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How to calculate your hourly rate

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Re: How to calculate your hourly rate

#31

Post by ams6110 »

rwhitman wrote: post #25
TamDenholm wrote: post #10

Like others have mentioned, charge by the value you provide. I know a few parables that illustrate my point that i often tell people, this is one, excuse my terrible paraphrasing. "Guy walks along and sees Pablo Picasso chilling in a cafe watching the world go by, the man goes up to him and asks, 'Wow nice to meet you, can you draw me a sketch on this napkin? I'll pay you for your time!' Picasso scribbles on the napk…

In my experience its been much easier to pitch clients by quoting an hourly rate, every time I've tried to do a project rate it falls flat. I can't tell if its sticker shock or my presentation of the value isn't very good. Love to hear if there are tips out there for the sales pitch when doing these kinds of bids...

What kind of projects?

Re: How to calculate your hourly rate

#32

Post by rm445 »

juanpdelat wrote: post #5

Please correct me if I'm wrong. So, in order to make the same $75k/year the employee makes in the example, the manager would have to hire around 6 employees with the same structure and have at least 6 projects per year.

In practice the manager/director is billable at a higher rate and has some hours on every project, if only reviewing the work.

But you're right in the general case, that a company whose income is from billed hours needs to bill enough to cover the whole company.

Re: How to calculate your hourly rate

#33

Post by baddox »

SilasX wrote: post #19
baddox wrote: post #18

Earlier quoted context omitted.

> Your job, as a business owner, is to set your price based on the customer, not based on your costs. That's true, but customers will consider your costs when deciding what price they think is fair for them to pay, so neither metric is isolated from the other.

I think you just obviated about 200 years of economics debate. I don't mean to sound trite, but that's basically a resolution of the whole debate between the subjectivist/marginalists and the "labor theory of value"/"cost the limit of price" camp.

I'm not an expert in the history of economics, but I don't see how anything I said is controversial or obviates any debates. I find it hard to believe that any economists think that consumers do not consider these things when deciding what prices they believe are fair.

Re: How to calculate your hourly rate

#34

Post by DougWebb »

_delirium wrote: post #22
runako wrote: post #15

Earlier quoted context omitted.

> But what if you end up working on a product for a company that never makes them any money at all? You haven't provided any direct business value, although you may have done quite a lot of work--maybe months or years. If you're being paid to do work (you're not working for free) in this situation, you can conclude that either a) you actually are providing roughly $YOUR_BILLINGS of value to your client or b) your cli…

> but your client certainly is aware of the value you're bringing In a small company, probably, but in Enterprise contracting, I would be surprised if this is usually true.

I would say small companies aren't aware of the value either. If they're small and hiring software development contractors, they probably don't know enough about software development to do the work themselves, which means they have no basis for determining what software is worth. They probably also don't have the skills/metrics in place for determining ROI for individual aspects of their business. They just look at cash flow in and out, and from that standpoint all they see for the contractor is a definite and precise cost with a vague notion of some value.

Re: How to calculate your hourly rate

#35

Post by tome »

jacquesm wrote: post #30
philiphodgen wrote: post #4

Note the inherent flaw in "by the hour" billing: if you want to increase your income you either must work more hours or raise your rates. In other words, hourly billing guarantees a built-in cap to your annual income. You have a maximum, but no minimum income. This is a world that I do not want to live in: a voluntary upper limit on my achievements. Hourly billing is a method of setting prices by looking at the cost…

> In other words, hourly billing guarantees a built-in cap to your annual income. In practice that cap works out to a hard ceiling of 350K. Which is pretty good considering you need to feed only one family of it.

What are you saying? That no one can charge more than $1k per day? Why?

Re: How to calculate your hourly rate

#36

Post by runako »

_delirium wrote: post #22
runako wrote: post #15

Earlier quoted context omitted.

> But what if you end up working on a product for a company that never makes them any money at all? You haven't provided any direct business value, although you may have done quite a lot of work--maybe months or years. If you're being paid to do work (you're not working for free) in this situation, you can conclude that either a) you actually are providing roughly $YOUR_BILLINGS of value to your client or b) your cli…

> but your client certainly is aware of the value you're bringing In a small company, probably, but in Enterprise contracting, I would be surprised if this is usually true.

Your point is fair, but they know order of magnitude. They know you're (likely) not bringing $10B annually of value, and they know it's more than your current billing rate (or they wouldn't waste time with you). The point is to talk with the client and try to pin the number down to bring your rate closer to the value.

Somebody in the enterprise is responsible for ensuring that projects aren't run without any expectation of creating value; that's the person/group to talk to. If you're not talking to that person/group, then you're right that value-based pricing is going to be hard/impossible to pull off.

If the buyer doesn't have any idea how much value you can/are creating, then your first task is to help them quantify the value (this is good for them no matter who they hire).

Re: How to calculate your hourly rate

#37

Post by SilasX »

baddox wrote: post #33
SilasX wrote: post #19

Earlier quoted context omitted.

I think you just obviated about 200 years of economics debate. I don't mean to sound trite, but that's basically a resolution of the whole debate between the subjectivist/marginalists and the "labor theory of value"/"cost the limit of price" camp.

I'm not an expert in the history of economics, but I don't see how anything I said is controversial or obviates any debates. I find it hard to believe that any economists think that consumers do not consider these things when deciding what prices they believe are fair.

I don't claim you were the first to come up with that resolution, but it's an insight without which the two camps were effectively talking past each other, unable to identify where the real disagreement was.

Re: How to calculate your hourly rate

#38

Post by tome »

artumi-richard wrote: post #6

The rule of thumb I was told is 1000 billed hours per year. If you want to earn £40k, and are billing by the hour, charge £40 per hour. That gives you the room to be flexible. The original article adds extra in as they have a different structure, but they start with $75k and year and end up with $85 an hour. Which seems to me to be close enough. I used it when I started by company. I think it was good advice.

One thousand billable hours per year seems reasonable, but if you want to earn equivalently to someone who's on a £40k salary you should aim for substantially higher than £40k of revenue.

Re: How to calculate your hourly rate

#39

Post by ams6110 »

DougWebb wrote: post #34
_delirium wrote: post #22

Earlier quoted context omitted.

> but your client certainly is aware of the value you're bringing In a small company, probably, but in Enterprise contracting, I would be surprised if this is usually true.

I would say small companies aren't aware of the value either. If they're small and hiring software development contractors, they probably don't know enough about software development to do the work themselves, which means they have no basis for determining what software is worth. They probably also don't have the skills/metrics in place for determining ROI for individual aspects of their business. They just look at c…

So you are right, mostly. If you're going to sell yourself on "value" to such a company, you're going to have to spend some time understanding what problem they need to solve, and help them determine what value that provides.

If they can't or won't look past an hourly rate, then you probably don't want to work for them, because their other expectations may be equally as baseless.

Re: How to calculate your hourly rate

#40

Post by pnathan »

One thing I always wonder is how to break into the consulting business.

The earning potential looks considerably above the salary employee potential. My current skills & expertise are very much "backend", and I don't have networking connections with people who could offer significant amounts of cash for the solutions I could offer. (Put another way, I only know very small business owners, as they are the dominant employer in the area).

It seems as if the best way in is to get hired at a consulting firm and really understand how tech can drive business value. Am I off?

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