“What’s your fee?”
When a client asks for your hourly rate, there isn’t a one-size-fits-all answer.
There are three general pricing models pros use to set their hourly rate. We’ll walk you through the pros and cons of each so you can decide which one works best for you.
The simplest: Cost-plus pricing
In the cost-plus model, pricing is based on just two things: your expenses plus the amount of profit you want to make.
Pros: It’s great in situations when you don’t have a lot of competitive information or you just want to keep things simple.
Cons: This model doesn’t take into account the value you provide to your customer—usually helping them save or make money.
How to calculate cost-plus pricing
If you know your expenses, your profit, and your billable hours, figuring your cost-plus hourly rate is pretty simple:
(Your total annual expenses + expected profit + taxes) / your billable hours = cost-plus hourly rate)
Let’s work through how you find this information.
Your total annual expenses include both your business costs and your personal expenses. Business expenses include costs like rent for your coworking space, travel, insurance, software, hardware, education, website, marketing, and office supplies. Your personal expenses may include your rent or mortgage payments, car payment, and insurance, groceries, utilities, and health insurance.
Your expected profit is how much money you want to make above and beyond your expenses. The floor for this number is 0% because you need to cover your costs. For a guide on how much profit to add, look to agencies. Agencies often double or triple the cost of contract work when they charge their clients. So you certainly shouldn’t be shy about adding 25% if you’re just getting started and 50% to 100% after you’ve built up a few years of experience.
Taxes are complicated for self-employed workers. They include federal and state taxes as well as self-employment tax, which covers Social Security and Medicare. The actual calculations vary a lot, depending on your income and location. We’re going to use a total tax rate of 30% for our simple example below.
Finally, you’ll need to figure out your billable hours. There are 2,080 working hours in a year if you work 40 hours per week. But remember, you won’t spend all of them on customer projects. The actual number of billable hours will vary from person to person and week to week. The most common answer to the question of billable hours in this Reddit thread was 5 hours per day, so we’ll use that for our example. Assuming you work Monday through Friday and take three weeks off, that’s 245 working days or 1,225 billable hours.
The best for confident pricing: Market pricing
In market pricing (aka competition-based pricing), your hourly rate is based on what your competitors are charging for the same or similar service.
Pros: It makes negotiations easier. If people are already paying others this price, they’ll likely pay you that much as well (assuming your service and quality are similar).
Cons: If you’re offering a service that’s significantly better than your average competitor, you deserve to be paid more.
How to calculate market pricing
To calculate your rate using the market-pricing method, you need to know what the competition is charging. (This survey conducted by Payoneer is a good place to start when researching average rates in your industry.) You can also get an idea of what other people charge by following online forums and looking through job boards like Flex Jobs and Upwork.
Another way to find out what your customers are willing to pay for a service like yours is by looking at full-time, in-house employees doing similar work. Find the typical salaries for these jobs on websites like Glassdoor and Salary. To calculate your rate based on a typical salary, divide the annual salary by your billable hours, and add the cost of benefits that employees would receive. Benefits will vary, but according to the Bureau of Labor Statistics, benefits accounted for approximately 31% of an employee’s pay.
Here’s an example. According to Glassdoor, the average salary for a web designer is $52,691. To calculate your rate using this figure, add 31% for benefits and divide by your billable hours.
The best for maximizing earnings: Value-based pricing
With value-based pricing, you base your prices on how much your customer believes your service is worth.
Pros: Value-based pricing helps you earn maximum revenue from your clients. Rather than limiting your rates to costs or the market, this model empowers you to charge as much as your clients think your product or service is worth. It also provides incentives for improving your service.
Cons: Value-based pricing can be difficult to calculate. After all, it’s time-consuming to figure out what dollar amount your customer places on the value of your work, if you can get that information at all.
How to calculate value-based pricing
There are two schools of thought on calculating price based on perceived value. One is based on the direct monetary value a customer will get from a service. So if your customer believes they’ll increase revenue by $100,000 after you redesign their website, it’s reasonable to charge $10,000 for the website.
Utpal M. Dholakia, professor of marketing at Jones Graduate School of Business, at Rice University, takes a different approach. He recommends starting with your competitors’ pricing and then adjusting the rate according to the additional benefits you provide. In contract work, those benefits might be additional years of experience or education. For example, imagine that you’re a content writer in the medical field. You determine that other writers in your market charge $30 per hour to write blog posts. However, you’ve just completed a B.S. in nursing, which is a rare commodity among your peers. You could present a higher price, after making the case that your service is better than your competitors.
You’ve set the perfect rate and completed an amazing project for your client. It’s time to get paid. Let Wingspan help you manage contracts and collect on invoices so you can focus on getting your next great client.