One of the most fundamental things you need to get vaguely right before you set up any business is deciding how much to charge your customers. Get it right and you’re well on your way to having a successful business. Get it wrong and you’ll either not make enough money to survive or you’ll be too expensive for your customers. Let’s be honest and open about this. Today’s we’re going to have a deep dive in to what to charge your customers.
You can watch the full video here but there’s much more information in the article below:
Before we start, a little rant
I’m sick to the back teeth of seeing people charge WAY too little and going out of business. It doesn’t do anyone any favours. It erodes the potential rates legitimate businesses can charge. It also makes good businesses look like rip-off merchants. “What do you mean you charge £40 per hour? This guy over here only charges £10 per hour!”. Oh look, they’ve gone out of business. Oh look, they’re insisting on being paid cash ’cause they’re not paying any tax. Oh look, they’ve got an elaborate business structure to avoid charging VAT. The crazy thing is -- there’s no need for it!
Let me let you in on a little secret. Don’t tell anyone… CUSTOMERS WILL ALWAYS WANT STUFF CHEAPER! It doesn’t matter whether you charge £200 per hour or £1 per hour. There’ll always be someone complaining that you’re too expensive. We live in a world of good customers and bad customers. Do work for the good customers and STOP UNDER CHARGING!!
If you are a customer thinking you’ve been ripped off, please jump to the last section of this article, entitled “You’re not being ripped off!”. Now that I’ve got that out of my system, let’s crack on.
Running a service-based business
We’re mainly talking about charging for your time in this article. So if your business mostly revolves around selling products then this might be less applicable to you. However, if your main source of revenue is charging an hourly or daily date, read on! So we’re talking about jobs such as:
- Private Teachers
- IT Consultants
- Joiners & Woodworkers
- Anyone who charges for their skills
Basically anything where the bulk of your income is from your expertise and knowledge in a particular subject. You’re charging for your very valuable time. There might be an element of product sales in all of this, but the bulk of your income will come from selling your time. As such you need to work out what your time is worth.
Two approaches to charging for your time
The structured approach
Most people use the structured approach to charging for their time. By this, I mean you have a baseline hourly rate to work off and calculate everything from that. Your customer doesn’t necessarily need to know what your hourly rate is, but you certainly do. From that you can work out a day rate, week rate or even monthly rate for your services. You can have different hourly rates depending on the different sort of work you do. Obviously if you only ever charge by the day then just multiply up your rate accordingly. Having an hourly rate to fall back on is always useful though.
The unstructured approach
Chuck a number at your customer and see if it sticks. This isn’t as crazy as it sounds and works especially well for the creative types. You might make a piece of fine furniture and sell it for £30,000. Or what about artists? You probably haven’t calculated how many hours you’ve spent making a ‘thing’ but you know in your gut it’s worth £x. This is great if you’re Banksy. Harder when you’re just starting out though. Use this approach with caution.
Charging a fixed price or charge by the hour?
This is a question that comes up a LOT and it varies hugely by industry. For example, solicitors often charge by the hour and don’t give you a fixed cost for a piece of work. It’s difficult to say how long a job will take and I can assure you they won’t work for free. Same goes for private music teachers, physio sessions and the like -- you’ll normally book your slot by the half our or hour and you pay accordingly. It’s fairly obvious from square one what you’re being charged for.
Having said that, unless you’re working in an industry where you can guarantee how long a job is going to take, I would personally recommend always charging based on a fixed price for the job. Otherwise if you finish early the customer will expect a discount and if it takes longer than expected they’ll think you’re swinging the lead.
Charging a fixed prices avoids this nightmare. If the customer is happy with the fixed price then it doesn’t matter how long the job took. Obviously you still need to know your hourly rate based on how long you think the job will take. But the customer doesn’t need to know this. In the same way that when you buy a Mars Bar you don’t ask how long it took to make. Or do you? Anyway, you win some, you lose some.
Hourly rate spreadsheet
Over on my Patreon I’ve put together a spreadsheet to help you work out your hourly rate. It can get a bit complicated depending on the structure of your business. Don’t worry though, it’s not as scary as it looks.
I’m mostly going to be chatting about this spreadsheet in this article so pop over to Patreon and download it. It’s in Microsoft Excel format and should work on most computers. If you haven’t already signed up on Patreon, you can get access from just $1 and it gives you access to a bunch of extra stuff that will hopefully help your business.
Let’s cut to the chase
In the UK, we’re very coy when it comes to discussing money… so let’s change that. In my experience of being self employed for 20+ years if you charge any less than £30 per hour for your time, you’ll struggle to make enough money to live on.
