this week and last week’s biz ladies posts have one major factor in common: depth of information. every week we strive to bring you free, helpful advice on running your small business but between last week’s two advertising guides (for bloggers and small biz owners) and today’s guide to calculating your rate from clair holt, the wealth of information has hit an all new level. it makes me so proud that we’re able to work with experts like clair (and all of our other contributors) that donate their expertise and tips cost-free.
today clair holt of grid impact (a creative management and consulting firm) is going to be tackling a tough, but often asked-about, topic: calculating your rate. clair has broken down the topic from top bottom to help you calculate what you should be charging for the services you offer. if you own a small business and offer a service of any type- clair’s article is a MUST. thanks so much to clair for sharing her advice with us this week!
ps: just a quick update– the biz ladies link (in the top menu above) now links to all of the article archives on one page. i’m working with how best to use those thumbnails – i know that’s a lot of that same image on one page- but in the meantime it means all the topics on one page with minimal clicking. enjoy!
CLICK HERE for the full post after the jump!
Calculating Your Rate
As a business owner, you have likely faced the challenge of determining your rate, evaluating what service you are offering for this rate, crafting the structure of your billing processes and skillfully communicating all of this to your client. Of course, service delivery is the most critical factor in developing a successful practice. After all, you have to be good at what you do in order to build your business. Another fundamental part of building a strong business is understanding the billing process and diligently managing its operation. Taking a holistic approach to determining your rate gets you on the right track for a healthy fee-for-service balance.
Part of this is raw math work (groan), but most of this process is elemental detective work that will really help you lay the important groundwork for your business.
Calculating your rate is more than just coming up with a number that sounds good to you. This is the kind of problem that must be approached from both ends of the equation. You have to think about it both backwards and forwards. By this I mean that you have to think about what it is you want out of all of this while keeping your starting point – and all points in between – in consideration.
There are a few questions that might help you get started with this palindromic problem:
What are my basic costs? What do I have to make in order to keep the lights on? It is really important to be realistic about costs when starting out. You’ll always have to be diligent about your finances and consult experts when necessary (and ask for the help of other entrepreneurs); and, in the beginning, it’s vital to start out with a realistic, healthy understanding of where you stand financially.
Start by detailing your overhead and operating expenses. They may be small or big – just write these down and be honest about these figures. You don’t get anything from artificially minimizing these costs. This part of the exercise is attacking the equation from its front side.
Attacking the problem from the backside involves looking at what you need from the business. Think about where you need to allocate your profits and what your financial goals are. Come up with a figure that accurately reflects how much money you need to make. This takes into consideration your personal expenses and any financial commitments for which you are responsible. Additionally, think about how much money you (and your partners, employees, etc.) want to make and how much you are prepared (or able) to work.
Look at the billable and working hours in your workweek. Is that number 20? 30? 60? Take a look at these figures over the course of a month and subtract time you need for administrative work, personal development (research, skill building, reading, etc), and other non-billable hours. Be honest here, too. It is neither possible nor sustainable (not to mention unhealthy) to work 100-hour weeks. Look at what you can realistically bill in a week and move forward with that figure in mind.
Finally…and this one is the essay question of the bunch: What’s it worth to you to give up this time to spend with clients when you could be doing something else? Reading, exploring, playing with your kids, hanging with friends, flirting with your sweetie? Most likely, you need to work to pay for things – like life –, but all the same, it’s important to understand the value of your time. Respecting your time is important and it’s a big part of your relationship with your client. If you don’t understand how precious it is, they sure as hell won’t. Then nobody wins…bummer.
Let’s give it a look with a real numbers:
You need to make $5000/month to cover your personal expenses (life, savings, etc.)
Your monthly overhead is $1200 (internet hosting, office supplies, telephones, etc.)
You are able to bill 120 hours monthly
$5000 monthly needs
+ $1200 overhead
$6200 sub total
Now, don’t forget Uncle Sam; you’ll need to set money aside for your quarterly tax payments. I calculate 30% and set this aside in a savings account. It’s a painful experience to cough up money later that you don’t have, so do your best to set this money aside and pretend it doesn’t exist. Consult your tax advisor about what’s the best percentage for you to set aside from your earnings. Additionally, you’ll need an advisor’s support if you have employees or charge sales tax. All of this depends on your business structure and its associated tax rate/bracket. You don’t want to be caught unawares regarding these potential eventualities. Moreover, your tax advisor is a valuable resource that will help you make the most out of write-offs and financial planning. Educating yourself about your tax exposure and tax regulations – with regard to present and future considerations – is the safest way to build a healthy business.
x – 30%x = $6200 ($6200/.7)
$6200 sub total needed
+ $2657 the standard 30% needed for taxes
$8857 total billings needed
$8857 total billings needed
/ 120 billable hours
Take a look at this rate and play with the figures a bit. Play them up and play them down – understand where you have flex in the equation. You will need to be flexible because there is no month that is like another and understanding that your business will have ups and downs is a good way to not get caught in the middle of a nasty shock. As you play with the figures, it may be that you are charging too little, in which case you can raise your rate. Or, you may be out of range for potential clients in the market for your kind of service. In this case, you’ll need to trim expenses or adjust your overall monthly needs. Understand the variables in your expenses and where you can trim if you hit a bump in the road. Evaluating outside factors will help you determine which way you should slide your rate and where you can control expenses.
