Whether you are charging enough is a question that haunts virtually everyone who ever sells anything. But the question shouldn’t be; “Are you charging enough?” The real question should be: “Does your hourly rate cover your non-billable expenses?” Think about it. These are two very different questions.
A common mistake people make, especially if they’re new to business, is to charge an hourly rate that is the same as, or close to what they previously made as an employee. They forget to consider overhead time and expenses they have as business owners that they didn’t have as employees. In the process they confuse the market as to the real cost of professional services.
Cameron Foote of Creative Business Magazine has said that any freelancer or firm (in the United States) that charges less than $100.00 per hour will either be out of business within a year, or will have to rely on other sources of income (like a spouse’s) to survive. He goes on to state that folks should multiply the hourly rate they hope to end up with by 4 to 5 times.
Here’s how this works:
If you want to end up with $50,000 per year ($25.00/hour x 2,000 work hours in a year), you’ll need to multiply the $25.00/hour times 4 or 5 = $100.00/hour or $125.00/hour for the billing rate.
In other words:
Employee minded Bob sets his rate at $20.00/hour, thinking that he’ll earn $40,000.00. However, at the end of the year his income averaged $4 to $5 an hour after expenses and overhead. He wonders how anyone stays in business.
However, business savvy Linda charges $125.00/hour in the hope that she’ll end up the year with around $50,000.00 in income. And as a result, at the end of the year her income has averaged $25 to $30 an hour. She’s happy she went out on her own.
Bottom line: Most people forget that their employer paid for much of their down time, vacations, and overhead expenses. The money needed to cover overhead time and expenses must be included in any hourly rate or flat fee you charge. Otherwise, you won’t be charging enough for your service, and you won’t be in business very long.
Take-away #1: You can’t charge for the following items when setting your hourly rate. It’s these items that need to be accommodated in the 4x to 5x multiplier:
Non-billable time (up to 50% of your time):
- Marketing and sales
- Promotional materials
- Sick days
- Down time
- Administrative time and personnel
Non-billable overhead expenses:
- Office space
- Vehicles and fuel
- Computers and software
Take-away #2: To succeed, you’ll need to strive for a minimum of 50% billable time.
Bonus Take-away: To succeed, you need to invest 20 to 25% of your time in sales and marketing. (You probably hate hearing this, but it’s true, and I know it from experience.) Also, if you have 4 to 5 employees, you’ll want to have a full time sales person.
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Contact us by phone at 661-287-0017 or through our website so that we can help you think through your objectives and propose the best solution for your needs and your budget.
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