For many small business entrepreneurs, particularly those in the service sector, pricing of services takes on an improvised approach. Minus some sort of structure, many entrepreneurs end up undepricing their services below market value.
Here’s a formula you may find helpful in pricing your services:
A. Determine the number of working hours available to work your business including marketing, accounting, seeing clients, selling, etc.
Subtract the total of number 2 + 3 + 4 + 5 from number 1. This gives you the total number of actual working hours available.
- Determine the total number of hours available for billing (i.e. 40 hours per week X 52 weeks)
- Decide the holidays you’ll be closed for business each year. Convert to hours (i.e. 8 hours X # of holidays)
- Establish the number of annual leave days per year. Convert to hours.
- Determine the number of sick days per year and convert to hours.
- Choose the number of vacation days per year. Convert to hours
B. Start with your current salary or the salary of a comparable position reflecting your experience and abilities.
C. Determine the hourly rate your business needs to charge using this formula:
Hourly business billable rate = [annual salary/available hours] X [overhead factor*x markup**]/utilization rate***
Example: ( [$125,000/ 1912 hours] X [1.9 X 1.10]) / 60%
( [$65.38/hour] X [2.09] ) / 60%
$136.64/ .60 == $227.73/hour
*Overhead factor: The Guide on Hourly Fee Rates for Consultants determines the overhead factor, based on studies, the average consultant pays for overhead such as admin, rent, office equip, etc. The overhead factor rate used is 1.90.
**Markup: The markup is whatever you decide you want your company profit to be – 10% - 15% - 25%? This is over and above your salary and overhead expense.
***Utilization Rate: The percentage of actual hours spent in billable time.
Your turn! Let this formula help you stop underpricing in your business.
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