Hourly Rate – How much should I charge per hour?
How did you figure out your hourly rate? If you just pulled a number out of the air or went with what a competitor is charging, you may not be charging what you need to charge to have a good profit margin or even cover your monthly expenses. We will go through the formula to figure out what you should be charging for an hourly rate, but first I want to talk to you a bit about Value Based Pricing, which if you are not using, I highly recommend it over hourly rate when possible.
What is Value Based Pricing?
Value Based Pricing is a pricing strategy that is based on the value (either perceived or actual) that it brings to the customer. So you first need to analyze what values are important to your customer related to the product or service that you provide to come up with your Value Based Pricing strategy. For example, say you sell a widget and the value to the customer is more widgets in less amount of time and clean widgets. For the customer to build this widget, because they do not have the proper tooling, it takes them 8 hours to make 1000 widgets. However you can produce 1000 widgets in 1 hour. So would you charge the cost of the widgets and an hourly rate? I hope not! The customer perceives that you have spent 8 hours on these widgets so even if you charged them the cost of the widgets plus 4 times the hourly rate, the customer feels that they are getting a deal. Possibly you may also have a machine that you dump these widgets in and it shines them up which takes 5 minutes and the customer has to clean each widget by hand so this is an added bonus. The point is with Value Based Pricing you can charge more than you can charge at an hourly rate.
How to calculate YOUR hourly rate:
- Open up Excel and list ALL your monthly expenses – add in some savings, even if it is just $50 and subtotal.
- Add in a cushion like 10% to help cover unexpected expenses and subtotal again.
- Now take this subtotal and times it by 30% to come up with your tax amount that you should be putting away and add this amount to your subtotal to come up with your Monthly Goal.
- Figure out how many hours of BILLABLE time that you have per day – This is the time you work minus drive time and/or administration time that you cannot bill for.
- Add your days that you want to work – if you want to work Saturday to get a lower hourly rate you can add that day to the spreadsheet.
- Total your billable hours per week.
- Times your billable hours per week by 4 to get your total billable hours per month.
- Take your goal of how much you need per month and divide that by your monthly hours to come up with your hourly rate.
- Take your goal and times by 12 to get your yearly income. – If this is not the yearly income that you were hoping for say for example you wanted to make $100k per year. Deduct your total yearly income from your yearly goal to get the difference. Now divide that difference by 4 to come up with the monthly difference. Add the monthly difference to your previous monthly goal to come up with your new monthly goal. Now just take this new monthly goal and divide by the total billable hours to come up with your new hourly rate to get to $100K.
Need help figuring out your hourly rate? Dailey Bookkeeping Services would love to help you. The owner, Jacqueline Dailey is a Certified Public Bookkeeper, a Certified QuickBooks and QuickBooks Online ProAdvisor and a Xero Certified Advisor. We work remotely so we can work with any company located in the U.S. If we can help you with this process or provide you with custom reporting, please give us a call.If we cannot help you, we will refer you to someone who can!