Are you trying to figure out how to calculate your hourly rate as you figure out how to price your services as a freelancer, consultant or coach?
Most likely, you’ve given little thought to your hourly rate because you’ve been paid a salary for most of your career!
Beyond understanding how much to charge your clients, your hourly rate also helps you:
- Prioritize your limited time by assigning a financial value to every hour of your workday.
- Identify the true financial value of all the tasks required to run your business, so you can free up more of your time by automating or delegating lower-cost tasks.
- Appreciate the value of your expertise and not just the value of your time.
You’ll never treat your time the same way again once you calculate your hourly rate!
Basic Hourly Rate Calculation
Let’s get you started with a simple calculation by figuring out your current hourly rate or from your most recent salaried job.
Your Monthly Salary (after taxes) / Hours Worked Each Week (average) =
Your Hourly Rate
If you want to start thinking like a true solopreneur, our calculation isn’t quite done!
From your monthly salary, subtract all expenses that enabled you to do your work like:
- transportation (gas for car or fare for bus, subway or train)
- home WiFi (estimated usage when you work from home)
- office clothes
- eating lunch out
- memberships to associations
- subscriptions to trade websites
If you’ve been working from home during the pandemic, I’m sure you noticed a drop in some of your expenses!
For your average number of hours worked each week, include time spent working outside of normal work hours and activities to support your work:
- working outside of office hours at night and on weekends
- networking and happy hours
- professional development
- even thinking about work!
Now let’s calculate your more accurate hourly rate with this additional information:
(Your Monthly Salary – Expenses) / (Offices Hours + Outside Office Work) =
Your Hourly Rate
What happened to your hourly rate?
Went down, right?
When you start working for yourself, how much money you make each year matters less than your hourly rate.
Your hourly rate helps you prioritize your time, tasks and intentions to help you work more efficiently.
Calculate Your Lifestyle Cost
How much money do you need to live your ideal lifestyle? Not sure?
As employees, we are taught to ask for higher and higher salaries as a symbol of our advancement and experience.
As a solopreneur, you can reverse engineer your income by calculating how much you really need to earn based on your desire lifestyle needs.
Once you understand how much you really need to earn, then you can calculate how much you really need to work to earn your desire income!
Our Lifestyle Calculator not only includes the cost of your lifestyle needs, but it also includes your business and tax expenses, so you can calculate a more accurate hourly rate.
When you work for yourself, you’ll be paying your taxes on a quarterly basis based on your estimated income. Our accountant Luke Frye recommends putting aside 30% of your revenue to have enough money to pay your income taxes.
Calculate Your Solopreneur Hourly Rate
Using our Lifestyle Calculator, you’ll be able to calculate how much more per hour you will be paid as a solopreneur compared to your current hourly rate as an employee.
To find out how much more you can get paid, on the first sheet of the Lifestyle Calculator, scroll down to the section “How Much Do I Need to Earn That?”
It will look like this:
To calculate your solopreneur hourly rate:
#1 Put your current hourly rate into the field to the right of “Deliverable Hourly Rate”.
#2 Then put your years of experience into the field to the right of “Years of Experience”.
#3 Your “Total Hourly Rate” will then be automatically calculated.
In the fields below your Total Hourly Rate, you can see how much time you need to put in to earn your desired income.
If you’re calculating your hourly rate for the first time as a freelancer, consultant or coach, you will most likely undervalue your service.
We’ve designed our Lifestyle Calculator to compensate you for your experience and effort.
To compensate for your experience, we use a broad market rate of a 1% boost per year for each year of experience you have gained.
For example, if you have 3 years of experience in the service you want to provide, your hourly rate would be increased by 3%.
To compensate for your effort, we apply a 75% increase to your hourly rate to account for all the other work you do to keep your business running outside of the actual delivery of your service.
First-time solopreneurs often think of their “hourly rate” as the rate they are charging for their service, so they only charge for the hours they worked directly for their client!
They vastly underestimate all the work they do outside of their direct client work. They are basically forgetting to pay themselves for work like accounting, research, learning new skills, finding new clients, improving their service and administrative tasks.
