Demystifying Pricing: How to Calculate Your Hourly Rate as a Business Owner
Posted on June 13, 2023 • 3 minutes • 443 words
As a business owner, you’ve probably faced that inevitable question: “What’s your price?” For many, this question triggers a moment of imposter syndrome - that nagging doubt of our value and worth. I too faced this challenge when I started my journey. Over time, I have found a formula to back up my pricing strategy, and I want to share it with you in this blog post. Remember, there is no magic bullet, but having a solid approach can help you regain your confidence when quoting prices to customers.
Key Factors to Consider
When determining your price, you need to consider several variables. First, how many hours did you work last year? How does this compare to the previous year? And how many hours do you plan to work in the future? For this example, let’s say you worked 1,000 hours last year.
Next, you need to consider your total expenses. What were your operating costs for the past year? Are you able to determine what the expenses per employee are? Being able to answer these questions will help you gain a clear understanding of your overheads.
The Pricing Formula
Once you have this data, you can start calculating your hourly rate. Divide your total expenses by the total hours worked. This will give you an approximation of your break-even hourly rate. For example, if your overheads come to $52 per hour, charging $52 per hour will cover your costs. Charging $60 per hour will cover your overheads and leave you with a $8 profit.
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Hourly Rate = Total Expenses / Total Hours Worked
Understanding Your Profit
This calculation gives you an approximation of your hourly rate. It’s important to remember that this rate represents the minimum you need to charge to cover your expenses. The profit margin you add on top of this rate is entirely up to you. In the example provided, charging $60 per hour gives you an additional $8 profit per hour.
Final Thoughts
Remember, this is just an approximation. The more data you track, the better visibility you’ll have into your budget and finances, which in turn will allow you to refine this calculation.
Ultimately, understanding your pricing strategy will give you confidence in your value as a business owner. It will help you back up your quotes with concrete data, ensuring you charge what you’re worth and earn the profit you deserve. It’s a simple formula, but one that has a powerful impact on your business’s financial health.
I hope you find this formula as helpful in your journey as it has been in mine. Keep tracking, keep refining, and keep growing your business with confidence!