When you’re the boss, you’ve got to know your worth — and price accordingly
One of the biggest concerns I hear from business owners is around how to price their time and services. I think this generally comes from one of two places: either not knowing what their time and experience is worth, or not believing it.
To confront the pricing struggle head-on, I use three data-based methods to help business owners appropriately price their services. If you’re one of the many employees I talk to about making what you’re worth, I’ll be back in a future article to talk about salary negotiations.
3 ways to calculate the value of your time and experience
I’m going to tell you right now that every single person I’ve spoken with prices themselves too low to start with. Getting confident in the value of your time and experience starts with data.
I like to use a few different approaches to calculate potential service rates, then choose the highest value as a starting place. I’ll dive into each of these methods in depth.
Desired Income
With this approach, you work backward from your desired income. This can help you understand what you need to charge per hour on average to reach your income goal.
Competitive Rates
With this approach, you research the published rates of comparable businesses and competitors.
Market Rates
If you have access to industry knowledge, determine what companies in your target market are already paying for similar services.
Desired income method
In the desired income method, start with the salary you’d like to have for your lifestyle. This is especially useful when you’re making the transition from a salaried position to working for yourself. We’ll then work backward to find your average hourly rate.
Start with whichever is greater: your last salary, if the work is similar, or the listed salary for comparable positions posted online. Glassdoor can be a great resource for finding comparables.
For back-of-the-envelope math, I like to multiply your desired salary by 1.3-1.5 to account for self-employment taxes, benefits and unforeseen costs.
Let’s say you want to make $100,000 per year. We would multiply by 1.5 to get a target income of $150,000.
100,000 * 1.5 = 150,000
If you have other known costs, such as energy, leases or software, you can add them in now. For our example, we’ll assume the business has little to no overhead.
150,000 + 0 = 150,000
We’ll set that figure to the side for now to determine the number of billable hours per year you plan to have.
Each calendar year has about 260 work days. Let’s make sure you get some time off, too.
10 days for holidays (United States)
15 days for three weeks of vacation
260 - 10 - 15 = 235
That gives you 235 working days per year. We’ll say you want to work eight hours per day.
235 * 8 = 1,880
That equals 1,880 hours of total working hours per year, but not all of that time will be billable client work. You’ll have to spend time on bookkeeping, marketing, writing proposals, creating contracts and doing the math to reassess pricing when you realize you’re still not charging your worth, just to name a few non-billable tasks.
That means the amount of money you earn from clients needs to pay for the amount of time you’re performing work on behalf of your business. We’ll say half of your hours will be spent on billable client time.
1,880 * 0.5 = 945
So each year, you’ll spend 945 hours on billable client work.
Now that we know the number of client billable hours you expect to have per year, we’ll come back to your desired salary with expenses and overhead. You have 945 hours to work and bill for $150,000 to meet your desired income.
150,000 / 945 = 158.73
So to bring home your desired salary of $100,000, you’ll need to charge an average of $158.73 per hour for your services.
Your industry may use deliverables instead of hourly pricing, and that’s great. I think it’s still important to calculate the hourly value of your time, even if you ultimately only use this number to inform your deliverable rates.
Competitive rates method
Next, I consider what other companies are charging. This has the benefit of telling you what rates the market supports, not just what you want to make.
The resources will vary based on your business segment, but I’ll use examples from when Alysha Love and I built Payette Media House and established our initial hourly rates (we now use deliverable rates).
We scoped out the competition and industry research about average rates. We found a mix of hourly, per-word and per-deliverable rates for digital agencies providing writing and editing services. Our next step was to convert each of the models we found to hourly rates so we could make apples-to-apples comparisons.
Hourly: We collected a sampling of hourly competitive rates and created an acceptable price range for each of the editorial services we were offering.
Price per word: This is probably unique to the writing and editing space; there may be other common models unique to your business’ niche. We worked backward from this rate, which is based on the total number of words written or edited, to come up with a corresponding hourly rate.
Deliverable: Other competing agencies used deliverable pricing, like per social post, newsletter, 500-word article or news release. We likewise worked backward from these rates to calculate a corresponding hourly rate.
Market rates method
Finally, I preferably try to access information about what clients in my target market are really paying the competition. Gathering pricing from customers in your target market can give you insights the other two methods lack. You may discover that your target niche pays rates that are higher or lower than the average. The market rates that customers actually pay could include discounts or markups, which may differ from the picture you’d get by only looking at competitors’ published rates.
My business partner for Payette Media House, who also happens to be my lovely wife, had insights from a prior job into the rates that companies in the technology world pay for these editorial services. She had been responsible for hiring, assigning and budgeting for outsourced content creation to digital marketing agencies.
This gave her an advantage that you may not have. If you don’t have first-hand knowledge, reach out to people you know in your target market to see whether anyone can share information around expected rates for the type of work you’re doing.
Comparing it all
After we used these three methods for Payette Media House, we ranked the rates from highest to lowest:
Market rates, based on past work in the industry
Competitive rates, from other agencies
Desired income rate
We ended up pricing our initial offerings somewhere between the rates we found for numbers 2 and 3.
“I honestly didn’t believe that anyone would pay me our highest rates,” Love said. “Even after doing the research and paying the market rates firsthand, I didn’t think those prices could apply to me. But when I started filling the roster with clients who didn’t blink at our hourly rates, I knew we needed to reassess.”
We quickly realized that we wanted higher rates tied to deliverables rather than hours. We used our experience offering hourly services and what we learned from the desired income, competitive rates and market rates methods to inform a new deliverables-based rate sheet.
At the end of the day, I think it’s most important that you arrive at rates you’re confident in by knowing they are in line with the market and support your business goals.
Stay tuned for future articles on pricing, where we’ll dive deeper into specific industries, business value pricing and why I strongly believe in deliverable pricing over hourly rates.