Understanding the Factors
Now that you’ve come up with a rough figure, think about the outside factors that will have an impact on your rate. Perhaps you are in a field where it’s easy to find out what others charge, but many don’t fall in this realm. Regardless if your offerings are mainstream or not, think about your service and find out what the going rate is for a comparable offering.
Thinking about the landscape and understanding where you stand in it will help provide you with the background thinking and logic you absolutely need in order to have a firm footing when talking to clients. After all, when you stick yourself out there, you’ll feel a lot more confident if you’ve thought things through and have solid reasoning that shores up your confidence.
If you’ve never been out on your own, it’s everyone’s private nightmare that things will go down like this: “My rate is $120 an hour” (you say timidly). “What? For you? Why? You don’t know a thing! Hilarious that you think you can charge that! Oh you’re just a scream! Now – really, be serious, what is your real rate?!” No one, and I mean no one, will say this to you. Almost everyone thinks this is what people will say to them (or at the very least they will think to themselves and then go wagging to everyone in the universe about what a fraud you are), and in attempt to save face in advance, they set their rate too low purely out of self-defense and flimsy resolve. This can end up backfiring in the end because a rate that’s too low can make you look like you’re not serious or, worse yet, may suggest that you are not that good at what you do.
If you are in a saturated market, you’ll need to concentrate extra hard on setting yourself apart from others in your area. This only impacts what you charge in a minimal way and you shouldn’t let this be the leading factor of how you structure your prices. Mostly, this impacts your approach to marketing and relationship forging.
Here’s a real world example: A person with blonde hair badly needs their roots done. It looks horrible and it makes this person feel bad. What is it worth to them to get this done? How is it getting in their way? Is this a problem that will solve itself? Is this a problem that is setting off other problems? Why is this a problem in the first place? Who can help them fix it?
So, in this example, the roots are the problem – the sticky wicket as it were. The person with the roots, well – that is your client! In this analogy, the problem is visible and has a relatively easy (and known) set of steps: 1. Make a call; 2. Set up an appointment; 3. Go to said appointment; and 4. Come out of appointment with fresh, new, root-free hair. As many of us know, if you want something done right, you go to a professional. And expensive doesn’t always mean the best; however, cheap certainly doesn’t either. Continuing with this analogy, this is a visible problem – it can be seen and to a certain degree felt. Many of your client’s problems will not be visible to them at all. More likely yet, your clients will come to you with what they think is their problem when there may be other factors at play which will make themselves known only later (you may have already had this experience). A couple of other pieces of this analogy are critical. A clear path to a solution may make it a good deal easier; however, it’s no cinch either. Loads of people have don’t have a good resource for their problem. That’s where you come in – you are the problem solver.
Everyone who is in business is a problem solver; your service solves your client’s problem. You’re an expert. When you define your rate and what you offer for that rate, you are outlining a solution to someone’s problem and placing a value on the service you provide. And while there maybe someone else who solves the same kinds of problems, you have a specific style and specializations that make you you and the service you offer unique to you. It’s always a good thing to keep asking and answering that question: “What makes the service I offer unique?”
If you haven’t been able to put your finger on that exact thing, try thinking about a time when you worked for or with someone else and you had an approach to a problem that no one else had. The answer to that question is a great place to explore your unique slice of the market. I like to call it the ‘niche within the niche.’
Act Fast! Buy One Get One Free! | Sticking to your Rate
Following the salon analogy, when was the last time you went to get your hair cut or styled and, when your stylist told the price, you said, “What? How about $100 instead of $130?” Never, right? Perhaps it’s a sacrifice and it is something you find a bit expensive – but, more likely than not, there is no way you could do that for yourself. And so, you happily pay and leap out back into your day with a problem-free head of hair. You are confident and happy and your problem has been solved.
Yet another detail inside this analogy that’s worth pointing out: the value of the resource. Unfortunately, most of us have had a bad haircut or two in our lives. Which means, once you’ve found someone who understands what you need and provides a great service, you don’t let this resource go. If you’ve managed to find someone who understands your ‘problems’ and they are the perfect kind of ‘problem solver’ for you, you are delighted that you have this asset. In a broader sense, this is what you want to become for your client: a valuable resource that they will come back to again and again; a resource that they will trust and hopefully tell others about.
