To run your business well, you need to know what your time is really worth. Before you jump into comparing yourself to your competitors, first you should estimate how much money you realistically need to live a happy life.
I live in an expensive city. My rent is $2000/month, I spend minimum of $1000 for food and $1000 for things like commute, phone bill, entertainment, health insurance, clothing etc. I also think about the future and plan some vacations, so I try to save money and my desired monthly savings would be $2000. That being said, my total ‘dream’ monthly income is $6000.
Let me make a few assumptions:
- I will need to pay 20% tax to our lovely government (*0.8 in the formula below).
- I want to work 20 days a week, minimum of 5 hours daily (20*5 days per month).
The formula is simple:
hourly rate = (Desire Income) * .8 / (hours per month you will work)
When I plug my numbers: $6000*0.8/ (20*5) = 48. It looks like $50/hour is a rate I will be happy with, and in fact this is exactly how much I charge my clients.
- My desired amount is ‘slightly’ bigger than what I really need, however this is the whole point of this exercise – you need to work with big estimations and be okay if you don’t entirely meet your expectations.
- 20% tax is much more than you will pay in reality. If you are a business (and you should be: LLC or Sole Proprietorship), you will be able to claim many expenses, which will significantly decrease the amount of money you send to IRS.
- I calculate only 5 working hours per day, while in reality I usually work 6 days a week for at least 8 hours every day. But still, keeping those numbers at a minimum is good, since you are never really booked for all your available time.
How many hours of your day can you really charge your clients for?
The calculations must conform with the real world. This is how I do it: I post on Craigslist and eLance ‘fake’ job requests to check the market in my area. Within a few hours I receive a variety of quotes from local web specialists – anything between $10 and $60 per hour. I also reach out to local web design firms and ask them for a quote for my project, checking their rates. I’ve noticed that in NYC, $100 per hour is the very minimum amount you can get from the larger web design companies with lots of overhead.
Experimenting with rates is a great way to test the market.
This confirms that $50/hour seems to be the correct rate to charge in my city. It also looks like I can experiment with $60/hr. Keep in mind, pushing limits is good when you are already busy and you know that you can meet your goals for a given month. In this scenarion rejections from potential clients because of your high rate will not hurt your business.
Don’t think you are trying to rip your clients off. You go to your local mechanic who charges $80/hours to fix a car, a lawyer charge you $300 for a 45 minute consultation (during which time you learn that to get more valuable information you need to hire him for at least 10 hours for additional research on the topic). You are a web specialist flueant in multiple programming languages, efficient in Photoshop and SEO, you can set up a unix server on your clients’ AWS within an hour, you code quickly and you do your job well enough so that corrections are not needed.
It came with years of hard work. If you charge your clients $60/hour, you can focus on quality work and quality clients and you do not need a large quantity of clients and projects to make a living. That translates into focusing on work rather than looking for more projects. If you know your client pays you good money, you will not hesitate to go the extra mile and give a discount or a few extra hours of work for free. Your higher rate is a win-win situation for everybody. If you think offshore competition is a problem, I recommend you check out my post “How to Compete Against Offshore Web Design Companies. 10 Small Things Which Can Help You Win a Big Client.”
Reality Check Part 2
Of course, you need to also look into your portfolio and compare the quality of the work you provide with other developers from your area (FYI: 6 years ago my rate was $25/hour, and I believe web design services should never be valued less than that). If you just started with web design, and you don’t have much to show and offer to your clients, you probably need to cut your expectations in half until gain some more experience. Remember, you can always start with average rates to generate cash-flow and build experience, then keep moving your numbers up every few months as you grow. Rome wasn’t built in a day.