Determine Your Hourly Rate
Now I can go and find my rate. Anybody here been uncomfortable telling people their rates? Why? Why are you uncomfortable telling people your rates?
Um, 'cuz I'm new to UX, so that's a hard thing to talk about, I guess, yeah.
It's a hard thing to talk about because you feel like you're not worth the amount you're actually--
Right, or you don't know what you're worth, I guess.
Okay, so I don't know what I'm worth. But I have an idea, right? And I'm kinda worth earning a living doing what I do really well. So we'll talk about that. 'Cuz it's really heard to say like... It's that weird feeling of, "Please pay me, "now that I've done my work." We're not just friends, you actually are paying me to do this. So we're gonna talk about that. We wanna talk about how you actually estimate and come up with prices. We talked about that in competitive analysis, this idea of, well, they're charging this much, let me charge a little bit lower. And basically what you do then is, I've heard it d...
escribed as a race to the bottom. You're like, now look, every time I go to get a price I have to charge this much, or whatever. So we're gonna talk about how to come up with your rate today. I'm gonna give you two examples that I think work really well. Prevent you from being in that bargain basement. Most of the time when I talk to people and they, and I said this earlier, they will email me or call me last minute and say, "I'm about to go into a meeting, how much should I charge?" (laughing) I don't know, right? I don't know what's going on. And it's always a couple of different ways, and when I hire people, or people hire me, you have to understand, and I talk about this a lot, in terms of interviewing or working with someone, this idea that when someone says to you you're too inexperienced, it often doesn't mean in actually doing the job, but how you relate in the actual interview or when you're pitching a client, you can come off as too inexperienced. And then they're afraid to hire you, 'cuz of the way you respond to questions, right? So Chris, ask me what my rate is.
What is your rate?
Um, $45, but I'm willing to negotiate. And, well, if that's not good enough, just tell me what you're willing to pay, and then we'll go from there. And it's a really common way for someone to say, this is how my rate is, right? Chris, ask me what my rate is.
What is your rate, Andy?
That's a great question, Chris. You know, my rate varies based on my scope of work in the actual project. So let's talk about the details of what you need done. We'll talk about the timeline and then I can give you an accurate rate after I tell you how I'm gonna actually solve your problem. If you don't ever practice those words coming our of your mouth, what happens is that moment when you go, gasp, and the client sees that. And they know then, right? They're not out to make sure that they pay you bargain basement and, "Oh great! We got someone in here to freelance for us "and we paid them nothing." You know, if they do that they're certainly not gonna have you come back and do more work, because you'll be frustrated and say, "Oh, after I looked at it, I actually made $2.00 an hour." So they're not there, but it is a business, and they have a bottom line too. So you have to be able to do that. We're gonna talk a little bit about negotiation in a little bit. But the way to do this, for me, and this is my experience because, when I started out running a freelance business, I had no idea what I was doing. And I was like, "I'd like to work." But then I realized I'd like to work and get paid. So here's what I do. Put together your personal budget. Most people I know don't even start with that. So I usually say to them in a meeting, I say, "How much do you spend a month." "What do you mean?" Well, how much is your rent? How much does it cost for your auto insurance, your car, your credit cards, your student loans? How often do you go out to eat, right? Put down that budget, so that you know how much is going out every month. And it gives you a really good idea, it's great for people who are looking to transition maybe, into being a freelancer full time, but also people who want extra cash. Often I see people going to freelance for extra cash, because they're not covering their monthly expenses. And they have an additional skill, or they wanna test the market, because they're sick of not earning enough in their permanent role. So put your personal budget together. I love this, 'cuz then you have an idea, this is how much I spend a month. When you're done with that, go ahead and put your business budget together. And this is... Oh that's your personal budget. Now put your business expenses together. 