How to set your fees for profitability

 

Fees break down as follows:

Labor and direct expenses      30 – 40%

Marketing                                       20-30%

Overhead                                        20-30%

Profit                                                10-20%

 

 The fee-setting process begins by determining the value of your labor, the daily labor rate.

 So there are approximately 1,428 working hours in a year (taking away holidays, personal days, vacation days, etc.)  Let’s say you want to make $100,000.00/year. 

 $100,000.00 / 1428 hours = $70.00/hour. 

 However you need to add in the overhead.  EVEN if you work at home, you have overhead.  We ALL do!  That’s what the percentages above represent.  So you need to sit down and add up your overhead. (just go through three months bills and multiply by 4 easiest way!)  (If you are not good at this, have your accountant help you – oopps and add that person in as part of your overhead!)

 So overhead includes (but not exclusively, there are many more categories):

  • Telephone
  • Postage/shipping
  • Automotive
  • Licenses
  • Professional development
  • Stationary
  • Personal benefits
  • Insurance
  • Marketing expenses
  • Subscriptions
  • Printing

 These are all examples of overhead and you don’t even see rent or office space  in this list!

So let’s just say your expenses add up to $5,000.00/year. 

$5,000.00/ $100,000.00 = 20% (that’s the percentage of your overhead) 

THEN

 Multiply that by hourly rate

 $70.00 x 20% =$14.00

 So now you are up to $84.00/hour.

 However there is one more important thing to add (oh yeah, PROFIT!) otherwise we are just working to pay our expenses.

DO NOT GO below 10% but 20% is really the going rate and makes the most sense. 

 So another 20% of $84.00 is 17.00. 

So your total fee, if you want to make $100,000.00 is $101.00/hour.  Now, you might want to look at what the average designer with your experience makes and mark it up to that hourly fee because you know there are designers out there charging that fee.  Usually it is based on seniority and/or how long you have been in the industry.  Just like senior partners or designers at larger firms are more than a junior designer who does not have the experience. 

 That’s how I set my fee.  I looked at what comparable people are making with my level of expertise and experience such as National Sales Managers or VP.’s of companies or CEO’s and used this formula to figure out my hourly fee.

 THAT’s how you figure your hourly rate, not let your clients decide.   Now you will also know that if you do take a job for less (and we sometimes MUST do that, I know I have!) you will not be making a profit. You may be making money, but you are typically not profitable and that’s not the way to run a sound business.  I know that we tend to think if we are making money, we are profitable, but that is not always the case!

 Oh…and by the way, this is not necessarily something you do once and then put away.  As your business grows, you might add an employee, part time even.  Or you may have to purchase more or better equipment.  I am not suggesting you do this every day or month, of course,  But a yearly check up when you have your accountant do your taxes, is not a bad idea!!

 12.09.  Deborah Flate/Dialogue Consulting