Here’s a big question posed to almost every small business owner: how much should you charge per hour?
It is not a simple question to answer, yet it is crucial you get right. Charging the wrong hourly rate can lead to a host of problems, including deterring customers and putting your own financial health at risk.
Take our small business advice and follow these simple steps for deciding on a fair hourly wage.
Step One: Settle On a Competitive Annual Wage
Settling upon a competitive annual wage is essential to business success.
Why? Because if you charge too much, then customers will go elsewhere. But if you charge too little, you won’t be able to afford the rent. Not to mention the fact that an hourly rate that is drastically lower than your competitors’ can be off-putting to customers. If you’re undercutting the competition by $10 an hour, people are going to start asking questions.
There must be a reason for charging such a low price, right? And it probably isn’t good.
There are plenty of methods available to help you choose a competitive hourly rate. Websites like PayScale can give you a ballpark estimate of what you could be earning. You can also look around the web and in classifieds to find others offering similar services. Check out job adverts for employers hiring for your job, too.
If you are feeling brazen, you could also just find people in your niche and ask them.
Step Two: Decide on Inclusions to Your Rate
So, after a bit of research, you now have an annual wage to aim for. But the work isn’t done yet.
Let’s say, for example, you’ve chosen a wage of $50,000 based on what you need to survive and what your competitors are charging.
The average American worker does the old 9-5 routine, an eight-hour working day. So, now we can simply work out the hourly rate.
$50,000 divided by 52 weeks in the year is $961 dollars per week. That divided by a full 40 hour work week is $24 an hour. There you have your hourly wage, right? Nope.
When it comes to traditional employment, you aren’t working 40 hours a week every week. You have holiday, lunch breaks and sick days. Your hourly rate while employed will also include training, pension plans, socialising with clients and colleagues and more.
Without adding any of these into your calculations for an hourly rate, you’ll be working twice as hard a traditional employee, running yourself into the ground, all while making exactly the same money as they do. Hardly seems worthwhile, does it?
Before you calculate your hourly rate, take our small business advice and consider making these inclusions:
- Lunch breaks: Taking 30 minutes per day for lunch isn’t excessive, it’s downright important.
- National Holidays: Christmas, 4th of July, Thanksgiving: you aren’t going to be working these days. So that’s 10 paid holiday days right there that you need to consider as part of your rate.
- Vacation: Unlike most developed nations, there is no rule in the USA that says employees are entitled to paid vacation days, but that doesn’t mean you can’t take them.
- Sick Days: If you get the flu, you don’t want to be worrying about a lack of income.
Step Three: Calculate Your Small Business’s Hourly Rate
This is where things get a bit tricky, and it varies from person to person depending on their wage, circumstance, and choice of inclusions — maybe you want to take one week’s vacation time in the year, maybe you want three.
Let’s take our basic rate: $50,000.
If you are taking two weeks vacation time plus 10 days national holiday, then you’ll be working a total of 341 days per year — minus weekends. Throw in potential sick days, and that’s another five off the figure.
336 days in your working calendar.
You’ll also be wanting to take at least 30 minutes per day for lunch and a coffee.
So, that’s 37.5 hours of time spent working per week over a period of 336 days, or 48 weeks. So now we do our calculation again.
$50,000 divided by 48 weeks is $1041 per working week. Divide that by your new 37.5 hour working week and you’ll come to just over $27.50 per hour. The difference from $24 may seem negligible, but it’s all cumulative.
Step Four: Don’t Forget Specific Inclusions
There are other, more specific, inclusions you may want to consider when calculating your hourly rate.
If you spend a lot of time networking or socialising with clients, you could also add in time spent doing work-related activities that aren’t actually making you money. The amount of time this takes depends on your business.
As an electrician, you won’t be doing much liaising. If you’re a wedding dress designer, however, you’ll probably spend a lot of time discussing ideas with customers.
You may also need training courses to keep yourself up-to-date, or perhaps your skills will last a lifetime.
You could include a pension on top of your fees, too. While some pensions are paid out of annual wages, others come as a bonus incentive. Decide how you want to do it for yourself.
Here’s Our Final Piece of Small Business Advice
Nobody is going to pay the little extras for you. Unlike being an employee for somebody else’s business — where you get benefits as part of your employment packet — you have to make your own perks.
This is one of the benefits of being your own boss. And so long as you keep your rates fair and competitive, you’ll be able to enjoy these perks without affecting your client base.