'Cuz what I wanna do is, I wanna know what it costs me to run my business. When I started it literally cost me, transportation, mobile phone and some equipment. So I needed to know that. If you purchase something in bulk a couple times a year, if you're a photographer or something, and you purchase some sort of equipment maybe once a year, just divide that by 12, and that's your monthly expense for the year on that equipment. Maybe it's software, maybe you have to buy a new computer, right? I just wanna know what it costs a month. For most of us, we work from home. So, again, this is literally a very simple class on how to start your side hustle. So I'm not gonna get into this idea of how much of a percentage of your office space in your home can you... But I'm thinking about in terms of, my rent, I'm trying to cover, so that's an expense. My business expenses, everything else. What does it cost? Do I do my own taxes? No! How much does it cost for me to do my taxes. Not really sure I can find out, 'cuz I will build my team when I network, and I'll talk to an accountant, right? So that's what I'm gonna do. So I put that together. Now we know what's going out every month. Really important. Has everyone done this recently? (laughing) No. Okay, so when you do that, now we're gonna talk about billable hours. So I know what's going out, and then here's the magic, what are billable hours? Right? And so this idea of, I can work a lot, and I'm hoping that I work every billable hour I have. But the truth is billable hours are not billable unless you have clients. But I need to know, sort of, if I'm gonna put an idea together of how much I need to charge in order to cover those expenses, right? So I'm talking about my break-even rate. In order to do that we're gonna calculate our billable hours. It's a really, really simple way to do that. And so the way I do that is I look at it simply this way, there are 40 hours in a week that we normally work. As a freelancer I might work more because I have great projects, but let's just go with the model for permanent jobs. 40 hours a week. There's 52 weeks in a year. So the total number of hours we normally work in a year is 2,080. If you look at salaries, most people will break that down, if you're like, "Oh, I'm making a salary of this much." Just divide that by 2, and you'll see what your hourly rate is. That's a very standard formula for working in the world. As I've heard. Okay? So you do this, and then you go, "Okay, I've got 2,080 hours "which I can work with this year." Then I'm gonna, take vacation. 'Cuz I don't like to work all the time. Why am I freelancing? I want freedom. I want to make my own choices and I want to build a business. So I'm gonna say I take three weeks' vacation this year. That's 15 eight hour days, so that's 120 hours. I'm gonna take five sick days. Okay, when you're freelancing, do you get sick days? Sure. But I like four weeks' vacation. So that's what I'm doing. 10 U.S. holidays, right? Some will argue there's only nine, but I consider my birthday a U.S. holiday. So there are 10 legal holidays including my birthday this year. So that's another 80 hours. So the total time off is 240 hours, right? So from my billable hours, what I'm basically doing, is I'm subtracting that from the 2,080, right? Everyone's happy, see, I love math, 'cuz this is where I get to talk about profit, and this is where I get to go, "I'm actually earning money. "It's the best part of my business." So I have 1,840 hours with which I can bill next year. This is what I've learned being a freelancer, I'm not gonna bill anywhere near that. Not everything is billable. I don't get to bill you for emailing you. I don't bill when I go out and meet new clients. I don't bill when I don't have work coming in. So realistically, if I am working full speed and doing everything I need to do, I'm probably hitting about 60% for me. New freelancers it might be 50, but for this example we're gonna say 60% of my billable hours I'm actually earning money. So that means I have 1,104 hours this year with which I can bill to earn my living. Make sense? Pretty simple, I just multiplied it by 60%. That's still pretty good, right? I mean if you think about it. That's a lot of hours I can bill, if I have a good rate. So now I'm gonna look at my break-even point. For this example I did my budget and it's gonna cost me $20,000 this year to live. That's rent, car, food, all the dry cleaning I have done, whatever, right? Clearly. So I'm gonna do that. My business expenses this year are only 5,000. I need to buy a new computer. I'm getting some software. I've got a couple other things I need. You know. Maybe I get a new computer every two years, maybe I don't, whatever. But that's the expenses that I figure out for my business. So my total expenses for the year are $25,000. So if I wanna freelance, I need to actually make $25, to end up with zero dollars. How fun is that? That's your break-even point. Here's what I like to do. I would multiply that by 30%. Because as a freelancer you pay your own taxes. I am not, nor do I play a tax accountant on television. That being said, part of your team is an accountant. Your tax rate will vary based on where you live and how much you earn. But a safe number for me, what I found is, if I multiply it by 30%, I know when I build that in, I'm not gonna owe money at the end of the year. Or I know what my actual number is, because I have to pay that as a freelancer. The more I earn, I end up paying taxes quarterly. So for me, I love that. When you hit the, you're paying taxes