Strategies For Billing For Your Services
I work with talented people all the time – graphic designers, coders, videographers, writers, and so on. I always love to see when one of them makes the leap from W2 employee to independent entrepreneur. Where some freelancers get hung up is the question of billing for their services.
It’s common for skilled employees to realize they can make more money and take greater control of their own destiny by going into business for themselves. The life of a “solopreneur” can look really appealing if you have grown tired of being an hourly employee. The call of greater income potential is hard to resist. But that doesn’t mean it’s an easy way to live.
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The Questions That Guide Your Billing
If you have always been a payroll employee of someone else’s company, the transition to billing for your own time can be confusing. There are a couple of important questions that you have to ask:
- How much do I want to earn this year?
- How much do I need to charge for every billable hour to reach that level?
- What rate is the market willing to pay for my services?
The first two questions work together to set your rate, and the third is a kind of a counter-balance that keeps you from billing a million dollars per hour. Because if you’re like me, you’d probably like to.
The Formula Behind Your Hourly Rate
Even the smallest solo venture needs to think about the Seven Pillars of a Successful Business. Among these are cash flow and operations. I have found this formula to be a simple and clean way for freelancers to calculate hourly rates. For every dollar that comes into your business:
- 40 cents gets set aside for taxes and fees
- 30 cents covers your employees and other overhead
- 10 cents rolls back into marketing
- 20 cents is what you get to keep
Now, if you’re a single-shingle working out of your home with no employees, your overhead costs are going to be much lower than a business owner with a team and a storefront. You can adjust the percentages to your advantage. But as a rule of thumb, these are good numbers to keep in mind. If your payroll is creeping up toward 40 or even 50 percent, you have some inefficiencies in your business that you will need to address.
The faster someone can do a job (without having to redo it) the more you can afford to pay them per hour. If you are paying a high hourly rate for someone who takes a long time to get things done, you’re looking at a need either to coach that person or to replace them.
Billing Based On Your Personal Target Income
Let’s do some quick math. Say you want to take home $80,000 this year. Using our formula, you can estimate that you will need to generate $320,000 in revenue this year. If you have no employees, then you can ratchet up your take-home. Of course, you could ratchet down your revenue projection, but why on earth would you do that? I’m joking…a little. If I knew I could generate $320,000 a year, the only reason I would choose to reduce that goal is that I project that the time and effort required to achieve it is a bad trade for quality of life. Then I would adjust my goals down to meet what I am willing to do to achieve it.
This is where the third question comes in. If I determine that I need to charge $300 per hour to finance my desired lifestyle, I have to know for certain that the market is able to sustain that rate. Clients in Chicago might be more willing to pay $300 per hour than clients in Beaver Dam, Wisconsin, for the same service. And an attorney can charge $300 per hour in most markets, whereas an accountant usually can’t.
A videographer in Pella, IA might determine that he needs to bill $200 per hour to reach his desired income, but all the other videographers in town share between $75 and $125 per hour. He has a choice to make: he either needs to reduce his hourly rate or add enough value to his offering to make it worth twice what his competitors charge.
How To Price Yourself For The Market
Here’s a good rule of thumb if you find yourself in a situation like this:
If you can’t offer the lowest-price in town, don’t waste your time competing for second-lowest.
You won’t take the business away from the lowest-price guy and you’ll destroy your margin in the process. Find a way to increase the value you bring and compete for the top-priced slot.
One of my friends came onto the team as a writer, but he also produces my podcast, and for awhile was managing our social media and some graphic design. As a writer, his hourly rate is a little higher than average, but as a “triple-threat” (a guy with three valuable skill sets), it’s a steal. Look for ways to bring extra value.
Another thing he did that I really liked is that he negotiates a flat monthly fee for his work. It’s like a subscription for his talent. Some months, he puts in a bunch of extra work, and some months there isn’t as much, but my cost stays the same, so it all averages out. If you can make a subscription model work for you, I encourage you to look into. Read the book “Automatic Customer” and see if you can’t come up with a way to turn your services into a subscription model. You’re welcome.
We Can Help Your Optimize Your Billing
I realize that, unless you make your living as a freelance bookkeeper, the number side of entrepreneurship can be challenging – even overwhelming. In full disclosure, I’m not a CFO, or even a bookkeeper. I can’t give financial advice on any level. But I do have numbers people on my team, and I’ll be happy to connect you with them.
One of the things we do for our clients is an audit of your systems, personnel, and cash flow. We can help you optimize your operations, reduce your costs, and structure your business so it can scale. Click here to schedule a free “fit call” with our team, so we can get a sense of where you are and where you want to go. Then we can see if it would be a good fit for us to work together.
In the meantime, make sure you’re getting our weekly podcast, “Messes To Successes,” where we cover topics like this in greater depth. And join our fast-growing network of entrepreneurs on Facebook or LinkedIn. I look forward to meeting you there.