Here’s another thing you’ll never hear at any salon worth its salt: “If you book five haircuts, you get the sixth one for free!” Stay away from this kind of hawking and gauche auctioneering in your own practice. You won’t give discounted quality of service, so why give a discounted price? And your service is in high demand (or soon will be) and so there’s no need for a closeout sale mentality. You’ve spent some time thinking about how valuable your time is and you’ll do a better job for your client (and feel better, too) if you know that you’re getting compensated properly. More often than not, when you offer a discount or a special rate, that won’t be last you’ll hear of the deal making. This is the loose thread kind of problem that can leave you with a ratty pile of yarn at your side with nothing keeping you warm.
You have to do all you can to protect your integrity and a big part of that is getting your needs met. A big part of getting your needs met is compensation. Sometimes compensation looks like money and other times it looks like experience or education. Whatever the case may be, you have to decide if what your putting into the project is somehow balanced by what you’ll get out of the endeavor. It’s very important to remember, if you aren’t getting your needs met, it’s really hard for you to provide exceptional service to your client. Protecting the integrity of your practice means that you have to constantly and unyieldingly uphold the standards of your business. It’s the only way that you build a business. If you’ve made a bad decision and a project is costing you too much (and I’m not just talking about money), either find a way to right the ship or finish out the work and chalk it up to learning experience. Finish the project with the same quality as a project that had proper cost projections. Even though it may be tempting to take it out on your client because things have gone sideways, do your best to remember that you played a part in the exchange as well. You might be able to say some things about your client that make you feel better, but your client’s representation of your services has a much broader impact.
Additionally, outside of being in business for yourself, you are also supporting a wider network of creative professionals when you stand by your rate. It doesn’t do anyone any favors when you undercut the value of your service, neither for yourself nor for your wider network of colleagues. Additionally, being unclear or waffle-y about your rate can make you look really unprofessional and inexperienced. I’ve found that most people appreciate someone who stands by their rate. It doesn’t leave them wondering about what’s going on and they feel respected because you’ve communicated with them plainly and directly – no deals or complications.
When clients try to ‘deal’ with me, I’ve found there’s something behind their approach other than just trying to save money. Sometimes it’s a power thing and other times they’re not really ready to approach their problem or project. If they want to get moving, they’ll figure out how to pay your rate. You remember when you wanted that doll that you could feed and change its diapers and you sold the daylights out of lemonade to get that thing? Well, those folks at FAO Schwartz weren’t dropping the price of that little doll because you had had a couple of slow lemonade days, were they now?
What are you offering, and what are you going to charge for it?
When launching out on your own – whether full time or not – a good starting point is clearly defining what service you are providing. Bullet points or mind maps are a good place to start. You will certainly refine and polish the offerings of your practice, so don’t get too rigid with your definition. There is not a right or wrong way to do this. The most important thing is to start and establish a distinct container in which your practice exists. Have a go at it and write that down in clear, simple language. You’ll want to have more than ‘Graphic Designer’ and probably less than ‘Graphic Designer specializing in Product Design, Packaging, Color Consultation and Eco-Friendly Materials.’ A good rule to go by is: Would my grandmother understand this if I told her this was my job?
In the world of freelancing, you’re not always going to have clients that know the name of the thing/service that they need. And while it is terribly important to be professional and qualified, a laundry list of qualifications can not only be overwhelming but also intimidating. These are some of the last qualities you want to employ in a client relationship. Helping meet your client where they are in their learning process and journey is a big part of a healthy start. They are seeking help and your expertise and it’s a good opportunity for you to respect that vulnerability with a clear, concise definition (using approachable language) that explains your services.
We’ve all been to restaurants with 10 page menus – it’s too much and in the end, none of it looks all that compelling and you end up sticking to something that you know because the whole thing just makes your tired. Same thing with clients: perhaps something new will be just the thing they’re craving and it’s your job to guide them there. So if you successfully explain your offerings and they have a great grasp of what it is you do and they can see how you can help them– then you are already doing your job and you deserve to get paid at the rate you’ve set. Yippee!
ABOUT CLAIR HOLT:
Clair combines her passion for the modern entrepreneurial spirit, the exchange of creative ideas, and a sense of wild possibility in her business design consultancy. Her past experience includes work in the advertising and marketing industry on an international scale, and as a leadership and development consultant focusing on German-American business partnerships.
Many of Clair’s clients are creative entrepreneurs and other independent business people who “know they can do better but don’t know where to start.” She divides her time between her native Austin and Berlin and can be found after work either riding her bike armed with a fresh pretzel or on a very long walk listening to Ira Glass or Terry Gross. Clair founded Grid Impact in 2004.
ABOUT GRID IMPACT:
Grid Impact is a consulting firm that helps you design and implement your next step in professional development. It is hard to make an impact without a well-crafted plan and we break down the process into the chunks necessary to execute your plan. Some call it irreverent organization. We call it business design. We like to take a creative approach to your most interesting problems. We create structure to help fortify your business and develop a clear set of steps to get you to your next breakthrough success. We are hardworking and curious. We listen. We support. We challenge.