How to work out your hourly rate

If you intend to charge using an hourly rate, it helps to know how much you are worth. Only then can you quote accurately and build a successful business that you can enjoy

When you work out your hourly rate, you need to balance your customer's needs with your own.

They have an expectation of value for money products/services and you need to set a price that will cover your labour, overheads, materials...and brings in a profit.

Calculating your hourly rate

We think we have 52 weeks per annum available to work (i.e. 40 hours p/week = 2080 hours a year), but we don’t really. If you allow for holidays, sickness, professional development days, etc. - we then have about 1840 hours.

Allowing for administration tasks, marketing, meeting with clients, promotion, travelling time, tea breaks, etc. we end up with approximately 1380 "chargeable" hours.

Then we must look at our annual overheads like rent, vehicle, telephone, insurance, electricity and freight. Let’s say your annual overheads total $20,000. To arrive at your hourly rate add what you would like to earn in a year, let's say $45,000, add the overheads of $20,000 and then divide by your available hours.

Your hourly rate is (using the above example) about $47.10 per hour.

Profit

Decide on your margin for profit (and GST, if applicable). A profit margin, however small, has to be anticipated otherwise all you are doing is covering costs and not allowing development time for creating new products/services or new directions in your business.

If you are selling through an agent, account for the rate of commission the agent will add to your price.

Securing your price

Once you’ve accounted for all these factors and ascertained your price, you then need to ask another couple of questions:

Would you buy the item/service at that price?
Does it compare well with your competition’s pricing?

If you can say ‘yes’ to both these questions then it’s time to test the market.

If not, then look at where you can cut costs without quality compromise.

The customer's perception of 'value'

Typically, this relates to more than just your price. This is where branding helps. For example a customer may pay more for a well-known product/service because they feel that the purchase is safer than a ‘no name’ brand. The same goes for who you sell your product/service through – for example: if it’s a store known for it’s high-quality stock, it’s likely your product will be valued more.

Oscar Wilde warned us against knowing “the price of everything and the value of nothing”. If you provide something that people want that no-one else is offering, then you will indeed be valuable and any price is possible.

Megan Hills is a freelance writer and editor who enjoys helping others be engaging and understood. Through her marketing, publicity and graphic design nous, she can maximise the power of what you want to communicate to the people you want to reach.

2 comments | Add your own

Hi Megan - I love your article and always (try to) teach my clients in training courses that (subject to the buyer's budget) the only thing that matters is the buyer's value PERCEPTION of the relative values of competing goods or services (actual facts are meaningless - perceived facts are the key). The only time when price is relevant is when the buyer is unable to differentiate value between various offerings. Grant Hyman from Sydney | Read my articles
While I have worked out what my hourly rate is (along similar lines as suggested by Megan), I nevertheless steadfastly avoid revealing that rate to my prospective clients. Instead, I negotiate my fees on the basis of the perceived value to the client of the project using criteria such as urgency; shelf-life (eg. will the discussion paper that I write for the client be still relevant in 12 months time); its market-span and/or degree of influence; and so on. In this way, the negotations tend to reveal to the prospective client that they are making an investment in the project's outcomes, rather than simply sinking money into an activity. This generally results in a clearer client brief plus a fair results-oriented fee. Donna McDonald from Brisbane

2 comments | Add your own

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