From XU Magazine, 
Issue 29

The Building Blocks of Business - What’s Your Time Worth?

Deciding on Hourly Rates When Starting Your Business

The crew from MinuteDock share their wisdom around figuring out charge rates in the early days of your business...
This article originated from the Xero blog. The XU Hub is an independent news and media platform - for Xero users, by Xero users. Any content, imagery and associated links below are directly from Xero and not produced by the XU Hub.
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Many professionals will make the decision, at some point in their career, to go out on their own.

For some, it is a matter of job flexibility, for others the move may be based on a desire to start and grow a business, and for some, being self-employed represents the opportunity to focus on a specific niche or area of interest.

Whatever your motivation, or inspiration, there is one aspect all self-employed professionals face – determining your service rate.

If you’re remaining in a field which you have been active in, you likely have an idea of what your services have been billed at previously and that can provide a good starting point. Even if that is the case, and for those who have no idea about where to start, these tips may help guide you through the process.

To start, consider your income goal. Some people would suggest this is as easy as thinking about what you want to earn, the number of hours you can bill, and then simply calculating an hourly rate of service based on this. While the concept may make sense in principle, in reality, it takes a little more than that. It’s important to understand that any new business will take time to grow.

In starting your business, you want to consider living expenses that must be covered, how many hours you can reasonably expect to bill starting out, and what an hourly rate based on these factors might be.

Next, consider the income you want to have, how many hours you can bill as a more mature business, and what that hourly rate looks like. In an ideal situation, you’ve planned for this slower start, perhaps cut some expenses, and the two match up fairly closely. If not, you may need to spend some time budgeting and strategizing before you actually begin.

Depending on where your business will be, any licensing, equipment needs, or support staff requirements, there may be some overhead associated with your business. There may also be fees you must pay in order to fulfil your service requirements. All of these must also factor into any overall budget planning/ rate setting.

Clearly, starting out you can’t expect a small number of clients will cover all of your costs and provide you with a sustainable income on top, but you want to be sure that as the business grows, and as your client base grows, the bigger picture has been factored in so that, in fact, your client revenues do directly cover business expenses and the income you hope to be earning. You also want to be sure, short-term, that having clients isn’t costing you money so that means ensuring basic expenses related to each client are covered.

Considering market standards is another important facet. As mentioned earlier, if you’ve already been in the business, you may have an idea of what a reasonable rate for service is. If not, calling a few people who provide similar services to get a basic quote can be a good way to start.

Keep in mind that you want to be comparing apples to apples. That may mean looking at smaller, independent professionals such as yourself, rather than larger firms with huge teams supporting each and every effort. Or, depending on your particular situation, it could mean just the opposite.

In some, although not all professions, experience can warrant a higher hourly rate. Sometimes this will simply reflect the efficiency bred by experience and the fact that you may be able to complete a task more quickly than someone with less knowledge. Other times, your experience may reflect a greater ability to provide insight into more complex cases. If you find your experience does warrant a higher hourly rate, don’t be afraid to charge what you’re worth - but do make sure you are transparent with potential clients so they understand why and can be sure they too are comparing apples to apples if they are shopping around.

It is also possible, if you are providing a niche service, or expertise in a specialty area, that a higher hourly rate may be warranted. You want to be careful to balance expertise with value however, or you may find potential clients will turn to someone with less knowledge, just to get a better deal.

The rate you charge when you start your business, perhaps when it is just yourself working from a home office, may not be a rate that can sustain the business once you need to invest in some equipment or support staff, or a proper office. That means you may have to reconsider your rate or fee schedule down the road.

When this happens, it is important to give consideration to existing clients. Is it possible to keep them on at the same rates, letting them know they have secured a loyalty rate as a thank you? Or do your fees have to be the same for everyone, for whatever reason, and if so, what added value can you offer to existing clients who will be hit by a rate increase?

Starting your own business is an exciting time that involves a lot of decisions. Setting an appropriate rate from the start, is a start in the right direction.

Why leave it there?

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