Setting an hourly rate – a topic everyone wants to understand but doesn’t necessarily want to discuss. Too often business owners don’t know how to properly set hourly rates and resort to methods such as guessing or copying a competitor’s rates. However, following these ill-advised procedures can often leave you not charging enough for your services and scared to ask for proper compensation. While there are many strategies for determining your hourly rate, this article breaks down the most widely used approach.
1. Determine billable hours
Start by using the formula (52 Weeks Per Year - Vacation Time) x 40 Hours Per Week. This determines the total amount of billable hours per year per employee, even though realistically you will never bill 100% of your hours. The industry average for billable hours is 60% efficiency but a good goal to set is 80%. Next, apply that percentage to your total billable hours and then repeat for each employee.
Make sure to realize that different positions will have different billable rates and some may not have any billable hours at all. If you are a one-man show you also have to consider the amount of time you spend on sales, accounting and the hundreds of other tasks business owners face daily.
Step 1 Example:
((( 52 Weeks - 3 Weeks Vacation ) x 40 Hours ) x 0.60 ) x 5 Employees = 5880 Billable Hours
2. Determine salary and overhead
If you keep track of all revenue and expenses in accounting software or create a yearly budget this step will be easy. If not make that a top priority and refer to your last year of taxes and make necessary adjustments for the current year.
Step 2 Example:
$300,000 in Salary + $100,000 in expenses = $400,000 in yearly expenses
3. Add in profit
We are all in business to make a living and support our families; and this is where we determine how much profit the business will make. Industry rule of thumb is 20% but set whatever you want within reason. So we will take our expenses from step 2 and add 20%.
Step 3 Example:
$400,000 in Yearly Expenses x 1.20 Profit Multiplier = $480,000
4. Put it all together
Our last step is to simply take the expenses and multiplier from step 3 and divide by our billable hours from step 1.
Step 4 Example:
$480,000 Expenses and Profit Multiplier / 5880 Billable Hours = $81.63 per hour
After rounding we bring it up to $85 per hour. (Please note these numbers are purely example)
5. Squeeze out more profit
Now that you have determined your hourly rate it’s time to tweak it. Here are a few tips to follow that should ultimately help to increase profits.
- Increase process efficiency and communications for more billable hours
- Regularly review expenses and cut out the fat
- Increase your profit multiplier (increase your rates)
6. The million dollar question
What are typical rates for web developers? While the answer varies from country to country, here are some typical ranges for North America and I suspect Europe is similar if you replace the $ with a €.
Freelancers: $25 - $85
Small & Medium Agencies: $85 - $175
Larger Agencies: $175 - $300+
While many struggle with setting a profitable hourly rate the formula for success is quite simple. Take some time to make sure your rate is accurate and don’t be afraid to charge what you are worth.
Stayed tuned for a future article on how to successfully raise your prices and take the anonymous poll below to help the community determine if Joomla! developers rates are on par with industry norms.
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