quarterly, congratulations, you're successful. I look at that as a way for me to measure success. One of my goals at one point as a freelancer was shift to a quarterly tax rate. Because now I know I'm earning what I need to earn. So here is my grand total. My expenses this year, with those billable hours, are $32,500. All I'm doing then is, I'm taking that expense and dividing it by the billable hours I have, which is 1,104. So that's $29.44 per hour. If I bill at $29.44, and I bill 1,104 hours, I hit my break-even rate. Pretty simple, right? We haven't looked at competition yet, but I wanna know what it costs for me to actually break even. So I do that. Now profit margin. Does anyone know what a standard profit margin might be for a business? I would like it to be 100%. (laughter) It's usually 10 to 20. We look at that as being a really accurate and a model for a successful business. That's 10 to 20 percent. So I'm gonna take my hourly rate, and I'm gonna multiply it because you guys are all really successful, and you're gonna be great as freelancers. I'm gonna add 20%. So now my hourly rate is $35.32. So I'm gonna round up and my hourly rate is $35.50. So for me to, if I'm just doing this as a side hustle, right? And I haven't looked at competition yet. But to know that I am asking an hourly rate and I am earning profit, that is my starting rate. Now I'm gonna do a couple of things. I will do competitive pricing and I'll look to see what else is out there. But I'll then also start to test the market when I meet with clients. But at least I have a number to start with, and based on my research. Because that's much easier when someone says, "What's your number?" It doesn't have to be a game. You get to go, I charge $35.50 an hour. Let's talk about the project. And if they go, "Uh huh, that's great, no problem." You're in the market. Then you'll test again, and you'll say, "I charge $42.00 an hour." And if they go, "Okay, great." Perfect. Then if you say, I charge 50 an hour and they're like, "Wait a second, what do I get for $50?" And you start to get a little bit of, what's happening at $50? Now you know you're in that range where you start to talk about what's my market value. What are my clients willing to pay? 'Cuz there's no science to this. You have to know your client and you have to start to look at what you're doing. So that's kinda what we do. Does that make sense? So that's your billable hours for somebody who's like, hey, I have this service, I wanna try it. Here's my break-even point. Here's my profit margin. Let's look at that. Super simple. Covering my tax rate. Now if I say to myself, I actually want to pay myself a salary. I am going to be a freelancer full time this year, I'm gonna pay myself a salary. A very nice salary. 'Cuz I've earned it, right? But I'm gonna come up with a salary. How do I do that? First thing is you can go to different sites. Get that information. I love the Bureau of Labor Statistics, 'cuz it also gives you by region, and it gives you a lot of really nice information. It will tell you the density of jobs in your area. So it's a great way to do competitive analysis as well. So I'll go there. Find out. Go to your associations. Ask your mentor. Ask other people. "Hey, you're on LinkedIn. "You have a job full-time doing what I do freelance. "I'd love to take you out to coffee "and quiz you on your salary." Could happen, right? Find out. Build them into your network. Once you do that, I'm gonna say I'm giving myself a salary of $50,000 this year. I wanna earn 50 grand. I am going to put that as my goal, put an action plan together and be specific. So when I do that, my billable hours, same example as I used before, I have 1,104 hours of which I can bill at, right? So I have to come up with my formula to say what's my hourly rate. So my $50,000 is actually an expense now. 'Cuz when you pay yourself, it's an expense. It's a business expense. I have the same expenses from the last example, $20,000 personal, $5,000 business. So these are my business expenses, I multiply them by 30%, because that's my tax rate. And so I know I have to earn $97, in order to cover my expenses this year. If I look at my billable hours and I divide it by that, my hourly rate is $88.31. And if I round it up, so my hourly rate is $88.50. It's your salary plus your expenses, times the tax rate, and then just divide it by your billable hours. Was that the hardest math formula you've ever seen? All right. I'm not doing anything like A Beautiful Mind on the board or anything like that. It's actually pretty simple. That's what I do. Now and MBA would actually look at you and go, "Well, I would actually factor it this way, "and do it this way, and do it this way." For me, the reason why I do it this way, is I know I am covering my expenses, and I have a target number. Now I'm gonna test this number in the market. It could be more than that. And the benefit is, if I actually earn more than that, I don't have to target 1,104 hours. But I want to, because I want to challenge myself and see what I'm worth. But that's how I come up with my hourly rate. Then I'm gonna go ahead and test this in the market.