You are selling a service, consulting, teaching, training, coaching.  And you need to offer your service at an hourly rate, in a proposal, on your website, or on the phone. What is an appropriate hourly rate for a service or a project? There are multiple price formulas and ways to calculate it.

Declarable hours

One specific consideration with pricing of services is that you usually cannot invoice all the hours you worked. For instance you cannot charge hours spent on administration, tax filing, advertising and promoting your business, writing proposals, etc. because they are something like “overhead hours”. Similarly, you may not be able to charge for all the preparation hours you put into a project. If you sell one day of training, you charge per training hour but not for the time to prepare the training, and travel time is usually not paid. The declarable hours are the number of hours you can actually charge on your invoice. The exact proportion depends on your type of business. If you are working alone something between 55% and 65% of total working hours is considered normal. Of course in the beginning you will need to invest more time in order to find your routine, and this “learning time” is not charged.

So, if you want to calculate a profit of say 100$ per day with 50% declarable hours, you will need to consider a 200$ profit per invoiced training day. If you incur a total cost of 200$, you will need to charge a cot proportion of 400$ for the day. In total you would charge 600$ per day.

This is an accounting classic where you start the actual cost incurred for a project and add your profit margin in order to calculate the price per hour for your service.

Price = variable cost + fixed cost + profit

Variable cost: this is all cost directly related to a specific service, like materials you bought in order to deliver this service, travel cost (if not charged separately), postage etc. You divide the total of variable cost by the total number of hours you can declare for this project.

Fixed cost: these are all general overheads, marketing, rent, depreciation of your equipment etc. Fixed cost cannot be invoiced but needs to be paid from your income.

Profit: how much you want to earn from this project.

The cost you incur for your business may be tax deductible, which leaves room for a higher profit margin, or in competitive markets for a lower price. The cost price method was designed for calculating goods and can be used in order to calculate a price per project.  It is less suitable if you want to determine an hourly rate.

The advantage of this pricing method, that it will get your cost covered (provided you have enough declarable hours to pay for your overheads), however, the price may not reflect the market price or your market value.

This is a price formula to calculate an hourly rate considering your unique background and by weighing the minimum hourly rate of your region with your personal factors regarding your education, experience, authority and uniqueness.

You start of with the “minimum hourly rate” of your country or state, that is the minimum wage that may legally be paid.

In the links to the right you will find some minimum wages paid in Europe and USA.

Next step is to determine your own personal factors related to your field of business. Always start with the minimum of 1, which means “low end”, beginner or unskilled:

1. Education:  Education pays – in some cultures more than in others. It is a sign of professionalism towards clients if you have learned what you are talking about, if you are skilled and knowledgeable. This creates trust in your clients, and that makes it worth paying for.
   For lower education you choose factor 1, for higher education factor 2, for university factor 3 and factor 3.5 or higher for postgraduate education or specialist training. The education should be related to your business, if it is not, take a lower factor. An MBA does not necessarily qualify you to be a good writer or coach.
2. Experience: Most clients don’t like to act as guinea pigs and appreciate if you have done the job a few times and know how to avoid the big mistakes. Starting off with no experience your experience factor would be 1. If you have little experience start with 1.1 and slowly increase to 2 for very experienced, or above 2 with more relevant experience. Experience is not only the number of years, but also the intensity, relevance, results and achievements. Two years part-time job would weigh less than two years full practice. Also consider the level of non-relevant routine you do during the working hours. Administration work does not increase your training experience.
3. Authority: Authorities are those people who have proven their competence to the world. You know them from books, TV, people writing about them. They are professionally popular and attractive. You just have to assume that they know a lot more than their average competitor, and you pay to hire this person. So think about your public recognition, like a ranking on elance, hubpages, publications, public talks etc. How much are you positively known among your clients or experts in your field of business. Don’t count the number of articles you published but rather the impact they made.
   Don’t overestimate your authority, and make sure you only credit your business-related authority. High scores on your family hubs may not count.  No authority would yield factor 1, to be one of many you would apply 1.5, and increase up to 5 for an absolute authority (people with high reputation and very well known in their field)
4. Uniqueness and Expertise:  What makes you different from the legion of competitors in your field? What makes you unique? How unique are you? Do you have a niche specialization which is hard to find? If you are not very unique, i.e. many people can do what you do, take factor 1. If you are a fairly unique or have a decent specialization, take 1.5, up to two for unique and above 2 to very unique and specialized. That would mean you are one of very few experts in your field or niche and people would be prepared to travel and spend money to get your advice.

