Pricing your work

There are two questions I get asked a lot by people who are thinking about becoming self-employed and even those already running a business. The first is How do you get the work? –this is something I’ll blog about in more detail later as the second is what I want to talk about today and that’s How much should I charge?

When setting out, this may seem a really difficult question to answer but in actual fact it can easily be calculated out and it’s critical to the success (or failure) of your business. When we first started out, I was plucking figures from thin air, when someone asked my how much a website would cost I decided a figure that I felt would compensate me for the time input. This is not what I would suggest doing!

Now that we are considering outsourcing work with the view to employing some new wonderful people to help out on the creation of our sites I felt it was time to work out a base rate from which we should quote. After some pondering I feel I’ve come up with a solution that can easily be re-used on any business.

Firstly, add up all your expenses (equipment, software, phone, ISP, rent, taxes, etc.) –it’s worth taking some time over this to make sure you include as many expenses as possible. Then add what you would like to get paid (your yearly salary). Finally, because you would like to grow your business add some profit (somewhere between 10% and 15% is about right). The figure you’re left with is the turnover you company is aiming for.

Now you need to work that figure back to an hourly rate. Lets assume you want to allow for 4 weeks holiday -you’ll have a potential of 48 working weeks available to you. Now, assuming you’re going to be a slacker and only work a 40hr week, following on from my previous post of how much time was spent on non-development work, we have to assume that we’ll be spending 16hrs of our 40hr week on non-development (yes we do have to take this into account –you’re still working!!)

This leaves us with 24 billable hours every week, this equates to 1,152 billable hours a year. To calculate your hourly rate, simply divide the required turnover by the billable hours.

Let’s try an example:

Expenses
Server Costs: £100pm = £1,200pa
Rent: £1000pm = £12,000
Phone Bill: £29.99pm = £359.88pa
Electricity: £40pm = £480pa
Total Costs: £14,039.88

Salary: £100,000
Profit: £114,039.88 + 15%
Required Turnover: £131,145.90

[Hourly Rate] = [Required Annual Turnover] / [Available Annual Billable Hours]
£131,145.90 / 1152 = £113.84
So in our example, your hourly rate should be £113.84

Notice in my example I have included the server costs which, in many cases will be covered by clients but what happens if they don’t pay or you don’t fill the space? You’ll have to pay so factor it in and any space you sell will be additional profit which you can choose to pass back to the client or save to reward your staff!

This figure should is a base rate, it is always worth factoring in the client when estimating on the work, for example, if you have a large corporate client, many of them will expect to pay a higher hourly rate and odd as it sounds are concerned when it’s too cheap so offset these clients against the smaller clients. Remember: you can be turned down for being too cheap as well as being too expensive!

To clarify that point a little further: If you have a small client who cannot afford £115ph and a large client who is happy with £175ph development costs, for every hour you work for the large client, you can afford to offer the small client a reduction:
10hours @ £115ph = £1150
5hours @ £175ph + 5hours @ £55ph = £1150

So when estimating work, look at it on a yearly basis –having business is better than no business, just don’t be a busy fool.

As a closing note, I would like to add that if your hourly rate sounds too high for your clients, you have to think about what they’re getting –You! You may be expensive but as long as your work is of a high standard price doesn’t matter. The alternative is to find areas to cut your expenses (or take a salary reduction!) so I know which I'd rather do...

I hope you’re starting out in business and when you do I hope you make it! Good Luck.

Update: I should just add, the figures in the example are not real world (or ours) they're merely for demonstration!

Update 2: I feel I should also point out that although we have a base rate that helps us estimate on work and allow us to quickly determine how profitable the project is, we rarely work on an hourly basis as we prefer to quote on a project basis -something which I'll write about another day.