You could be. In fact, you probably are, and there is nothing wrong with that, as long as it is intentional. I’m down with investing my time, but I’d rather surf or nuzzle my wife than work for free. I’m sure you can all relate.
Let me share how this article came to be. I was about to write a carefully crafted argument on how tracking your time directly affects your income. Then I realized the dialog I just finished with my friend on IM says it better than any argument I might make. I asked for permission to post our chat, she reviewed, sealed, stamped and delivered.
So, to set the stage, we were gabbing along about life drama and all and suddenly, mid conversation, she pulled a little IM judo and slipped in some business:
Friend: is $2800 US too cheap for something like xxxxxxxxx.com?
Shane: all from scratch?
Friend: yep
Shane: how long did it take you start to finish
Friend: full time? I don’t know.
Shane: do you clock?
Friend: no
Shane: hmm … start clocking, it will help you define your rate
Friend: I usually work on a couple of different things at once
thought: aren’t women amazing. I tend to trip when I think. still, thats not a good enough excuse
Shane: I understand. When, I first started clocking, I realized I sometimes worked for less than $12/hr. Start clocking.
Friend: but, I tend to work on packages / fixed bid projects
Shane: I know how you feel. I felt that same way. I found that clocking turned my whole business around. It might be awkward but figure it out. Trust me, you need to, or you end up working for free
thought: hmmm maybe I should shut up and ask her for a few fixed bids …
Friend: LOL – is that a hint?
Shane: I can’t tell you if the work you did was too cheap unless I know truly how long it took, nor can you
Friend: well, it took about a month, but that was in bursts of time
Shane: so if you had to guess? how many real hours, design, code, planning, meetings, QA, the whole thing
Friend: probably about… 100-120, thats a rough guess
Shane: you do the math
Friend: do you think that it would be unreasonable to charge $3500?
Shane: seriously, you need to do the math
The conversation went on for a while. The point. If you don’t know how much time a project takes, how do you know what to charge? I don’t mean how much time you spent coding or designing. I mean the whole package. Once you have begun clocking, figure out your true hourly rate. Once you have that, you will either be pleased or, if you were like me, absolutely horrified. It’s sad when the kid at the local in-and-out burger has a higher hourly rate than you do.
How to Set Your Rate
Once the nausea passed, I realized I absolutely couldn’t keep doing the same thing. In my quest for guidance I was offered very valuable advice: work it out backwards. Instead of asking what will the market offer, I asked myself how much money do I really need to live, and what do I need to save to make progress towards my life goals. These formed i) my baseline target and then ii) my I-don’t-know-how-I’m-going-to-do-this-but-it-would-be-amazing-if-I-made-this goal. Just to let you know. Since the day I did that, I’ve overshot every it-would-be-amazing goal to date.
- I start with what I’d like to take home after taxes when it’s all said and done. I figured that out by reviewing our family expenses and then setting a goal for savings. For a long time early on my goal was a true take home of $5000/month.
- Then I figure out what profit represents pre-tax. Since that is about a 25% taxrate in California, we are talking $6250/month.
- Next I look at my expense basis (or guess) and tack that on to figure out my gross. I had few expenses early on -Â for the sake of easy math, let’s say for now $750/month (computer, software…), which brings us to $7000/month.
- With my gross revenue dollar figured, it’s then a matter of division. Figure out how many hours are you willing to put into your business and then subtract how much of your time is non-billable. When I was truly a one-man shop, I found that my time was 60% billable. I did manage to improve it up to 75% once I became aware of how high my non-billable time was. So, if I was working 50 hours per week on average (some way higher, some lower), then my billable time was 37.5 hours at 4 weeks = 150 hours. 7000/month devided by 150 hours = $46.67/hr.
- Once I had a rate to focus on, the next questions I had – what are my pivot points? Where can I improve the odds? With some experience and advice I began to work on tweaking my i) billable hours ratio ii) rate iii) taxes & expenses. I play with those consistently to this day. That’s what real business owners do.
Trust me, this is the most profitable little piece of math you’ll ever take the time to do. It pays really well to count your pennies and your minutes. For a nice little summary of other factors that you will eventually need to consider when setting your rate, check out Cyan’s post on FSw: nine factors to consider when determining your price.
Once you know what rate you need to make, then start asking yourself: what need is out there that I can fill and people will pay for? But that is a different article.