Pricing When You Are The Product
The first challenge that service-based entrepreneurs such as consultants, coaches, and freelancers face when opening their doors is figuring out what they’ll charge for their services.
Although the math behind figuring out one’s hourly rate is pretty simple, it’s the nuance, unknowns, and comparison of “what’s normal” that cause service- based entrepreneurs to second guess their calculations. Below are some commonly missed considerations to factor in when calculating the math behind one’s prices. Whether you’re a graphic designer, writer, consultant, or coach, the points below will be applicable to most service-based businesses.
Your Actual Billable Hours Are Not 40 Hours/Week
When you calculate the hourly rate that your pricing should be based on, you have to crunch this number under the consideration that you’ll only be working a set number of hours directly on client work per month.
Do not calculate your hourly rate under the assumption of a 40 hour billable work week.
Billable hours are the direct number of hours that you’ll be spending on a client’s project. You 100% will not be working 40 billable hours per week (unless you plan on working nights and weekends), instead you will likely come close to 20-25 billable hours per week. The reason for this is that when you’re a one-person shop, you are responsible for networking with leads, responding to client emails, invoicing, troubleshooting problems with your bank, and the list goes on and on. Your time will become heavily occupied with indirect client work that’s essential for your business, but will eat into your billable hours pool.
If you want proof, use a timer app such as Toggl and record how many hours you spend per week working solely on client work — I have consistently come in at 20 hours per week. Use this data to accurately inflate your hourly rate so that it covers all of the time you spend doing indirect client-related administrative tasks. If you don’t calculate your hourly rate this way, a few things will happen:
You’ll end up working 50+ hours per week, or if you’re having trouble finding client work you’ll consistently be in an end-of-the-month panic because you didn’t bring enough revenue to cover your bills (read more on how to prevent this in the next section below).
You’ll become resentful because you’re working too much or not enough to pay your bills.
You’ll be in a constant state of financial, work-life, and mental imbalance.
Accurately charge your clients according to your capacity. Your clients are paying you to deliver premium work and you will not be able to deliver on this promise unless your bottom line is met.
You Trend At A Set # Of Clients Per Month
Although you may not have a cap on the number of clients you’ll work with per month because you’re happy to work with anyone who has a project for you, your business will show a clear trend line of the number of clients you work with every month. Whether you depend on referrals, Facebook ads, or Instagram marketing — all of these lead generation channels have a set number of leads that they’re capable of providing you.
There is not a limitless number of leads at your disposal, unless you do something intentional in your marketing plan to contribute to that lead increase.
Therefore, when you calculate your hourly rate, you should additionally inflate it according to the number of clients you’re anticipating to work with every month. So for example, if in the previous section, you calculated that your hourly rate is $104 (under the assumption of 20 billable hours per week), but you think that you’ll only be hired by 2 clients this month who need a total of 15 billable hours per week, then you would use this figure as this month’s billable hours per week standard for your calculation, resulting with your hourly rate increasing to $138.
You Can’t Vacation In Italy If Your Pricing Doesn’t Cover It
The freedom to vacation when you want, for how long you want is one of the biggest benefits of being your own boss. Take advantage of this benefit and remember to factor it into your pricing! If it’s January and you anticipate that you’ll vacation for two weeks in April, distribute a price increase for the next 3-4 months to adjust your numbers for that time off or take on extra work for the quarter.
If you have a pretty good idea of how many days off you’ll take throughout the year for vacations, consider this calculation when crunching the math for your hourly rate. For example, if you plan on taking atleast 1 month in vacation time and holidays off throughout the year, rather than calculating your hourly rate based on 12 working months, calculate this rate according to 11 working months (to account for 1 month vacation time and holidays off).
Don’t Price At Hourly Rates
Despite all of this talk about hourly rates, the hourly rate you have calculated for yourself should act as a North Star to make sure that you’re coming above your breakeven point, and should not represent your actual pricing. Pricing at hourly rates is problematic because clients do not want to receive a project quote that they can’t budget for. A confused mind always says no, and providing a vague idea of pricing through hourly rates adds to friction at the checkout process. This post does a great job of explaining why you should avoid hourly billing for your service business.