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.
"When you work out your hourly rate, you need to balance your customer's needs with your own."
Your hourly rate is (using the above example) about $47.10 per hour.
[Or alternatively, Flying Solo’s rate calculator can be handy for working out your hourly rate].
Want more articles like this? Check out the pricing strategy section.
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.