Everyone, individuals and business alike, appreciates free stuff. The article below, and the Free Hourly Rate Calculator, provides entrepreneurs with an approach for selecting an suitable hourly rate.
How Much Should I Charge per Hour for My Services?
A tough but critical question for any entrepreneur. The hourly charge-out rate is used to invoice clients and/or develop project proposals. For service-based businesses, multiple factors need to be considered when selecting a suitable charge-out rate. And the answer is often a range of rates rather than a single magic number.
To address this question, we will break it into three steps:
- Step 1 - consider factors directly related to you and your cost of doing business
- Step 2 - consider competitors, clients and the type of work
- Step 3 - set a charge-out rate range
Step 1 : Hourly Rate Calculator
The Hourly Rate Calculator is a free tool (MS Excel® spreadsheet) designed to analyze factors only related to you and the cost of running your business. The calculator is aimed at one-person shops, and considers these factors:
- fixed cost of running your business - the higher your fixed costs, the more you need to charge per hour
- what you think your time is worth - given your skills, experience and training as well as your own personal financial goals
- number of billable hours available - your working hours are spent doing non-billable work (for example, developing proposals, meeting prospective clients, general office admin) AND billable work. Your charge-out rate must cover the "cost" of the non-billable work.
By using this calculator, you can determine the charge-out rate to cover your expenses and "pay" you, as well as the minimum rate needed just to cover your basic expenses.
After you have downloaded the Calculator, replace the sample data with your own data. Try to be reasonably accurate!
Download: Hourly Rate Calculator (MS Excel®)
Step 2: Competitors, Clients and Other Factors to Consider When Setting an Hourly Charge-out Rate
The hourly rate calculator (above) provides you with a possible charge-out rate that would cover your expenses, and pay you what you want. There are other considerations before you settle on a firm rate (or range of rates).
Gather information on the following questions about your service, your target market (your clients) and your competitors:
- degree of specialization or uniqueness of your service (commodity vs niche) - in marketing lingo that means how you "position" your product. The more specialized, unique, or hard-to-come by, the more you can charge for your service.
- expectations of your target market - closely tied to the above point, what does your target market expect to pay for similar services. Since price is often used as a measure of quality, your price should "match" your quality.
- competitor rates - what do your competitors charge for similar services (consider their service and expertise, business reputation and history)
Finally, think about the following questions. You might decide you want to set a range of rates, which vary with the work or the client.
- complexity or riskiness of the project - projects requiring a higher order of skill and/or have higher risk may warrant a higher charge-out rate
- previous client relationship - you could charge a different (lower) rate for established clients, especially those who are a joy to work with
- ability to pay - you could charge an established business a higher hourly rate than a non-profit group
- desirability of the project - you could charge less if the project helps you develop new expertise and/or expand your potential market. Conversely, you could charge more if the project involves work you would rather not do.
Step 3: Putting It All Together and Setting a Charge-out Rate
You have now gathered information on charge-outs rates of your competitors, what your clients expect and the work you do. You probably now have a good idea of what your preferred charge-out rate should be. Let's consider a couple of scenarios before you make your final decision.
Imagine Scenario A represents your situation where each coloured block represents hourly rates for you, your competitors, and client expectations (lower prices are on the left and higher on the right).
In Situation A, you have some flexibility in what you can charge because your desired charge-out rate range is within the range charged by competitors, and expected by your target market. So, you could select a charge-out rate in the upper end of your desired rate range, and still be competitive.
Conversely, suppose your situation looks like Scenario B below:
In Scenario B, clearly there are some challenges because your desired charge-out rate range is relatively higher than what your competitors charge or what customers expect to pay. So what are the options?
- re-define your target market (i.e. identify another group of clients that is willing to pay more)
- be prepared to spend extra effort convincing potential clients why your services are worth more; indeed you may be a bargain!
- lower your charge-out rate (either accept less pay for your efforts or try to lower your business expenses)
The key point here is to consider your overall business environment before you select a charge-out rate. Of course, it is important from time to time to review your situation, and revise your rates if needed.
Armed with the results of the work completed above, you can confidently make informed decisions about how much to charge, including discounts offered or premiums charged - essential information that will help you maximize your business success.
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