How to calculate your hourly rate

It might sound strange, but most service providers are "selfish" in their pricing. Meaning, a rate is determined by looking inward — how much do I need to charge to make more than my monthly fixed expenses? What's the equivalent hourly rate when I was a salaried employee? What are my peers charging?

I've been able to continuously raise my rates over the years ($50 -> $250+/hr) by getting better at understanding the business problem at the root of a project request (i.e. they don't "want a new website designed", they really just want more walk-in customers) and tailoring my proposal, discussions, and execution toward that end.

As long as you can position yourself as an investment instead of an expense, and wield your technical + business skills to make your client's business better off than they were before hiring you, your ceiling is whenever the project cost outweighs the potential payoff.

(FYI, I wrote a book on this: http://doubleyourfreelancingrate.com)

In nations that are more work-centric (eg. the US) the possible billable hours will be nontrivially higher and thus the hourly rate will be significantly lower.

For instance, I know people who get only 10 days off per year minus holidays, meaning that they take a maximum of 10 days per year total. This also entails working ~8 Saturdays per year, which comes out to roughly 1850 hours per year.

It seems as though this type of calculation will vary widely based on location.

Love to hear if there are tips out there for the sales pitch when doing these kinds of bids...

But I will bring up a neglected point, which is that this formula assumes that all employees hours are equal, or at least indistinguishable enough that you can take an average, and completely ignores the idea of leverage in professional services. Leverage is how you make a professional services firm a profitable, growing business, and not just a series of contractors that you farm out.

To start thinking about leverage, you need to realize that not all of your employees are the same, so a globally blended rate doesn't make sense. Some of them are junior level employees who are smart and capable, but still learning the ropes. They benefit from your firm's intellectual property, so they're able to add value greater than their salary would indicate. At the top, you have the firm's principals or partners, who tend to have less time to spend doing work, because they're busy trying to market the firm and win new business. So even though their rate may be higher, it's spread across fewer hours. In the middle are either technical experts or managers who are able to command a higher rate, and can mentor others, but aren't quite ready to bring in new business on their own.

As your employees learn and become capable of better work, they also become more valuable to you, which means you should pay them more, which means their rates should go up accordingly. But now you need them to do more valuable work, so you also need to find new junior people to replace them. This is how you help your employees grow, and it's how you help your firm grow.

Your firm's profitability comes from the fact that you can charge greater than an employees costs to your clients. That's the basic idea behind a services business, otherwise you're all just independent contractors. So your source of profits is the amount you charge on top of your employee costs, and that could vary by level.

The number of people at each level, and the amount you charge for them, depends on the nature of your work and your firm. Figuring out the rate balance and the right growth rate is one of the most important parts of managing your firm (probably second to creating a great culture, although the two are related).

The reason that the firm in the article is able to raise more revenue by raising prices is because they've been undervaluing their own work this whole time. Once the price starts to better reflect value, the way you grow is by sustainably hiring in new people and growing them with the firm - the price mechanism is money that's currently being left on the table, it's not a growth mechanism.