This is the bare minimum I think self employed people should charge. Now, obviously this will vary a LOT depending on the complexity and overheads of the business, but we need to start somewhere. We have a national minimum wage for employment. Let’s set a national minimum rate for self employment and #PAYAFAIRRATE. If you already charge more than that, great. If you charge less and make a good living, also great. We need to start somewhere though -- so why not there?
Why £30 per hour?
Very simple. Almost every business I know of who charged less than that have gone out of business. Almost every business I know who charges £30/hr or more have survived. Here’s a handful of examples:
- Back in 2008, in the world of IT, we were charging £65/hr for a junior engineer and up to £200/hr for a consultant in London
- In 2011 a survey found the cheapest hourly rate for mechanics in the UK was £35/hr and the average was £80.44/hr -- that’s what the client is paying, not what you might get as an employee!
- In 2019 The Musicians’ Union recommended a minimum hourly rate of £34 for private music teachers. They also recommend a minimum day rate of £196.75 with a maximum working day of 5 hours
- My own mechanic charges £40/hr and that’s a bargain. My window cleaners charge £20 for a clean that takes no longer than 10 minutes. Yes folks, my window cleaners charge £120/hr!
- Get with the programme -- stop under-selling yourself!
But that’s way more than minimum wage!
OK… you need to read this section REALLY carefully. If you think an hourly rate for a self employed person equates in ANY WAY to the hourly rate of an employee working for a company, then you have a fundamental misunderstanding of how business works. Let me try to explain. Generally speaking…
As an employee
- You get paid no matter what
- You get paid when you’re on holiday
- You get paid when you’re off sick
- You get paid when you’re having a break
- You get paid when you go for lunch
- You get paid when you’re out quoting customers
- You get paid when you have no work to do
- You’re provided with a place to work (e.g. an office)
- You’re provided with stuff needed to do your job (e.g. computers)
- You’ll have business expenses covered (e.g. mileage)
- Your employer will pay for necessary insurances
- Your employer will contribute to your pension
- Your employer will pay all the bills (e.g. telephone, power, internet)
As a self employed person
- You don’t get paid for holidays
- You don’t get paid when you’re off sick
- You don’t get paid when you’re having your lunch
- You don’t get paid when you’re doing your accounts
- You don’t get paid when you’re looking for new work
- You don’t get paid when you’re updating your web site
- You don’t get paid when there’s no work to do
- You need to pay for premises
- You need to pay for business equipment (e.g. computers)
- You need to pay for insurances (e.g. public liability)
- You need to sort your own pension
- You need to pay all the bills
- You need to do your own marketing
- You need to do your own sales
- You need to pay accountancy fees
- You need to pay legal fees
Your hourly rate as an employee
In the world of being employed by a company there’s a simple approximation to working out your hourly rate:
Take your annual salary, divide it by 2 and remove 3 zeros
So if you’re on £20,000 a year you’re on roughly £10 per hour. If you’re on £25 per hour you’re on roughly £50,000 a year. I hate to burst your bubble but IT DOESN’T WORK LIKE THAT WHEN YOU’RE SELF EMPLOYED!!! If you want to make £20,000 per year from self employment you’ll need to charge SIGNIFICANTLY more than £10 per hour.
How many hours can you actually charge for?
A good starting point is working out how many billable hours you can feasibly work. A great example of this is gardeners. For half the year you can’t do any work! So you need a business model that caters for this -- for example doing a different type of work over the winter period or simply charging more!
Generally speaking there’s a lot of things you just can’t charge clients for -- for example if you’re off sick, if you’re on holiday, doing quotes (although some businesses do charge for quotes), doing your accounts etc. If you’re not charging the client then you’re not making any money.
In the spreadsheet mentioned above this is all worked out for you. Let’s run through an example -- sample figures are shown in orange. At the end I’ll tell you what your potential earnings are using the sample figures.
Maximum number of hours per day you can work
Do you do work that’s restricted to a maximum number of feasible working hours per day? For example, if you provide extra maths tuition for kids you can probably only do it from 4pm to 8pm each day. Or do you do work that’s so physically strenuous that you simply can’t do more than 6 hours per day? Let’s pick 8 as a baseline example.
Travel and lunch hours
Do you need to travel between clients? You can’t charge for that. If you’re charging by the hour presumably the customer isn’t paying you to have lunch? Let’s say there’s 1 hour per day lost to travelling between clients and lunch.
Working days per week
Normally this would be 5 but again you might do a job where you can work more or less than that. Perhaps you only want to work 4 days per week? We’ll stick with 5 days for the example.
