How do I set my hourly rate?
I’m often asked by service business owners how to go about setting appropriate hourly rates. Entrepreneurs are often advised to compare their rates to the competition, but this isn’t the whole answer. As one business owner told me, “My competitors are charging anywhere from $50 to $150 per hour!” So what other factors should you be considering?
When you’re charging by the hour, your rate is the most important business decision you can make. The rate you set must pay not only for your time, but all your expenses and obligations.
Start by considering your living expenses. Total up your regular expenses, including housing, utilities, food, clothing, health care, family care, transportation, and entertainment. Add to that required payments for your debts and income tax, an allowance for emergencies, and a budget for savings.
Then add your overhead expenses. What will you need to pay for office space, supplies, computer equipment and software, travel and transportation, phone and Internet, and anything else you need to run your business.
Now consider your marketing costs. How much might you need to spend on expenses like advertising, marketing collateral, website design and maintenance, networking lunches, and attending events and conferences?
Your rate must also pay for the same benefits you would expect to receive as someone else’s employee. These might include health, disability, and life insurance coverage, a retirement plan, sick leave, vacation time, and one-half of your Social Security payments.
And, your rate should cover reimbursement for your startup costs and professional development expenses. You need to consider the risk factor, too — there is no guarantee you will bill as many hours as you would like.
Keep in mind that over the course of a year, a successful professional may bill only 20 to 25 hours per week. Don’t set your fees expecting to bill 35 to 40 hours. Especially for the new professional, work more typically follows a 3-to-1 rule — you spend up to a third of your time marketing, another third managing the business and keeping up in your field, and the last third working on client projects. Assuming three weeks of vacation, these guidelines suggest you should count on billing no more than 1100 hours per year — 22.5 hours times 49 weeks. Some professions might average more, but others average considerably less.
To decide on your rate, add up your annual estimates for all the costs described above, and divide by the number of billable hours you can project. For example, if your living expenses, overhead costs, marketing budget, and employee benefits total $90,000 per year, and you’d like to add 10% more for reimbursing your startup costs and allowing for risks, divide $99,000 by 1100 hours. That would indicate an hourly rate of $90.
After you know how much you need to charge, then compare that to what others in your field and market area are charging. Even if your needs are low, you should charge at least as much as the low end of the competition. Don’t discount your rate below that just because you’re new. When rates vary widely, try to choose a level within the range that seems appropriate for your experience and education.
Once you’ve decided on your rate, stick to it. When clients ask you to work for less, instead of lowering your rate, negotiate the scope of what you offer. You could perform a no-frills version of the client’s project that will pay you the hourly fee you require, but reduce the total cost to the client. Or include a not-to-exceed clause in your agreement to eliminate any concern about runaway costs. If you work by the session, you could schedule fewer sessions per month. Clients are often more concerned about their monthly or total budget than they are about the rate they are paying you.
You can always expect some people to question your rate, so if no one says it’s too high, you’re probably not charging enough.
Thanks for sharing this, C.J. This is an issue CTA students struggle with (hey, let’s face it, all of us struggle with this). You’ve laid out a comprehensive method and I hope my students will take advantage of your experience. Nan 🙂