How to calculate your hourly rate • Hacker News Board

Re: How to calculate your hourly rate

#41

Post by jacquesm » Thu, Feb 28, 2013, 7:44 PM UTC

tome wrote: post #35

jacquesm wrote: post #30

Earlier quoted context omitted.

> 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?

What it means is that for normal IT consultants that work 'normal hours' if you are paid by the hour that is roughly what it works out to. 1000 hours at 350 / hour or thereabouts. Sure there are some gods that can charge more than that but for mere mortals this seems to be roughly the cap.

Sure you can charge more than $1k / day. It's just that at that rate you'll find it hard to book 350 days / year. Billable days are anywhere from 125 to 200 / year depending on your rate, reputation and skillset. If you bill $2k/day (definitely doable) you'll find that it gets harder to book all your days, it's simply demand and supply. Elsewhere in this thread someone is charging $800 / hour, which is great, you would only have to work a very small number of hours at that rate to have a living, or you could work a much larger number of hours and save like crazy. But I don't see that as the norm for IT consultants, programmers (Ruby, PHP, Java that sort of thing: $80 to $150 / hour, clojure and other 'exotic' stuff $120 to $250 / hour, M&A work $300 to $500 / hour but that is definitely not the kind of work that you could reasonably speaking book a whole years worth of unless you are the pet of some VC and involved in every deal in the pipeline).

Re: How to calculate your hourly rate

#42

Post by jacquesm » Thu, Feb 28, 2013, 7:45 PM UTC

philiphodgen wrote: post #13

makalumhenders wrote: post #7

Earlier quoted context omitted.

Philip, if you can raise your rates, then how is there a maximum income? We raised our rates until supply balanced demand.

I have raised my rates again and again and I am still overworked. (Full disclosure: currently I am $800/hour). The difference is that now I am working on much bigger deals for people who appreciate my value. I cannot tell you how important this is to my general sense of happiness.

How many hours do you book at $800 / hour?

Re: How to calculate your hourly rate

#43

Post by philiphodgen » Thu, Feb 28, 2013, 7:52 PM UTC

jacquesm wrote: post #42

philiphodgen wrote: post #13

Earlier quoted context omitted.

I have raised my rates again and again and I am still overworked. (Full disclosure: currently I am $800/hour). The difference is that now I am working on much bigger deals for people who appreciate my value. I cannot tell you how important this is to my general sense of happiness.

How many hours do you book at $800 / hour?

Not too damn many, because of the pressing needs of running a business. If I can hit 100/month I am doing well.

Re: How to calculate your hourly rate

#44

Post by jacquesm » Thu, Feb 28, 2013, 7:59 PM UTC

philiphodgen wrote: post #43

jacquesm wrote: post #42

Earlier quoted context omitted.

How many hours do you book at $800 / hour?

Not too damn many, because of the pressing needs of running a business. If I can hit 100/month I am doing well.

That's still pretty damn good! Congratulations!

Re: How to calculate your hourly rate

#45

Post by ahoyhere » Thu, Feb 28, 2013, 8:28 PM UTC

bguthrie wrote: post #8

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…

Measuring value in software development is difficult. If you can tie your activities directly to either higher revenue or lower cost, that's great. As an international tax lawyer, I'd think you have a relatively straightforward way to demonstrate value: it's proportional to the money your clients save on their taxes. patio11 has the same advantage: consulting time spent optimizing conversions through A/B testing can…

"But what if you end up working on a product for a company that never makes them any money at all?"

This isn't something that happens to you, this is something you choose. It's your responsibility as a consultant to pick your clients carefully.

If you're talking about a project that everyone expects to have an enormous upside, but doesn't, and it's not your fault, you base your rates from the outset on the client's expectation of value returned, not what the actual result is.

Re: How to calculate your hourly rate

#46

Post by grey-area » Thu, Feb 28, 2013, 8:30 PM UTC

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…

As a customer, I can look up the price of a C-class, but how can I judge the value? I do it mostly by comparing with other cars available, and what they can do, but what was the price of the other cars based on? And what is the value anyway? How fast it goes, how it makes me look to others, how big the luggage compartment is? There is no one true objective value.

I'd argue the reason your customers are happier with a fixed price is not to do with value (after all, what is value - can a customer tell you?), but to do with predictable expenditure and risk. It's a good policy and popular with clients (and also helps to make scope very clear and costed), but it's popular with customers because it gives you a very good incentive to finish on time and on budget, as compared to hourly billing. I'm not sure that's really comparable to shopping for a car.

Re: How to calculate your hourly rate

#47

Post by polymatter » Thu, Feb 28, 2013, 8:41 PM UTC

grey-area wrote: post #46

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…

As a customer, I can look up the price of a C-class, but how can I judge the value? I do it mostly by comparing with other cars available, and what they can do, but what was the price of the other cars based on? And what is the value anyway? How fast it goes, how it makes me look to others, how big the luggage compartment is? There is no one true objective value. I'd argue the reason your customers are happier with a…

A lot of the value in a car is the social signalling it represents. Which is (in a curiously recursive fashion) largely determined by its price.

Re: How to calculate your hourly rate

#48

Post by rwhitman » Thu, Feb 28, 2013, 9:01 PM UTC

ams6110 wrote: post #31

rwhitman wrote: post #25

Earlier quoted context omitted.

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?

Usually web development, sometimes design + dev

Re: How to calculate your hourly rate

#49

Post by scarecrowbob » Thu, Feb 28, 2013, 9:03 PM UTC

pnathan wrote: post #40

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 emp…

Personally, I just found built up some savings to give myself a runway, found two small-ish but workable projects/clients, and quit my job...

It was a bit easier because I was not making a lot at the job anyhow-- I basically had to sell one small project a month to replace the income on the job (maybe 3 or 4 days of work), but after that I simply tried to be nice to folks, super available, and really knowledgable. Your situation may be different.

It doesn't hurt that I'm 90mi outside of Austin, so there are a) no jobs here to tempt me, and b) a whole lot of possible work within a small drive.

But I also have to have a lot more going on than just my specific tool chain of computer skills-- I have to do a lot of business strategy and networking things, even if that usually just means eating lunch with folks I've worked with just to keep in touch.

Re: How to calculate your hourly rate

#50

Post by DougWebb » Thu, Feb 28, 2013, 10:44 PM UTC

dworin wrote: post #27

Enough people have pointed out the importance of value pricing over hourly billing that I don't have anything to add there. 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…

My father-in-law and I had a discussion about this in relation to my company, which charges different rates for a few different roles on our projects. We've had trouble with this as people shift from project to project or work is shifted from one role to another (eg: junior to senior developer) which changes the amount of time available for the fixed budget we had planned. I was interested in his input since he has a lot of experience running large Enterprise departments.

He told me that he had tried different approaches over the years, and the best approach was to charge the maximum rate for all roles on the project. The working assumption is that senior workers will tend to do the work faster and on their own, but junior developers will require oversight from senior developers. That justifies the higher rate for juniors; it offsets the time that seniors have to spend mentoring them, which also ensures that the same quality of work is produced whether it's done by a senior or junior.

Charging the same rate for everyone greatly simplifies budgeting, especially if some parts of the project turn out to be over-estimated while others were under-estimated when the initial budget is put together. If all hours are the same price, you can shift them freely where they're needed as reality starts to beat up your plan. When hours have different prices, it's a lot more complicated to do that.