When I work with entrepreneurs, I think one of the most difficult things for many is to understand what their rate is. This is especially true for new entrepreneurs just starting out but also for those who have been at it a while. Figuring out what you are worth can be tricky. If you price yourself too high you may find yourself trying to justify your worth, too low and you may be doing a whole lot of work for very little reward. Even worse is to make up a price based on what your need is at the time creating inconsistency for you and your client.
I remember the first time I put a price to my work, it was terrible. I underpriced my value, worked way more than I should have, and walked away feeling I had no idea what I was doing when it came to pricing my time. I think part of the reason I was so terrible at it was because I was conditioned to think that my value was what I made a year from my employer. Using your historical annual salary as a benchmark may seem like a good start because its a record of how you have been getting by so far; however, what some seem to forget are the added costs you endure while running your own company.
As an employee, your company priced your worth to them based on the role or function you performed in their company. They agreed to pay for your talent and as an employee you agreed to accept their offer. In this exchange, the company employing you is placing a price for your time based on the role you perform not necessarily the value you as an individual may bring to the company. Because the role has a set range the company is willing to pay, you get locked into that rate and thus are left with an impression of your value in the real world. When I decided to venture out on my own, I wanted to ensure I was not only doing what was right for my business but also what made sense for the clients I served. I knew my background and experience were unique and that there was a value for what I brought to my clients.
Here are 3 things to consider when putting a price to your work.
Long ago when I was an undergrad in business school I had a professor that taught us a lesson I still carry to this day. The price is what the market will bear. A profound insight for me at the time. He went on to explain that price all depends on what someone is willing to pay and there are factors that exist for many that determine this. One's trash could be another one's treasure. Awesome, so what does that mean for you as an entrepreneur? It means that you have to understand the market in which you compete. You need to know who out there does what you do, how well do they do it, and what is their availability in contrast to your own? In addition, consider what they bring in value versus yourself and what they charge. This is tough because it means you have to be honest and realistic about your capabilities.
A tool I sometimes use to get grounded rates for roles in a variety of industries is O*Net Online. O*Net is a national database maintained by the Department of Labor, which houses just about every type of job you can imagine in the United States. It provides information about the knowledge, skills, and abilities of people who do those jobs as well as salary information both nationally and by state. From the website you can quickly determine whether you are pricing yourself too high or too low in consideration of the role you are providing for your client. This tool is also very helpful when you need to hire someone as well. Remember though, this is a national database and salaries do not reflect the fully burdened cost of running your own business. It also does not include premiums for special skills you may have; however, it is a great tool to use as guidance.
Evaluate Your Costs
As a business owner, your costs are different because you have more than straight salary to be concerned with. This is where it gets tricky because on one hand you want to ensure you are pricing for the market but also ensuring you are covering your overhead. Business overhead can run between 30% to 65% and sometimes more depending on where you live and how you are taxed. Fluctuations can also depend on costs like licenses, equipment, rent, support resources, and more. In addition, you should also add some margin for growth. Let's face it, as you get busy your costs will go up. You need to ensure you are building capital so you can scale as needed. By taking into account all of your added operating costs, you can add that to your revenue goal, which can then be broken down and calculated into your rate. The thing to remember is that if all of your added costs are not built into your rate, you risk earning less than your target revenue goal.
Consider Your Engagement
It is often said that entrepreneurs are the only people that will work 80 hours to avoid working 40. Part of the reason is that entrepreneurs tend to have a lot of passion for what they do but they also know that the conventional math for a 40-hour work week does not always work in their favor. Here is why. A typical full-time worker puts in 40 hours a week. Multiply that by 52 weeks a year and you get 2,080 hours a year. However, if you back out the typical 3 weeks for vacation, 7 U.S. holidays, and 5 sick days (216 hours) you end up with 1,864 hours. This would be a great number to go by but as a business owner you not only have to do your job but run the operations of your business as well. As an owner you will need to look for new clients, manage your financials, make phone calls, market yourself or your company, engage in networking opportunities, and more.
To make room for all this it is recommended you take another 25% of time away for those activities, which leaves you with 1,398 billable hours a year or just about 30 hours a week. Knowing this is important because lets just say you were getting paid $80,000 a year by your company before you went out on your own. Using 2,080 hours to calculate your rate would mean about $38.50 an hour. If you calculate your overhead at 40% and build in a slim growth margin you may come up with $55 an hour. Sounds good right? Well, if you wanted to maintain the 40-hour work week you grew accustom to, your annual earnings using our new number of 1,398 hours would be $76,890. Congratulations, you just lost $250 a month. Ah, the life of an entrepreneur.
There is no doubt that being your own boss and controlling your own destiny can be more rewarding than working for someone. However, the whole point of going into business for yourself is to grow your worth not devalue it. Ensuring that you are armed with the information you need to be a success will help improve your chances for success!
Ben Olmos is an expert in sales and marketing operations with more than 20 years of experience working with global brands in the consumer packaged goods industry. Ben also has over 10 years of experience as faculty and academic leadership in higher education having taught more than 40 courses in Business Administration. As founder of Satisfactionist Consulting, Ben is focused on helping organizations improve their trust, communications, processes, and routines for better efficiency, revenues, and profitability. Ben is also host of The Satisfactionist Podcast, a podcast available on iTunes, GooglePlay, and Stitcher Radio that focuses on telling the stories of regular people doing amazing work. For more insights like these and to get notified when new episodes of The Satisfactionist Podcast are available, visit and like us Satisfactionist on Facebook. For more behind the scenes insights on the things that keep us busy, subscribe to Satisfactionsit Insights and be the first to hear about the work we are doing and get behind the scenes insights from friends of Satisfactionist.