Hacker News Board Hacker News, browsed like a classic message board
Live data from Hacker News

How to calculate your hourly rate

makaluinc.com

Post reply on HN
Print view View original

11–20 of 66 posts

Re: How to calculate your hourly rate

#11

Post by makalumhenders »

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…

Tam, it's not easy to determine value. Are you going to charge for the value you might deliver, or the value you actually deliver? How will you determine the value you actually deliver? It's a tricky issue, I admit. But keep in mind that IDEO, having studied this issue hard, ultimately settled on charging by the hour.

Re: How to calculate your hourly rate

#12

Post by philiphodgen »

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…

The value to my clients comes in two forms: (1) amount of tax saved and (2) stress and fear eliminated.

The first is easy to quantify. It also means there is an upper cap on your income. The upper cap is the amount of tax saved. As your price approaches that number, the likelihood of a "yes" decreases.

Do not set your pricing based on easily quantifiable criteria, unless you're working on huge deals where you can take a small fraction of the value as compensation. (By small I mean low single digit percentages).

The second is where the true value sits. People are willing to exchange money for a peaceful brain. People are willing to exchange money in exchange for more time in their lives. It is here that personal value choice discontinuities work in your favor. Set your pricing based on intangibles.

A business owner is willing to throw money at a problem to not have to think about the problem at all. This frees up the owner's brain to think about stuff that really matters and will make money.

An hour spent by a CEO looking at tax returns could be an hour taken away from making a deal that brings in $1 million for the company. It's worth spending $1,000 to make the problem go away. You are happy to take the $1,000 because it takes you $125 of time input to solve that problem.

I have seen this with very large companies. There is a reason why their compensation packages include "your employer will pay for a lawyer, accountant, and personal financial planner." You don't want an executive with 10,000 employees under him/her to be sweating credit card payments, or "Is my will up to date?" or any trivia like that.

Moreso, however, I see this with entrepreneur-driven companies. The owner is the manager and this person's time is incredibly valuable and should not be spent on trivia, especially emotion-laden trivia.

Re: How to calculate your hourly rate

#13

Post by philiphodgen »

makalumhenders wrote: post #7
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…

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.

Re: How to calculate your hourly rate

#14

Post by ghaff »

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…

Charging for value is a nice idea. How practical it is depends on a lot of things including how predictable the outcomes are and what the standard practice is. And, as your parable suggests, if you do bill by the hour/day, your rates are going to have to reflect (assuming you want to make a decent living and stay in the business) what percentage of your time can realistically be billable.

When I was doing IT advisory work for vendors, a fairly small percentage of my time was spent doing direct billable work for clients over and above annual subscriptions many of them paid us. The rest of the time was spent researching, being briefed by companies, talking to journalists, writing, etc. When we did do a specific project (for which we generally charged for a deliverable--although that deliverable could be a day of advisory work), we charged what would seem to most people a really high hourly rate because we had to capture all the non-billabel time (and, of course, because our rates were in line with industry norms for this type of work and companies apparently felt we delivered sufficient value to capture those rates).

By contrast, I did some legal work as well and for that was paid on an hourly basis at a much lower rate. But, because it was a big block of work and I could charge for any time related to the project--including travel, background reading, etc.--it was pretty good work.

Re: How to calculate your hourly rate

#15

Post by runako »

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? 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 client is a moron and is paying for zero value. You may not be able to directly quantify the value you're providing, but your client certainly is aware of the value you're bringing. The point is to try to more accurately quantify your value and capture more of it.

> Measuring value in software development is difficult.

Again, your client has a ballpark of what value they expect you to deliver. Measuring the value is difficult for the contractor. This is a great area for discussion with the client.

Summary: if you're being paid, your client perceives that you are providing business value.

Re: How to calculate your hourly rate

#17

Post by joedev »

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…

Will you happily pay $20k if you know that someone else, billing by the hour for the same quality of work, will cost you $10k?

Re: How to calculate your hourly rate

#18

Post by baddox »

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…

> 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.

Re: How to calculate your hourly rate

#19

Post by SilasX »

baddox wrote: post #18
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…

> 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.

Re: How to calculate your hourly rate

#20

Post by SilasX »

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…

Great point, but in the analogy the drawing probably still looked like crap ...
Post reply on HN