Set an hourly rate using maths!
This is one of a series of articles written to help designers charge for their work.
My last article focused on getting money before you started work, but how much should we charge? In this article I will show a simple method of setting a hourly rate that is actually based on what you need to earn to survive and not just what your mate down the street is charging or what you blurted out in a panic whilst having a coffee with the client.
Step 1: How much do you spend on labour? (What do you want to earn?)
First you need to decide what you want to earn in a year. The average wage in NSW, Australia is about $80,000 (before tax). So let’s start with that figure.
Step 2: How much are your expenses?
How much do you spend in the course of running your business. You will need to account for a lot of different things here. Lets start with these:
Studio Rent and internet: $6000 per year
Hardware (computers etc.): $3000 per year
Software (programs etc.): $3600 per year
Stationary: $1200 per year
Other: $1200 per year
Total: $15, 000
Step 3: How much do you work?
Now we need to figure out how much we actually work. There are 249 working days in Australia in 2017. You will want to take some holidays. Lets go with 20 days. And you will be sick sometimes so lets go with 10 sick days. That leaves us with 219 days. If you work 8 hours per day then that equals 1752 hours.
However you won’t be billing every one of those hours to a client. You will also need to do business admin, creative development (learning), marketing, new business and skiving. You will also just not have billable work to do some of the time. An average figure is 60% of your hours are billable. But we are a new business so let’s be on the safe side and say that 50% is billable. That leaves us with 876 hours.
Step 5: Calculate your minimum hourly rate.
So now we need to figure out the minimum hourly rate we could possibly charge using the figures above.
Labour costs per year: $80,000
Expenses per year: $15,000
Billable hours per year: 876
The minimum rate is ( Labour + Expenses) / Billable Hours.
Minimum rate: (80,000 + 15,000) / 876 = $108 per hour
So that is the minimum you can charge. This rate will ensure you will get your wage paid and be able to cover your expenses. Does that sound like a lot? Possibly, possibly not. We can talk about adjusting this further down the line. However first we need to talk about profit!
Step 4: How much profit do you want to make?
Profit is an essential part of a growing business. It is not enough to charge exactly the amount you need to earn your desired wage. You must make profit that can be used to build your business, cover you when times are hard, pay your maternity pay, buy you a new computer when the old one packs it in midway through a project etc. etc.
A general guide for our industry is to charge between 20 and 30% profit. At Multiple States we charge 25% profit. Lets go with that figure.
Step 6: Calculate your hourly rate.
Our final hourly rate will be our minimum rate plus profits.
Profit = 108 x 25% = $27
Hourly rate: $108 + $27 = $135
Hooray! We have a rate! It is a figure that actually means something and a figure that we can now be confident in.
Step 6: Juggle the figures based on the competition.
This figure may seem way out of line with your contemporaries and that is obviously something that needs to be considered. Some things you can do to reduce your figure are:
- Reduce your salary.
Maybe you don’t need that salary? Drop it and see what that does to your rate.
- Reduce your expenses.
Only do this if it is realistic. If you drop your rate based on this but your expenses don’t actually go down then you are going to run into trouble. You could find cheaper programs to work with (Adobe is not the only provider anymore) or work from home for a while just to name two.
- Reduce your profits.
Maybe you don’t feel like you need 25% pr0fit? Try 20% and see how that effects the rate.
- Up your hours.
This reduces your salary for the hours worked so be careful. You could take a few less holidays (not recommended), work a few extra hours a week (not recommended) or work when you are sick (not recommended)… In fact this method seems to be, on the whole, not recommended.
If you need to make your figure higher then up your wage or, even better, reduce your hours!
Step 7: Say it again and again and again
Now you have this brand new, shiny hourly rate that you have confidence in, you need to tell everyone. “ Hi! My name is Will, I charge $135 per hour”. Say it again and again and again. Say it in the first meeting and the second meeting and the third meeting. The more you say it the more comfortable with it you will become. This will help you when the inevitable question comes… “Can I have a discount?” Your answer to this is always “No” (don’t read the next heading just yet). You may say it with a bit more diplomacy ie. “I’m really sorry but that rate is fixed. We could work on dropping some of the features to reduce the project cost.” However it is always a “No” to dropping the actual rate. As you now know the rate is based on hard figures and dropping it will have a knock on effect that ends with you earning less then you need to earn — and no body can expect you to agree to that!
Step 8: Set a discounted rate
OK… So the answer is not always “No”… Sometimes you can offer a discount. The only time we offer discounts is when a client is signing up for regular work. Regular monthly work over the period of 6 to 12 months can significantly reduce the hours you need to spend on new business. This frees up hours to become billable ie. the hours you were spending marketing and pitching for new business are now spent charging clients. Therefore it is feasible to drop your rate to reflect this. I wouldn’t drop it in a big way. Maybe somewhere between 5% and 15%. Enough to say “Thank you for trusting in me, I am going to reward you for your loyalty”. Call this your regular client rate and advertise it along with a guide to how many hours per month a client has to sign up to in order to receive it.
Keep an eye on this rate though. If you end up charging a lot of hours out at this rate but you find you are still only billing for 50% of your hours you will run into trouble.
So there you have it! Get in there and set your rate! If you have questions then please ask in the comments.