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.

If you enjoyed this article, you may also want to check out these others:

7 Secrets to Doubling Your Efficiency
8 Secrets to Being Awesome at Everything
The Power of Telling Stories and Anecdotes in Presentations
Increase Your Credibility by Increasing Your Visibility
Using Social Media to Position Yourself as The Go To Expert

This article is published by Will Sherwood | The Sherwood Group |Website Design | Graphic Design | Marketing Communications: The Sherwood Group has over 30 years of experience working with all sorts of companies, small and large. Our clients range from entrepreneurs to Fortune 500 firms, in nearly every business sector, from across the street to around the world (and yes, even Europe, China, and South America). Our goal is to create advertising,  graphic design, website design, and marketing communication that still looks fresh and relevant 10-15 years later. Our mission is to stir your imagination and leave your competition shaken and wondering,  Now what do we do?”  We are located in Myrtle Beach, South Carolina.

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