Determining Your True Hourly Base Rate

Time to start deciding what you will charge. The first thing you need to do is to determine your “true hourly base rate.” However, this rate is for your information only, not for your clients. It is the hourly price you will use to calculate what you will charge based on the overall effort you will put in, and the return you would like to get for that effort. It is not the figure you will tell the client you charge per hour. Even though it won’t be used on all types of pricing structures, it’s an important number to understand regardless of the pricing model you use.

To calculate your total base hourly rate, you need to fill in the following variables:

A. Desired annual revenue $____________________________
B. Number of work weeks (annually) ____________________
C. Number of hours worked per week ____________________
D. Working base rate (TBD) ____________________________
E. True hourly base rate (TBD) ________________________

Once you have these figures you want to plug them into the following formula:

In this formula you have:

• A (which is the total desired revenue annually) divided by:
• B X C (which is the sum of total weeks worked in a year multiplied by number of hours worked per week), which gives you:
• D — your working base rate (D).
• The last step, since you will never work 100 percent of your week delivering services for fees (think sales and marketing time, admin-istration, networking, hand holding, project updates, travel, etc.) is to assume that at best you get to spend 50 percent of your week delivering revenue-generating work. So, you multiply “D” (your working base rate) times two (2) to arrive at:
• E — your true hourly base rate.

Here’s a real-life example:

• You want to make $100,000 in a year (A).
• You start with 52 weeks in a year, but subtract 4 for vacation, sick leave, holidays, and so on, so you have 48 weeks of work in that year (B).
• You take an average of 40 hours worked per week (C).
• You multiply 48 times 40 (work weeks X work hours per week) and get total hours worked in a year as 1,920 (B X C).
• You divide annual revenue by total hours worked (100,000 divided by 1,920) to get your working base rate of $52 (D).
• To adjust for true hours worked, you multiply that working base rate X2 to arrive at your final true hourly base rate of $104 per hour (E).

However, you’re still not finished because you will have expenses. Even working from your house you will have Internet bills, cable, phone, supplies, non-reimbursed travel expenses, membership fees, and so on.

You need to add your operating expenses into your true hourly base rate to make sure you cover those costs as well. A good rule of thumb is to use 10 percent of your projected revenue for expenses or the cost of doing business. Obviously this figure can vary widely, but it will work well for now. Once you get your business running you can come back and revisit true expenses if need be.

The fastest way to do this is to simply take 10 percent of your true hourly base rate and add it on. In the example above, my true hourly base rate is $104.00. Ten percent of that is $10.40. Combine them and you arrive at $114.40, but keeping it easy, round it up to $115.00 per hour, and that’s the figure you should use in some of the fee structures we will tackle next.

I’ve created an automated Excel spreadsheet that will help do these calculations for you. Visit www.innermetrix.com and look under the “Consultant Support Library” to download it.