Figuring out what to charge for your services when you’re self-employed can feel like navigating a maze. It’s not just about picking a number for an hourly rate; it’s about understanding the many costs that come with being your own boss, such as taxes, transportation, and other operational expenses like specialized tools or software.
You need to ensure that your prices are competitive, but you must also make sure you receive proper compensation for your expertise and the quality of your work. Your set rate directly influences your livelihood and your business growth potential.
In this guide, we will dive deep into the complexities of setting your hourly rate. We’ll guide you through a detailed five-step method to decide on a rate that accurately represents your value and covers your costs. Additionally, to ensure you’re on the right track, we’ll point out some common mistakes to avoid. Let’s get started!
How to Determine Your Hourly Rate as a Self-Employed Professional
As a self-employed individual, setting your own rates can be challenging. You need to find the perfect balance that covers both your personal and business expenses while setting a competitive price that mirrors the quality of your services. However, determining this crucial number is essential for your business’s success and sustainability.
Understanding the Marketplace and Your Worth
It’s tempting to look at the rates your competitors are charging and base your prices on that. But remember, while some might offer their services for a surprisingly low fee, this doesn’t necessarily reflect the quality of their work. Being competitively priced doesn’t mean being the cheapest. It’s about offering value for the services you provide.
A few realities to keep in mind:
- Pricing Expectations: Some clients will always expect discounts or lower prices, irrespective of the quality you deliver.
- Undervaluation: Setting your rates solely based on competitors might result in you undervaluing your services.
- The Exposure Trap: Promises of exposure or future referrals rarely pay off. Be wary of offering discounted or free services in exchange for such promises.
- Client Awareness: Recognize that some clients will never be fully satisfied with your rates. Aim to deliver excellent service, but don’t compromise on your worth.
Read Next: How Do I File A Self Assessment Tax Return?
Common Mistakes in Setting Your Hourly Rate
Many newbies commonly base their rates on their desired salary or the industry’s average. However, you should set an hourly rate that considers more than just your desired income. As a business owner, you should ensure your rate covers not only your personal expenses but also your business costs, including taxes, tools, software, and other operational expenses.
A Step-by-Step Guide to Determining Your Rate
- Personal Expenses: Start by listing all your monthly personal expenses – rent or mortgage, groceries, utilities, entertainment, etc. For our example, we’ll consider an annual personal expense of £25,000.
- Business Overheads: List out all the expected costs associated with running your business. This might include marketing, software subscriptions, office rent, utilities, and any other recurring costs. Let’s estimate this at £10,000 annually.
- Total Annual Expenses: Add your personal and business expenses. In our case, this amounts to £35,000 annually.
- Calculate Working Days: Factor in weekends, bank holidays, sick days, and any vacations you intend to take. From a year (365 days), this leaves us with 219 working days, considering 146 days as non-working.
- Determine Billable Hours: Decide the number of hours you intend to work daily. Assuming an 8-hour workday, this gives 1,752 billable hours annually (219 days x 8 hours/day).
- The Final Calculation: Now, to find your hourly rate, divide your total annual expenses by your billable hours. For our example, the rate would be roughly £19.98 per hour (35,000 ÷ 1,752).
Don’t just think of your hourly rate as a number; recognize the value you offer to your clients. While staying competitive is crucial, make sure you don’t undervalue your skills and services. If crunching numbers isn’t your strength, reach out to professionals who can help you set a rate that’s both competitive and profitable. Always be open to expert advice, especially if it can impact your business’s sustainability.