Profits. What a concept.

Luke MyssePricing might be the most debated and talked about subject in our industry. Okay, maybe crowdsourcing is up there as well. But let’s face it, deciding how to price a project could be one of the hardest things to do.

One thing that I’ve seen missing from most solo models is profit. It was missing from mine for years too.

I think most solopreneurs use a formula, if they even have one, like this:

hourly rate = expenses divided by estimated hours for a project

Or perhaps something like:

hourly rate = what I think the market can bear

But the truth is, figuring out your hourly is a little more involved than that. Knowing what to charge and what you need to make is mission critical for the survival of your business.

BTW: Watch on June 14 when 3 creatives describe exactly how they price 3 projects on The Pricing Game with Ilise Benun. (If you can’t watch live, you’ll get the recording.)

When calculating your hourly rate, you should know a few things, like how many hours you want/need to work per week, and how many you need to be billable. And here’s a secret, if you think the answer is 40 hours, you’ve underestimated how much time is spent on other things or you’re working too much. Being billable a full 40 hours is really hard, if not impossible. As an example, I shoot for about 20 hours per week and base my hourly on that.

BTW: Get worksheets to figure out your hourly rate and overhead in The Pricing Bundle.

Once you have that estimated number of hours per week, you need to figure the other side of the equation: Monthly overhead + wages + profit = your total monthly billing. Now divide that number by your total average hours per month.

You should plan on including profit in your base hourly rate. I think most solopreneurs make the mistake of thinking that profit is what you make when you happen to finish a job in fewer hours than you estimated. Or a vendor comes in cheaper than expected. To me, that’s gravy, not profit. Your hourly rate should include a certain amount of profit.

For the sake of demonstration, here is some hourly math (everyone’s numbers will vary)…

Budget side:
Overhead: $1,500
Wages: $5,000
Profit: $1,500
Total nut: $8,000

Hours billable: 20 hours per week, 80 per month guestimate.

80 / $8,000 = $100 per hour (which includes profit)

Project side:
Estimated hours: 10 x $100 = $1,000
Outsource or cost of goods: $500
(any sort of buyout, if applicable)
Markup on job costs: + 20%
Total job base rate: $1,600.

(This base rate is what you know you can sell the job at and not lose money. It includes all the costs and your markup. It also includes profit, which is part of your base hourly rate)

Client proposal: Value Pricing
At this point, you know what the job costs and can price based on market, the client and whatever the value is of what you’re doing. I don’t charge clients hourly, but I do track my time against that “Estimated hours” for a project. In this example, the goal is to hit 10 or less. I may price the job out at $3,000, for example, but I will still try and hit that 10 hours.

If it looks like the job may go over on hours, I will ask myself why. Have I miscalculated my own ability? Is the client taking more time? Do I need to have a conversation with the client and let them know that we are getting close? Regardless, I use every job as a learning experience and make adjustments to my value pricing all the time. The base, however, rarely adjusts unless something changes on the budget side.

How does this compare with your process?

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