Recently I was asked the question: How do I decide what to bill for my time? This is a question that plagues many consultants who have no idea what to charge for their services. Here’s what I recommend:
What is your vision for your business?
The first place to start is to understand what you want your business to look like: Do you want to be a premium service provider (i.e. you have a value differentiator in the market) or do you want to be the lowest cost provider? It’s very difficult, and not sustainable, to charge a premium price if you don’t have unique value to offer (this is, in my opinion, one of the biggest mistakes companies make).
What’s your income goal?
At the end of the year, what do you want your income to be? Obviously, you need to be realistic with this number. If you’re a wedding planner with a year of experience under your belt, don’t expect to make what a seasoned and experienced professional nets. As a starting point, think about what your income might be if you were working for someone else.
Know your expenses
Estimate your annual overhead. This would include the cost of your telephone, office / rent, staff, travel, insurance, and all of the other expenses needed to run your business.
Project your profit
What do you want your profit margin to be? – this is what you’ll earn over and above your salary. Profit margins are important: they can help you save up for the unexpected, the wanted and the rainy days. They also give you the ability to reinvest in your business – that means website updates, new staff, new technologies, new inventory, etc…all things important in growing your business.
Estimate your billable hours
A lot of new consultants make the mistake of thinking that they bill for most of their time. Unfortunately with downtime, administration tasks (quoting, billing, book keeping, etc), travel, education, and a slew of things tasks every consultant needs to do (that most hate doing), the average time spent on UNbillable work is about 35%. You also need to account for any vacations or holidays you want to take off throughout the year. So, if you’re thinking of working a 40 hour work week, only 26 of those hours will likely be billable. If you add a 2 week vacation, that works out to 1,300 billable hours per year (26 hours per week x 52-2 weeks).
Calculating your hourly fee
So, let’s say you want to make $80K, your overhead is $20K, you want a 10% profit margin, and you plan on working 1,300 billable hours
Your salary + overhead = $100K
A 10% profit margin = $100K + $10K = $110K
Divided by you billable hours = $110/1,300 = $84.60
Based on this example, your hourly billable rate would be $85.
Is this realistic?
Do your research and find out what others are billing. Go back to my first question: What’s your vision for your business and determine how your pricing fits in line with other market offerings. If you’re not in the ballpark, you need to seriously reconsider either what you want to make in a year, what your overhead costs will be and/or how many hours you need to work on billable projects.
Good luck & happy billing.
Do you have any other methods you’ve used to calculate your fees?
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