I want to make sure you avoid that common mistake!
In the same way your employer markups up your hourly rate when charging their clients for your work, you need to cover your administrative costs too!
Calculate Your Client’s Perceived Value
When you are figuring out what to charge for your services, what really matters is how your clients value your offering.
We work with a lot of heart-centered solopreneurs in our Accelerator, who often confuse the value of their service with their self-worth.
I remind them to calculate the value of their service from the perspective of a potential client. I suggest asking themselves questions like:
- How much time does your service save your client?
- How much money can your service make for your client?
- How much time does your client waste on feeling frustrated by the problem you want to help them solve?
Here are two calculations to help you calculate the cost of your service from your client’s perspective.
#1 Calculation: Time Saved = Money Saved
In the course of a month, how much time can you save your client as a result of working with you and your service?
How much is each hour worth to them? How much money do they earn each hour, whether as a company or as an individual?
Simply multiple the number of hours they waste each month by the value of each hour.
Hours Saved X Value of Each Hour = Money Saved
If your client is wasting 10 hours a month on the problem you want to help them solve and each hour is worth $100 to them, then they are wasting $1000 each month by not solving this problem!
You might price your offer at $1000 to work with you over the course of a month. For an investment of $1000, you can help your client save $12,000 a year by solving their problem! Sounds like a good deal to me!
#2 Calculation: Percentage of Earned Income
If your service might help clients earn more money, you might calculate the price of your offer based on taking a percentage of the income you earn for them.
For example, you might be a consultant who proposes taking a 10% revenue share of any new income generated for your client as a result of using your service.
Maybe you’re a money coach helping someone build their wealth. You might offer a 5% share of any new wealth you create for them over the course of a year or a flat fee of $500 to save them a minimum of $5000 over the course of a year.
You will be so much more successful when you take the time to understand how your client values your service, instead of trying to justify your hourly rate.
Don’t Charge Your Hourly Rate
I know I’ve spent this entire blog post teaching you how to calculate your hourly rate.
Now I’m telling you NOT to charge your clients an hourly rate!
Honestly, I’m not trying to confuse you!
If you price your services based on your hourly rate, you will be trading your minutes for dollars. You will only earn income when you spend your time working.
Basically, you are just creating a job for yourself, instead of a business!
Here’s what ends of happening:
- You’ll be trapped trying to convince your clients why to pay your hourly rate when it only has meaning for you and not them.
- You’ll get burned out! You’ll become resentful for not getting paid for all the work it takes to run your business outside of delivering your service to your clients.
- You’ll commoditize your service. If you charge by the hour as too many other freelancers, coaches and consultants do, you will leave your client evaluating your service on price alone, instead of focusing on your unique value and expertise.
When you sell freelance, consulting or coaching services, I highly recommend selling them as “packages,” focused on solving specific problems for your client using the calculations in the previous section.
So why do I want you to understand your hourly rate if I don’t want you to charge your clients that rate?
#1 I want you to understand the value of each and every hour of your day. This will help you become much more focused on your priorities and will eliminate distractions. As the old adage goes, “Time is money.” Use your time as wisely as you use your money.
#2 I want you to understand different work tasks have different values. For example, when you are performing routine administrative tasks a virtual assistant (VA) could do for $25/hour or less, doesn’t it make sense for you to do that same work at your higher hourly rate? It may make more sense to hire a VA to free up more of your time to spend on higher-value tasks only you can do!
#3 I want you to be able to increase your profit margin. Think of your hourly rate as your “cost of goods sold”. It identifies the cost for you to deliver your service. Knowing this information will incentivize you to streamline your process, boosting your profit margin!
My core financial metric for success is my hourly rate. As it increases, I need to work less, while earning more.
Every time I streamline our services, outsource tasks to others and use automation to make our systems more efficient, I know we are increasing the hourly rate for every member of our team.
Knowing your hourly rate also helps you maintain your focus on building a business that works for your pace without the need to hustle!