If you have trouble rating yourself, put yourself into the shoes of your clients and consider how much you would value the level of education, experience, authority or uniqueness you have to offer.

These factors are indicators of your unique selling proposition and the level of quality your clients believe you will be able to deliver. Make sure not to upgrade a factor above 1 without having hard evidence for this. This is not an exact science, but surprisingly I find that people tend to recognize themselves in the result.

To calculate the price per hour, you weigh the minimum rate with each of the factors, the higher the factors, the higher the rate. Then divide by the percentage of your declarable hours in order to get the chargeable rate.

An example for a personal market value calculation:

Minimum wage 7$ per hour.
Education: university in another field plus a business related certification = 2
Experience: 5 years = 1,8
Authority: you have published some articles and blogs = 1.2
Specialism: you have developed your own method, which is one of many = 1.5
Declarable hours = 60%

Price Formula
hourly rate = (minimum wage * education * experience * authority * uniqueness) / % declarable hours

Example
hourly rate = (7$ * 2 * 1.8 * 1.2 * 1.5) / 60% = 75.60$

Your personal market value would be 75.60$ per declarable hour.

The personal market value method is very focused on you as a person, but does not recognize the cost you incur and the value you sell along with each service. Your value per hour also depends on the market you operate in, the competitors in your market as well as the demand. Markets can make a difference here as well. While Europeans value education, expertise and experience very much, US tend to emphasize the value of uniqueness, achievement and results.

The personal market value exercise can help you to put your personal value into perspective and recognize which of the factors contributing to your personal market value may offer a potential to grow in your market environment.

What are your competitors doing in the market? Find out how much your competitors charge and compare with their education, experience, quality, authority. It can be most revealing to buy their service in order to find out the true relationship between price and value. This is a benchmark for pricing your service as well as an opportunity to learn from your competitors. Concentrate on your market segment or niche, neighboring niches may pay different prices. Compare yourself to prices on internet forums like elance or guru only if you really plan to work via these platforms, if not take the effort to find out about your local competitors. Look at the market leaders, rather than follow the low cost providers. If you are a translator, your earning potential depends on which language you offer and what kind of texts you translate, as well as, how much of that is already available on the market.

While competitors reflect the offer, your potential customers reflect the demand side of the market. The key question here is: “how much are your customers prepared to pay you?” You will need to find out, what they value, how much they value service, image, quality, etc. You can find out by talking to potential customers, by writing proposals and asking for feedback. Experimenting can be an effective method, too.

Whatever feedback you get try to graph a price elasticity curve (price – turnover function): at which price do you sell which quantity? The totally elastic product or service will sell high quantities if the price is close to zero and very little or nothing if the price is high, and you will have the best sales value for a medium ranged price. Often you will find your customers are not prepared to pay a high price and at the same time mistrust a price which is too low, because there can’t be quality behind. Just going down with your price may not help to sell more, that is called “snob-effect”, if your product is good, it has to have its price.

If you go through all of the pricing models you will see that the results may differ more or less from each other. The art of pricing is to carefully balance all of these aspects to your advantage. 

None of the above price calculation methods alone is sufficient for finding the right price. The personal market value, benchmarking and customer value don’t consider your cost, and the cost-price model does not consider the market. Each of the models has an important aspect to add, and combined they will give you something near to the full picture.

Beyond the pricing indication these models can give you clues on where in you need to work on to make your business more attractive.

If the prices derived from the models differ a lot, try to find out why they differ. Maybe your assumptions are not realistic? Maybe your expertise is just not in demand where you live, or there is a lot of competition?  Which opportunities do you see to satisfy the demand that is there? What can you do in order to differentiate from your competitors? How can you adapt your marketing message?  Or do you see the demand for a value you cannot (yet) deliver?