Thinking about how much to charge for your services, and equally how much to pay your staff, is a huge stumbling block for many new businesses. Get it right and you will perfectly balance customer demand and profitability, get it wrong and you could be on the path to ruin...
N.B. This information has been designed for professional service based businesses - however could equally apply in many other industries too. Please play around with the figures and if you have any questions relating to your field drop them in the comments below.
***Come on, I don't have time to read, just give me the tool!***
Where to begin
When I first started freelancing I was charging £15 an hour. At the time I thought it seemed very reasonable; I did the maths - £15 x 40 hours, x 52 weeks... woah! £31k! Not too bad right? Oh bless how naive I was...
One of the reasons I was first inspired to set up my own business was finding out how much my ex employer charged for my time. I was being billed out at around £80/hour whilst taking home less than £20k - how could this be fair? And when I first started freelancing, and then running a business with hired employees, I soon realised very quickly why this was the case.
With the best will in the world, no one can do 7.5 hours of 'billable' client work in a day - there's just too much un-quoted for admin, prospecting, chasing, invoicing... pretty soon it's lucky if you can clock 5, then throw in to the mix amends and those surprise changes to the brief and suddenly your £15 an hour becomes an almost laughable £2. This is not an exaggeration - find me a single person who has ever worked self-employed and hasn't worked below minimum-wage on a project and I'll buy them a drink, though maybe they should buy me one!
This all gets significantly more serious when you have employees yourself. Whilst as self-employed you can work 100 hours for a £100 project (cursing under your breathe and wishing you were a wage slave) - however with employees you obviously can't pay them less than minimum wage. So the mistake that cost you 100 hours of your time as a freelancer, costs closer to £1000 as a business owner. Jeez - at the start that could be enough to put you out of business...
But what can you do about it?
Enough of the boring anecdotes, just give me the tool!
All right, all right, you're here for the gold and here it is:
Wait, what's going on behind the scenes?
Ironically it was a client who first told me to put up my prices, and he taught me about the "rule of thirds" when it comes to business costs. Essentially the rule is that for every employee you hire, they need to generate 3x their wage. So a third goes to cover their direct wages, another 3rd goes towards the overheads, insurances, contributions etc. that goes along with hiring them, and the final 3rd is for the business. I.e. the final 3rd has to go into your company's pocket for either future growth or a nice big dividend for you as the owner...
Because come on, you're not setting up a business to be poor. I know it's apparently 'bad' to like money, but nobody is going through all of the stresses and strains of setting up and running a business not to have anything left over after staff and expenses have been paid!
And this is where a lot of new businesses fall down, they set costs based on a low multiplier, maybe double staff wages, but all this does is covers the expenses... what's the point? Why bother bringing in another hire or another client if all you do as a business is break even? There has to be profit built in to the model otherwise you do not have a viable business!
There’s a little more to the formula too, as expense and productivity are considered (which is why the freelancer rate and business owner rate are slightly different), but essentially it’s a very simple tool.
But my clients would never pay that!If you've just used our tool and been hit with a number that feels far too high for your customers then it may be because of one of these reasons:
A word on that final point - simply put, If you can't create the thing (service) someone needs, for the price they're willing to pay (with a decent profit), then you don't have a scalable business model and you will be living hand-to-mouth in business forever...
You did not go in to business to be poor. Whilst you may love the freedom of "being your own boss", you have to factor in this profit.
Have I laboured this enough? (I'm really talking to myself here, we need to take this advice more too).
Thank you for checking out our tool - whilst it works for us and our partners in our industries I would love to know what you make of it? Please 'like' the post if it was of use (and we'll make more stuff like this).
When you popped in the numbers did it seem reasonable to you? Too high? Too low? Do you agree with the "rule of thirds" or think we've over-simplified things?
Comment below and let us know, we'd love to refine it and make it more useful for other businesses in the future!
And finally, if this has been a little wake-up call that you need to increase your rates then blooming well go and do it...
Remember, you're worth it!