One of the most complex issues facing any solopreneur is “How much should I charge for my services?”
Ask too much and you risk losing business because your price is too high.
But if you charge too little, you leave money on the table.
Or worse, you can’t make ends meet!
But don’t worry!
This easy guide to solopreneur pricing offers you 5 different options to determine how much you should charge.
Even better, it walks you through the calculations without any scary math!
Solopreneur Pricing: 5 Ways To Set Rates For Your Services
Unlike pricing physical products where the inputs are straight forward, deciding how much to charge for your time and services involves an emotional component.
Your rates not only determine your compensation but also reflect on your personal sense of worth.
1. Guesstimate Solopreneur Pricing (aka: Finger-in-the-Air Approach)
With guessimate solopreneur pricing, you pick a number out of thin air without any basis for your decision.
Key benefit: Guesstimate pricing requires no research or calculations.
But unfortunately it has a good chance of being off, either too high or too low.
Before you think “I’ll get the job with a lowball bid,” be careful.
Because your potential client may think that your work isn’t very good or you’d charge more.
2. Cost-based Solopreneur Pricing
While it sounds complicated, cost-based solopreneur pricing ensures that your income covers your cash outflows.
Numbers-phobes don’t worry—you only need to know basic arithmetic to do this.
A. Calculate Monthly Fixed Costs
Determine the costs for products and services associated with your business.
You must pay for them whether or not you generate any income. But they would go away if you didn’t have your business.
Ideally it helps to have 6 months to a year of data to understand how they change over the course of a year. For example, how much does your heat cost in the winter or your air conditioning cost in the summer?
But, if you don’t have the information, make an educated guess.
Major solopreneur business line costs include:
- Utilities (additional heat or air conditioning)
- Internet connectivity
- Other office-related fees (such as cleaning services)
- Technology software and hardware (include related support)
- Stationary and supplies (including pens, paper, copiers, postage, etc.)
- Support staff (including freelancers and virtual assistants (aka VAs)
- Legal services
- Accounting services
- Website maintenance and related fees
- Email suppliers
- Marketing and PR services (if you need an outside agency)
- Local travel expenses (Money for visiting prospects and entertaining them)
- Out-of-town travel expenses (Include conference attendance and other business generating costs)
- Other expenses (Include memberships in associations and certifications)
Calculate monthly cost per line item:
Monthly Cost Per Business Expense = Business Expense ÷ Number of Months
Then, add all of your business costs per month together to get your total monthly business cost. Before you take any income from your business, you must pay this amount to cover your costs.
Your business costs per month equals the sum of all of your individual business costs per month.
Economists refer to this monthly business cost as your pricing floor. If you charge less than this amount, you will lose money!
Disclaimer: I am neither an accountant nor a financial advisor. Don’t assume that these costs can be deducted on your taxes or need to be reported to your government. Please check with the appropriate professional.
B. Calculate billable hours per month
If you assume an 8 hour work day and 20 working days per month, you have 160 business hours per month.
Further, you have to account for work that you can’t charge for such as email, office work, and business development. Since this unbillable time can take from 10% to 20% of your time, reduce the 160 hours by 15% to get billable hours. This yields 136 billable hours per month (or 160 X 0.85).
C. Determine business costs including overhead per billable hour
Take your monthly business costs and divide them by 136 monthly billable hours. This is how much money you need to cover on an hourly basis. If you don’t make this much money per hour, you shouldn’t take the work.
Business Costs Including Overhead Per Billable Hour = Total Business Cost Per Month ÷ 136 hours
Assume that your monthly business cost is $2108.00, then your billable hourly cost is $2108.00 divided by 136 hours or $15.50 per hour.
D. Calculate your hourly billable rate
Since most solopreneurs work to make money beyond just paying their bills, add your hourly billable rate to your business costs including overhead per billable hour.
Cost-Based Solopreneur Pricing = Total Business Costs Per Billable Hour + Solopreneur’s Hourly Rate
Let’s assume that you value your time at $50 per hour.
Then you need to convert your hourly rate to a billable hourly rate. To do this, you divide your hourly rate by 0.85 since you don’t get paid for your overhead.
Billable Hourly Rate = Your Rate ÷ Proportion of hours per week (or day) you bill
Your Billable Hourly Rate is $50 divided by 0.85 = $58.82
Cost-Based Solopreneur Pricing Per Billable Hour = Business Costs Per Billable Hour + Billable Hourly Rate
Therefore your Cost-Based Solopreneur Pricing Per Billable Hour is $15.50 + $58.82 = $74.32
(Note: For convenience, most people will round up to the nearest dollar. In this case, make it $75.00 per hour.)
- Want to know about VAs?
Check Jess Ostroff’s book, Panic Proof
3. Annual Salary Approach to Solopreneur Pricing
To calculate annual salary solopreneur pricing, start with the full year amount you currently earn or want to earn.
If you’re making the transition from a full time position to independent contracting or freelance, don’t start with your base annual salary.
Because your annual salary covers additional benefits that you must pay for when you’re on your own.
