Have You Done Your Rate Math?

At the beginning of this year, I decided to take a novel approach to the much-hyped financial crisis. I raised my hourly rate.

This isn’t a number I share with clients. It’s a guideline I use when I calculate project rates. Effective January 1, I increased this rate by 12%, pumped up my annual revenue goal by about the same amount, and felt pretty proud of myself for having the chutzpah to do it.

Until last week.

That’s when I read the “What Should I Charge?” chapter of Ilise and Peleg’s book The Designer’s Guide To Marketing And Pricing (that’s Chapter 8 for those of you who, like me, are a month or so behind on the Marketing Plan + Calendar’s reading list). Here I found everything I needed to factor into my hourly rate, including my overhead, my estimated taxes, and even my own salary.

At first I figured I was doing fine, but a little voice in the back of my head suggested that I should run the numbers just to be sure. After 7 years in business I’ve learned to trust “the voice” without question when it talks to me.

On this particular day, it was screaming.

So I took the handy worksheet from the book, popped all the numbers into an Excel spreadsheet (I’m geeky like that), and had what I can best describe as an epiphany. What had seemed to be an ambitious hourly rate back in early January turned out to be far short of the mark. In fact, to hit my revenue target for this year and still have time for a life, I needed to increase my hourly rate by an additional 58 percent!

Now if you think this exercise isn’t practical in today’s tight economy, here’s a reason to think again:

The very same day I crunched these numbers, I submitted a proposal for one of the biggest jobs I’ve gone after this year. In my second spreadsheet of the day, I added up the time I figured I’d be spending in client meetings, copywriting, editing, revisions, and such…and multiplied it by the new hourly rate I had worked up that morning. The final number was five digits.

Now I’ll freely admit I was a little spooked when I sent this proposal. I knew I was taking a risk and that I might lose the bid. At the same time I had a far better understanding of what I needed to make, both to survive in business and to support my “balanced life” habit. I knew that I simply couldn’t afford to do the job at my original rate for this year. Knowing that gave me more than enough courage to hit the “send” button.

A few days later I got a call from the prospect. They wanted to negotiate the price down a bit, but only wanted to haggle on a portion of the job (in fact, they accepted the cost of the most expensive items without flinching). In the end I settled for about 10% less than my original quote, but I wasn’t complaining. The final amount we agreed on was 40% more than I would have asked for if I had written the proposal a day earlier.

The moral of this story isn’t necessarily to raise your rates during tough times, but you do need to have a firm grasp on what you need to make to keep your doors open in any economy. If you’re not charging enough to pay your expenses for fear of losing clients, you’re not building a sustainable business model. You’re running a dangerous race that will cost you time, money, and peace of mind. In fact, it’s more important to know and charge that magic hourly rate in hard times, because businesses that don’t are more likely to fail before the recovery comes.

Will you miss out on some jobs by asking for more? You bet you will. But if you haven’t lost or re-negotiated a bid because of price this year, you’re probably not charging as much as you should.

So here’s my advice for today’s marketing time. If you haven’t figured out what you must charge to stay afloat and meet realistic financial goals, grab a copy of The Designer’s Guide To Marketing And Pricing, flip to Chapter 8, and crunch those numbers right now. And if you want a copy of the spreadsheet to figure out your own, send an email to ilise at marketing dash mentor dot com You may even discover that you’re charging too much. But I doubt it.

Thanks again to Tom “TNT” Tumbusch of Digital Dynamite in Cincinnati OH.