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 $30 an hour. She’s happy she went out on her own.
Bottom line: Most people forget that their employer paid for much of their down time, vacations, and overhead expenses. The money needed to cover overhead time and expenses must be included in any hourly rate or flat fee you charge. Otherwise, you won’t be charging enough for your service, and you won’t be in business very long.
Take-away #1: You can’t charge for the following items when setting your hourly rate. It’s these items that need to be accommodated in the 4x to 5x multiplier:
Non-billable time (up to 50% of your time):
- Marketing and sales
- Promotional materials
- Vacations
- Sick days
- Down time
- Administrative time and personnel
- Chores
Non-billable overhead expenses:
- Licenses
- Insurance
- Office space
- Vehicles and fuel
- Computers and software
Take-away #2: To succeed, you’ll need to strive for a minimum of 50% billable time.
Bonus Take-away: To succeed, you need to invest 20 to 25% of your time in sales and marketing. (You probably hate hearing this, but it’s true, and I know it from experience.) Also, if you have 4 to 5 employees, you’ll want to have a full time sales person.
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9 Comments:
By jerrold 06 Jun 2013
Excellent article and good guidelines.
A 100$ plus fee is regular as services are equally provided.
Having said that, services offered on line by some law firms are ridiculously high priced in some cases…300$/hour to have a chat with a graduate is not uncommon in our area.
Check your competitors,,,,,,explore your prospects….and charge accordingly
By Karla Schott 06 Jun 2013
I found this very helpful. I wish there were tips for those us just graduating out of college.
By Will Sherwood 11 Jun 2013
Probably the best tip I can give you would be to go to work for a person or firm that does the kind of work you want to do and has the ethics and integrity it takes to survive in business. Work there for at least 5 years before striking out on your own.
By Tyler 11 Jun 2013
Thanks for this article. I recently battled the idea of freelancing (due to an employment change). I would have failed within a year. As it is, this lingering “thought for freelance” has left me with clients that are getting a steal. How do I transition to a rate that makes business sense?
By Will Sherwood 11 Jun 2013
One of the master designers that I interviewed some years back had a similar situation. But as soon as he raised his rates, all the bargain-hunters flaked out. You may have some folks that stay with you when you up your rates to the “survival” level, but it ooks like you’ll have to get some new clients. Sorry.
By Jack T Design 13 Jun 2013
I’d like to recommend a book by Ilise Benun and Pelog Topp called The Designer’s Guide To Marketing And Pricing: How To Win Clients And What To Charge Them. It is a good read and provides a basic guideline towards how to figure out your rates based on your overhead and the salary you wish to earn. I believe they also host workshops at HOW conventions every year.
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