Ready to start charging your clients — but have no idea what your hourly rate should be?
No worries — I have a few tips that can help you determine how much you should be charging for your business’s services. Whether you’re self-employed or just at the beginning of your small business journey, take a look at the six steps you need to figure out your hourly rate.
6 Steps for Figuring Out Your Hourly Rate
Determine how much you want to make each year.
You should always start out by determining the salary you want to make. Consider this your North Star for calculating how much you should be charging customers for your services.
For example, when I first started out as a freelance copywriter, I wanted to take home about $50,000 in my first year, as it was a significant pay bump from my 9-to-5 paycheck. Knowing that’s what I wanted to make helped me set my hourly fee, as well as to ensure that I didn’t inadvertently end up not making enough money to pay my bills.
No matter what your ideal salary is, keep that figure in mind while reading the rest of this article. I’ll show you how to use it to calculate your hourly fee in a bit!
Guesstimate your yearly expenses and materials.
If you’re just starting out with your business, you probably don’t have the best idea as to how much you’ll spend on overhead, i.e., expenses, materials, and other business costs. That’s why I recommend asking someone in your industry for a little guidance here, as they can provide you with a good estimate for what you should anticipate for overhead.
Remember, your overhead costs usually include:
- Retail space rent
- Internet and phone charges
- Electric/gas bills
- Office equipment
- Business insurance
- Licensing fees
- Travel expenses
- Legal and accounting expenses
- And more
You’ll be adding the cost of your overhead to that North Star salary number, which I’ll show you how to do in a later example.
Add in your profit margin.
No matter what line of business you’re in, you absolutely need to build a profit margin into your hourly fee. This is the money you’ll pour back into the business, use to hire employees, or potentially even open a second retail location.
Keep in mind that your salary doesn’t count as profit, so don’t be tempted to skip this step!
In general, try to shoot for a profit margin of about 20% when calculating your hourly fee. If you’re not sure how to do this, don’t worry — I’ll show you an example at the end of this article.
Determine your billable hours.
If you want to work about 40 hours each week, that means you should aim to have about 2,080 billable hours per year (40 hours each week x 52 weeks in a year). Of course, that’s if you’re planning on working throughout the year; don’t forget to factor in any vacations you’re planning on taking!
So for example, if you want to charge $50 per hour and you’re planning on working 50 weeks of the year, this means you’ll need to bill for about $100K worth of work ($50 x 40 hours = $2,000 per week; $2,000 x 50 weeks = $100K).
This formula should help give you a good ballpark idea of what you can expect to take in for a salary.
When in doubt, do market research.
If you’re still not sure how much you should charge per hour, it might be time to do some market research to find out what others are charging. Here are a few ways you can do just that:
Find a few people in your area who do what you do. Ask them how much they charge, and how they came to that hourly rate. Most small business owners are happy to share their own hard-won wisdom, so don’t feel like it’s taboo to ask others what they charge for their services.
Do some online research to see if any of your competitors list their hourly fees or project prices on their websites.
If you specialize in contracting, cleaning, or other service-based work, sites like HomeAdvisor.com and Thumbtack.com can provide you with plenty of information to determine what others like you are charging in your area.
Don’t sell yourself short.
If you end up with a higher hourly rate than other folks in your industry, don’t immediately assume you’ve miscalculated. If you’ve been in your industry for a long time or are highly skilled, it’s OK to charge more. Resist the urge to reduce your hourly rate just because you’re afraid you won’t get any clients.
Here’s why: If you set your hourly rate too high, it’s pretty easy to knock it down until you’re at the range you need to be. That’s because your customers won’t mind getting a discount, so it’s really a win-win situation. But if you set your fee too low and want to raise it, there’s a good chance your customers will be disappointed. They may even opt to find another service altogether.
Ultimately, setting a too-low hourly fee can make your business look cheap, and that makes it a lot harder to convince prospective clients that you’re worth their time and money.
An Hourly Rate Example
Let’s put these steps into action and calculate an example hourly rate.
Jim, a carpenter for another company, wants to strike out on his own and become a self-employed contractor. He made about $50,000 at his current job, so he sets his North Star salary at $75,000. He knows from his previous job role that he’ll probably have $20,000 in overhead during his first year in business. He wants to earn a 15% profit and commits to working 40 hours per week for 48 weeks in the year, allowing for four weeks of vacation time.
Jim adds his overhead to his salary: $75,000 + $20,000 = $95,000.
He takes this number and multiples it by his profit margin of 15%: 15% of $95,000 = $14,250 profit; $95,000 + $14,250 = $109,250.
Finally, he divides this number by the number of billable hours he’ll work in a year: 40 hours per week x 48 weeks = 1,920 billable hours; 109,250/1,920 = $56.90 per hour.
Jim rounds it up to $60, thus setting his hourly rate.
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