How to calculate your hourly rate

I've also done it by working backwards. This can be useful particularly in smaller consulting firms. Say you have three tech guys who want to start consulting, you start by saying how much do you want to make each year? How many hours do you want to work a week? Then how many people do you want to hire to help? How much would you have to pay them? From this you have some variables you can tweak to see what various numbers of subordinates and various annual salaries get you as an hourly rate.

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 of the product you are selling. In fact a customer does not care what it costs for you to deliver a product or service. You could be delivering a product that is made of diamonds and unicorn horns. It doesn't matter.

What matters is the value of your product or service to the customer. Your job, as a business owner, is to set your price based on the customer, not based on your costs.

Set your price based on the value that you deliver. Then adjust the inputs (hours of worker time, etc.) until you can deliver the value at that price. Mercedes Benz adjusts the inputs for a C-class car until it hits the target price. It adjusts the inputs differently for an E-class or S-class car.

There is a lot of information out there in the wide world about this. It is not "fixed pricing." Call it "value pricing." Fixed pricing is just computing the cost of your inputs, adding a margin, and declaring a price. Value pricing is a matter of working backwards from the customer's value desires to set the price.

For you math people, this is an "area beneath the curve" problem.

I'm an international tax lawyer. I make far more money (and have happier customers) when I charge a declared price than when I bill by the hour.

All that being said, one of the points in the article is exactly right: raise your prices and you will get better quality customers.

Go see www.verasage.com as a jumping-off point for discussions of pricing in professional service firms. All business are alike. Don't think that advice to an accounting firm is inapplicable to you. It's not. It's all "delivery of a service to a human being in exchange for money".

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.

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 be directly tied back to increased revenue.

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. Are you going to charge them nothing?

Rates are a proxy for value that accounts at least in part for the risk of project failure. High-risk individuals might account for this by trading equity for hourly rate or accepting some other form of in-kind compensation, as many startup employees do. But you have to be a strong believer in the project in order to do so, and most freelancers, to put it bluntly, aren't. Otherwise they'd be employees.

Nonetheless, don't start at the bottom by calculating costs. There's a market value for your services in the area where you live. If you can, start by asking other freelancers and consulting firms. The value of a good is what people will pay to get it, not what it costs to make.

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 napkin for a minute or two and hands it to the man, the man asks 'Thats great, how much?' Picasso replies '$5,000', astounded the man says, 'but it only took you a few minutes! I'm not paying that much!', Picasso says 'Yes, but it took me decades to be able to do that in a few minutes, you're paying for the decades of experience, and in decades to come, that drawing will be worth a lot more.'".

My point being that you shouldnt be leasing your time, you should be providing $100k worth of value and charging $20k for it, regardless of how long it takes.

And if i'm the customer and i know that you can provide $100k of value to my company, then i'll happily pay you $20k to do it.