Podcast 37: How to Work Out Your Minimum Hourly Rate

business ethical business money mindset podcast pricing Oct 29, 2020

This is the third in a mini-series around the topic of money and valuing yourself. We started by looking at how to value yourself and what you do. Last week we discussed money mindset and how to deal with the limiting beliefs that are sabotaging your success. This week, we’re looking at pricing basics and how to work out your minimum hourly rate.

Knowing your minimum hourly rate will help you to price your services effectively. This figure will ensure you both cover the cost of running your business and pay yourself a proper salary in the process.

Understanding the minimum rate to charge an hour will help you create a sustainable business for the future.

How did you work out your prices?

There are three ways practitioners’ price their services:

What your competitors charge
The costs of providing your services and products
The value of the results you get for your clients

How did you work out your prices?

Pricing based on your competition

Whilst you need to understand the market and what others charge to help position your services. Basing your prices purely on what other practitioners charge isn’t a good strategy. It means you’re basing your prices on someone else’s business costs and salary requirements. You have no way of knowing what costs they have in their business or how much they need to earn to pay their bills.

Pricing based on your costs

Using this strategy, you'll be ensuring you cover your basic requirements of running your business and paying yourself. You absolutely need to know how much it costs you to provide your services and products. What gets missed using this calculation alone is the value of what you provide for your clients. You’re limiting your ability to make bigger profits in your business which will allow it to grow and flourish.

Pricing based on the value you provide

Using this option looks at the value you provide to your clients from working with you. What is the real value of having you help them? What results are you helping them achieve?

Pricing on value isn’t an exact science but you need to look at the value of the results you help your clients achieve. Improving someone’s health and wellbeing, saving them time and/or money has huge value.

People will pay a premium for help in all these areas. You’ll find that they’ve often already invested in trying to solve their issues in other ways - spending hours and thousands in the process.

Minimum hourly rate

Whilst there are lots of considerations when it comes to your pricing, knowing your minimum hourly rate will help you. It will ensure your other decisions are based on the knowledge you’re able to run your business and pay yourself.

A few simple sums will help you work this out and I’ve created a clever calculator you can use to try out different scenarios such as working fewer days or increasing your salary.

To prepare for this, you’ll need to work out the following – do this for your average month.

Time spent working

How many days do you work each month? Take your average number of hours worked in a week, multiply it by the number of weeks you work a year (allowing for holidays etc.) and then divide it by 12 to give you the total.

How many hours a day do you work? Don’t include any breaks you take, just the hours you work.

How many hours do you spend working on the areas of your business you can’t charge for? These are essential to the running of your business such as marketing, CPD, administration etc. but you don’t get paid to do them.

Working these out will provide you with the number of hours you have available to do paid work with clients by doing this sum (you can use my calculator to do the sums for you):

Days worked x hours worked = total hours – time not charged = time available for paid client work per month

Business costs and wages

How much does it cost to keep your business running (your overheads) each month? These are the costs you have to pay whether you see clients or not and you need to find the money for them however many clients you see. Work out all those costs you pay monthly and remember to allow for the annual costs too.

How much do you want to earn each month? This figure is before you pay any tax on it so make an allowance for that. Consider how much you need to earn to comfortably pay your bills and give you the lifestyle you want. This is something you can use the calculator to play with to see how much putting your salary up affects your hourly rate.

Add these two figures together to give you the income your business needs to make from your minimum hourly rate.

Working out your minimum hourly rate

Take the total income for your business and divide it by the number of hours you have available to work with clients. This will give you the minimum you need to charge for your time per hour.

How did you find this figure – were you shocked by the answer or pleasantly surprised? This figure doesn’t give you every answer when it comes to your pricing but it’s a good starting point to make sure you’re on track to a sustainable and profitable business.

As a side note, you'll need to add in any additional costs of seeing each client (direct costs) for example room rent (if you pay per client) or commission when you work out what to charge for your services. Your minimum hourly rate will give you the foundations for your pricing decisions.

Here's the link to the calculator again.