Are you finding it hard to work out how much you should be charging for your services?
One of the most common questions we’re asked by new business owners is how much should they be charging per hour for their services.
There are a number of factors to consider when setting an hourly rate. Here are our top tips if you are running a service-based business.
Work out your total number of income producing hours per year
Determining your total number of working/income generating hours per year is an important first step. Don’t forget to include time off you’ll need for:
- annual leave (taking regular breaks is important for your physical and mental wellbeing)
- public holidays (if applicable)
- personal leave (eg. for illness or carers obligations)
- professional development/upskilling
- business administration (such as installing equipment or invoicing)
- non-billable meetings with potential new clients or to network.
Example: If you plan to take four weeks of annual leave, two weeks of public holidays, two weeks of personal leave and four weeks for upskilling, business administration and non-billable meetings, this would leave you with 40 working weeks to generate income. If you were to work 40 hours in those 40 weeks, that would give you a maximum of 1,600 income producing hours per year. It’s also important to factor in that it may be unlikely you will be able to bill all your available hours to clients. As a starting point, we suggest working on a rate of 65 per cent (the billing conversion rate). In this example that would give you 1,040 hours per year.
Determine the total operating costs of your business
Do you know how much it actually costs to run your business each year? Estimating your overheads includes expenses such as:
- leasing a business premises (if applicable)
- any licences, permits or business insurances you need to start your business, operate equipment etc. consider which are ‘one-offs’ and which are required on an on-going basis
- fees for banking, telephone and internet services
- fees for services such as accounting or legal advice
- motor vehicle expenses
- communications, such as phone and internet
- marketing and advertising.
Download our free operating expenses forecast calculator to help you identify and calculate the everyday expenses you are likely to incur in running your business.
If you’re in the start-up phase, our free initial start-up costs calculator can help you identify any additional costs you need to factor in.
Working out your hourly rate
Now that you know the total number of income generating hours you will be available to work and the cost of operating your business, you can work out how much to charge per hour. To do this, you’ll need to factor in:
- How much profit/income you hope to make. Look carefully at your cost of living when estimating this and don’t forget to put some savings aside for a rainy day
- Any capital investments in the business to pay back.
- Costs of goods or materials.
- Travel time and any other unproductive time.
- Any industry specific rates of pay or competitor pricing that you’re aware of and need to factor into your own rate.
Example: If your desired pre-tax personal income is $83,500, your business has $30,000 in overheads/costs, and you are looking to make $16,500 in profit you will need to generate $130,000 in revenue. With this total figure the following calculation can help you work out your hourly rate.
Desired profit amount + desired salary + operating costs / number of income producing hours = your hourly rate.
For example: Desired profit of $16,500 + desired personal pre-tax salary of $83,500 + operating costs of $30,000/1040 income generating hours = $125 per hour.
Use our hourly rate calculator to help you make this calculation.
Tip: If your business is registered for goods and services tax (GST), you’ll need to add the 10% GST amount to your hourly rate.
When to increase your hourly rate
There are a number of different strategies you can use to review potential increases to your hourly rate.
The two most common strategies are:
- Annually review and adjust your hourly rate taking inflation into account.
- Seasonally when the volume of clients/orders exceeds your supply capacity. Increase your hourly rate/prices in increments and measure if there is a drop in demand. Experiment with increases to judge the optimum mix of price and demand to give you the volume of the workload you can manage comfortably and the income you are striving for.
What to do if a client questions your hourly rate/quote
It’s quite common for clients to try to bargain or question the cost of a quote. In some cases, you may even have a client ask you to reduce your quote without reducing the scope of work.
It’s important to be disciplined when it comes to quoting and pricing. If the client demands a lower price, negotiate with them as to what is their desired price and then reduce the scope of your work accordingly.
If you’re new to quoting or would like more tips on what to do if you’ve underquoted, read our 3 tips to avoid under quoting.
- Contact our free business advisory service to ask our experienced business advisers any questions you have about pricing your services or quoting.
- Download our free financial management tools to help you calculate your business costs, forecast your cash flow or cost of goods sold.
- Read our finance information for more tips and guidance on topics such as developing financial processes, providing credit to customers and debt recovery.