Job-related benefits include:
- Bonus and other cash or stock incentives
- Deferred income (Includes matching retirement accounts and/or pension.)
- Insurance (Includes health, disability, long term care and/or life.)
- Smartphone and related data charges
- Car and/or other transportation benefits
- Vacation, holidays, sick days and paternity leave (As a solopreneur you don’t get paid unless you work.)
Further beyond these financial benefits you’ll no longer have someone in HR to contact when problems needs to be solved.
If you’ve never been laid off or worked freelance some of these costs can surprise you. For example, despite the Affordable Health Care Act, also known as Obamacare, health insurance in the US has a hefty price tag. Further, costs depend on your household income, state of residence and type of protection desired.
Total Annual Compensation Calculation:
Add your salary and the sum of your related benefits to determine your total compensation.
Total Annual Compensation Less Time Off:
Assuming 2 weeks of vacation and another 2 weeks of holidays and sick days, there are 240 workdays per year (or 48 weeks times 5 work days per week.)
Further, reduce the 240 work days by 15% (or multiply by 0.85) for overhead and business development. This yields 204 billable workdays per year or 1,632 billable hours per year. (This assumes an 8 hour day.)
Hourly Billable Rate Based on Annual Salary:
For this example, let’s assume that you want to make $100,000.00 per year and that your total benefits equal $20,000.00. Then:
Annual Compensation = Annual Salary + Annual Benefits
Your Annual Compensation equals $100,000.00 plus $20,000.00 = $120,000.00
Divide this by the number of Billable Hours Per Year to get your hourly rate:
$120,000.00 ÷ 1,632 = $73.53 (Note: You might round this up to $75/hour)
Hourly Billable Rate Based On Annual Salary With Overhead Costs
Before you quote this number to a prospective client, you’ll need to add an amount to cover your overhead and allow for project creep.
As a rule of thumb you can add anywhere from half of your hourly fee up to twice your hourly fee for business costs. This depends on the amount of time and money you spend on your office and business development.
Even if you’re doing this as a side hustle, add something. Since if you decide to go full time in the future, you won’t be able to increase your rates to cover new expenses!
With the Annual Salary Solopreneur Pricing approach, your overhead factor is an arbitrary amount.
Assuming a factor of two, you Hourly Billable Rate Based On Annual Salary Including Overhead Costs:
Billable Rate with overhead = $73.53 X 2 = $147.06 (or round up to $150/hr.)
4. Competitive Solopreneur Pricing
Alternatively, set your fees based on what other peers charge.
By knowing what your colleagues charge, you set your rates to be competitive. But this pricing may not cover your expenses. This is more likely to happen if you live in an expensive region.
While this method sounds easy, in reality people tend not to share their fee structure.
Instead ask colleagues who hire similar types of consultants and freelancers for pricing insights. This works well for common types of projects.
Alternatively check what other professionals charge based on information posted on their website. Some solopreneurs will hint at the cost for a basic project to weed out low-priced inquiries.
Also, use this method to find out hourly fees. But understand that some professionals intentionally price “By Hour” sessions low. Since they want to get to know their community or to stay abreast of issues their target audience faces.
If all else fails, search Google and LinkedIn to check salary surveys and other pricing information. For marketers, Andy Crestodina publishes an Annual Salary Survey.
Key Competitive Solopreneur Pricing Question:
- How does your experience and brand relate to competitors?
- You can’t charge more than someone with better experience and credentials.
5. Value Solopreneur Pricing
With value solopreneur pricing, you set your rate based on how much the work is worth to your client.
Value solopreneur pricing works best when you have specialized job skills or a well-known brand.
Specialized job skills example:
A friend has kept his independent contractor status at a major US bank despite the firm’s reduced use of freelancers.
Because his computer skills and area knowledge are so tailored and specialized to the business that they can’t replace him!
In fact, they’ve stopped his contract several times and in each case they’ve asked him back on his terms. (Namely, he likes to work remotely most of the time!)
Well-known brand example:
When I ran online marketing at The Economist, I chose to pay more for a top market research supplier rather than saving a few thousand dollars for Mr. No Name PhD.
Because the research firm’s established brand name mattered to The Economist management and our clients.
Further, I negotiated price reductions with the Tiffany brand research firm by purchasing multiple research efforts at one time. Further, I developed the first draft of the surveys.
Solopreneur bottom line:
When you’re an independent contractor don’t underestimate the pricing power that a brand name consultant carries.
The Easy Solopreneur Pricing Guide Conclusion
Regardless of the solopreneur pricing method you choose, understand that there’s no perfect answer.
Pricing is more an art than a science.
As my accounting professor taught me the answer is always: “It depends.”
To cover your costs and replace your income, use a combination of the Cost-Based Approach and the Annual Salary Approach.
Overtime, you’ll get feedback from the market. Then you can adjust your rates accordingly.
Get Heidi Cohen’s Actionable Marketing Guide by email:
Want to check it out before you subscribe? Visit the AMG Newsletter Archive.
Photo Credit: https://unsplash.com/photos/cnseVhmbA7k cc zero