Do you charge an hourly rate, or are you commission based or maybe you charge by project? How do you set the amount you charge? How do you decide what is the best way to charge? Over the next few weeks I am going to explore each method and what the advantages and disadvantages of each one are.
In a previous blog I have spoken about how much does it cost to just open your doors. I strongly advised you to work this figure out and to make sure that when you are quoting or setting prices you are at least covering costs. But how does that help me work out my hourly rate, commission rate or project rate I hear you ask.
This week we will look at working out your hourly rate and if you should be using an hourly rate method. Then over the next few weeks will look at working out your commission rate and your project rate.
This is where you work and track each hour you work for each different client and then at the end of the day, week or month you send them an invoice for what you have worked. This invoice includes the hours you have worked and the hourly rate you have charged. Charging by hourly rate is the most common method of charging.
People like to charge by hourly rate because it makes everything clear to them. They know that they are working this many hours and for this hourly rate. It helps them to make sure that what they need to get to just open the doors each day is covered, or if it isn’t then how many more hours they need to work to make sure it is covered.
I have had big discussions around hourly rates with my clients. I just find it all very interesting. When I first started bookkeeping I was charging $33 per hour (this was 15 years ago). My Mentor who was based in Melbourne was charging out her bookkeepers at $45 per hour and herself out at $75 per hour. The reason for the difference was location. People in Melbourne were more willing to pay the higher price.
At the same time, one of my first clients was a washing machine repairer; he was also charging $33 per hour. He now charges $88 per hour and I charge $55. I would say that he is covering the rate of inflation and the cost of running his business way better than I am.
A few weeks ago I was talking to a client about his hourly rate that he gets charged from his subcontractors. The Builder is charging him $45 per hour, the Plumber is charging $75 per hour. Why the difference I asked him and he replied, because the Plumber believes he is worth every cent he is charging as he is needed. The Builder doesn’t believe anyone would pay him $75 per hour as they could always get another builder from somewhere else.
Also the Builder is needed for a longer period of time, building the house takes weeks, a Plumber is needed for a short period of time. Therefore people are more willing to pay a higher hourly rate to the Plumber as he isn’t there for as long as the Builder.
That is the same situation between my washing machine repair client and myself. Everyone needs their washing machine repaired. They will always ring and get it looked at before deciding to buy a new one or fix the current one. He is in demand (if he is doing a good job). When it comes to bookkeeping, people can choose to have a bookkeeper or not. I could give you a great argument as to why you need a bookkeeper and how it is essential, but ultimately you don’t need me as much as you need the washing machine repair guy when you washing machine breaks down.
It is also the same reason as the Builder and the Plumber, the Washing Machine Repairer is only needed to fix the machine, once it is fixed they wont see him or use him until their machine breaks down again. Where as they will see the Bookkeeper every week, or fortnight or month or quarter, whatever timeline the Bookkeeper has set up with them.
So how do you work out your hourly rate, I hear you ask. Well there are a few things you need to do to get to this figure.
- You need to go back and read my blog how much does it cost to just open your doors and work out how much it cost you to just operate each day.
- You need to do a bit of market surveying and ring or get someone else to ring 10 businesses in your area that do the same thing as you and ask them what hourly rate do they charge, or how do they charge.
- You need to do a bit of market surveying of businesses similar to yours but who aren’t in your area, so they may be in the next town across or in your Capital City. You just need to get an idea what and how people are charging.
- Then you need to look at your ability and what you offer. Is it the same as everyone else in your industry? Or are you doing things slightly different?
- Write down the hourly rate that is the highest in your industry in your area. Does it cover your costs? Are you comfortable with that rate? Do you think it should be higher or lower? If it is higher will people pay that rate? NEVER EVER charge less than what everyone in your industry is charging, even if it doesn’t feel right to be charging that amount.
- Believe that you are worth every cent you are charging. If you don’t believe you are then you shouldn’t be in business, it is as simple as that.
If you are someone who charges an hourly rate then you need to sit down over the next few days and work out if you are charging the correct rate. Let me know in the comments below if you are or even if you aren’t and what you are going to do to make things different.
If you would like to get my Hourly Rate Calculation Sheet then click the button below to download it now.