How much you should charge for your hourly rate or project work can be tough to figure out. You don’t have to let figuring out what to charge stop you from pursuing clients or new business.
You’ve researched on Google and even looked at rates on Flex Jobs but those haven’t solved the mystery for you.
I’m often called by colleagues interested in starting their own business. Sometimes they are interested in going out on their own full time and sometimes they are asking me about side hustles. I’m frequently asked similar questions.
Often the questions are generally about the logistics of working from home.
Sometimes the questions are more specific. The things people really want to know but are nervous to ask.
At the top of that list is “How much can I charge for my services?”
Whether you are charging by the hour or per project you may have seen this or a variation of this basic formula for the minimum cost to do work
Time + Materials = Cost
But that didn’t really answer the question, right? It didn’t answer it for me either.
Talking about money is hard. But if you are going to have your own business you are going to have to have hard conversations.
I asked this hard question – what’s an appropriate rate to charge – to a couple of mentors.
And while it was hard to ask it was also the question, once answered, that gave me the confidence that I could earn a living with my consulting services.
A very important thing to consider when setting your rates is that it is very hard to increase your rate once set.
If you think asking colleagues or mentors about their rates is hard just try asking a client to increase their rate!
Save yourself the step of raising rates, at least for a while, with the following simple method that was recommended to me by one of my mentors. Offer a new client an introductory discount.
If you are concerned the rate you quoted is too high for your client or makes you nervous an introductory rate lets you and your new client test the waters of working together..
If you do this, be confident and don’t hide your full rate.
Clearly offer your full rate first. And only if needed note that since this is the first time working together you will do the work or provide the service for XX% less. Whatever the rate is that you think will close the deal while still covering your costs (your time, expenses AND your salary and taxes.)
This is why the expense and overhead cost exercise I’m about to describe is so important!
As aggravating as Time + Materials = Cost is the individual parts are very important.
If you don’t know the cost of providing your service or product then you may not ever charge enough to break even.
If you provide a service, the cost of materials could simply be the overhead of operating your business. The business expenses you incur to operate your business might include internet, app subscriptions and website hosting.
It’s a good idea to take a minute to make a list of your expenses and overhead items.
Time sounds pretty simple. How long does it take you to provide the service you want to offer?
How many 30-60 minute time blocks does it take to complete a client call, task or project?
There are a couple different ways to determine how long tasks and projects take. If you haven’t started your business yet or are just starting out this one can be a little harder to figure out.
My mother-in-law uses a timer to regularly check how long it takes her to complete repetitive parts of her business process.
That would make me nuts. I look at 30 minute time blocks in my calendar to get a rough idea.
Think about your current job, even if it has nothing to do with the business you want to start. How long does it take you to explain to a new client what you do and how it will benefit them? How long does it take you to complete regular tasks? How often do you check in with clients or colleagues in other departments over the lifetime of a project?
Count up those 30 or 60 minute time blocks based on which ones apply to your new business’s services and processes.
Make your best guess on how many 30 or 60 minute time blocks will it take you to provide your service.
Using the basic formula time + materials = cost by doing the two steps above, you should now have a minimum answer of the lowest you can charge to break even not including taxes.
BUT that still didn’t answer the big question, right? You now know your cost – your break even point – but you still aren’t sure what hourly rate to charge!
The Value of Your Time
How much is your time worth? Only you can answer that. And it’s different for everyone.
How much does your current employer pay you? How much did you last employer pay you? How much did they contribute toward your benefits? Your taxes?
Do you think they paid you fairly for your time? Do you think they underpaid you?
Once you decide what you value your time at make sure it covers your costs, pays your taxes and pays you a slaery.
If it doesn’t then you need to increase your rates.
Taxes are a really important item not leave off when setting your rates.
Do you know what IRS tax rate you are likely to be in?
If you aren’t sure and you don’t want to navigate the IRS website to make a good guess, I encourage you to talk to an accountant. Accountants can recommend what percent of your business income to set aside.
If you aren’t sure how to find an accountant you can check out my post How to Find an Accountant When You Are Self-Employed.
Setting your rates when you start a new business can seem daunting. But by knowing what your expenses, taxes, value of your time and how much time it takes you to complete tasks you can set a rate that allows you to make a profit and pay yourself.
How much profit you can make is dependent on your industry and your willingness to ask for what your work is worth.
Money is a hard topic for many people to talk about but to be successful running a business sometimes you will need to step outside your comfort zone.