discussion for another time.

[2] It is the market that will determine it.

[3] Whether or not they will make that amount depends on other factors, such as the quality of their work, how much time/money they spend on marketing and advertising their services, and other similar factors.