Holiday days per year
In the UK we have around 8 public holidays (bank holidays) per year plus normally at least 4 weeks of main holidays. So there’s 28 days minimum if you want to have the same bare minimum as your employed friends. Obviously you can elect to work during holidays but beware. Being self employed is hard. If you don’t take some time off you’ll burn yourself out. Let’s stick to 28 days for now.
Quote days per year
How many days do you want to allow for quoting customers and actually winning work? This can vary dramatically by industry. Sometimes you’ll have a steady stream of work without doing any quotes. In some businesses, especially where you may need to submit complex tenders for work, you could easily spend 50+ days per year just working on sales paperwork. Let’s say you allow 1 day per month -- so 12 days per year.
Admin days per year
Don’t underestimate the amount of administration you’re going to have to do as a self employed person. Things like:
- Preparing your accounts
- Invoicing clients
- Updating your web site
- Updating social media
- Preparing advertising material
- Designing business cards
- Dealing with suppliers
You could easily spend 10-20 days per year just ‘running your business’ and doing all the essential admin stuff. Let’s allow another 12 days per year for admin work.
Sick days per year
Let’s hope you don’t get sick ’cause you ain’t getting paid! How many days per year do you want to allow for sickness? 5? More if you’re not taking any holidays! We’ll optimistically say you’ll only lose 3 days per year to sickness.
Predicted work rate
This the hardest thing to estimate. Even taking in to account all of the above, business simply may not come in! The chances of having a steady stream of work to pick from is slim to nil. You might get 5 customers all wanting work done on the same day and then nothing for the rest of the week. Your predicted work rate needs to cater for this. Yes, you can probably get on with some admin work but you must allow for time lost due to not having any billable work. After a couple of years you’ll get a much better idea of your normal work rate. Let’s start by saying it’s 70%.
Potential earnings (part 1)
Using the above example figures, an hourly rate of £15 would only give you a gross profit of £15,068 (roughly £7.50 an hour if you were an employee). This is less than the current minimum wage of £8.21 per hour for employees over the age of 25. Not great. And I’ve got more bad news. We haven’t catered for ANY business running costs!
Business running costs
Your business is going to have a number of overheads. Sometimes your overheads will be relatively low. Sometimes they’ll be high. Since it’s close to my heart, let’s say you’re a joiner who works mostly on customer sites. So no workshop. Here’s some example running costs, again shown in orange.
Vehicle hire / depreciation
If you’re a joiner you’re absolutely going to need a vehicle. You can either hire one or buy one. If you buy one it will need replaced every, say, 5 years? If it was worth £10,000 when you bought it and £5,000 when you sold it 5 years later, you might as well say £1,000 per year in depreciation.
Equipment costs / depreciation
As a joiner you need tools. It doesn’t matter that you already own them. They have a cost and you need to account for that. Some joiners will have £20k+ of tools. Let’s play safe and allow just £500 per year on new tools, ignoring the tools you already own. That’s a very optimistic figure but it will do for now.
Training / certification
You probably don’t have too much to worry about here but there are plenty of businesses that require annual re-certification. That all comes at a cost, not to mention more non-billable days, hotel costs and the like. We’ll leave this as zero for this example.
For this example let’s assume you only need public liability insurance and vehicle insurance. How old are you? Let’s optimistically say £700 per year.
Accountant & legal fees
Doing your own accounts? I hope not! Getting a good accountant can save you a fortune in the long run. There are plenty businesses where you’ll also need a legal professional on-hand to help with contracts and the like, so don’t forget to account for that. Let’s be very optimistic and say £400 per year.
Phones & internet
As a bare minimum you’ll need a mobile phone. Let’s allow for £15 per month which is £180 per year.
Web & advertising
Unless you’re planning on managing your own web site you’re going to have some costs in terms of domain names, hosting and advertising. Let’s optimistically say £300 per year.
Fuel & vehicle maintenance
You need a vehicle and you need to fuel it somehow. You could easily be spending £2,000 per year on fuel, MOT and servicing costs.
As a joiner you’re going to have things like glue, nails, screws, saw blades and a host of other stuff that you might not be charging the customer for on a per-job basis. Let’s allow £300 per year.
Premises rent / mortgage
We’re assuming you’re working out of the back of your van so don’t have rent to worry about. If you need a workshop then you can probably add £7,000 per year to your running costs. We’ll keep this as zero for now though.
Premises utilities / other
Again, we’ll keep this as zero but you could easily have bills of £3,000 per year to keep a workshop running.
Potential earnings (part 2)
So there’s £5,380 per year on business running costs and that’s incredibly optimistic for a joinery business. Do you want the bad news? At £15 per hour you’re now only bringing in £9,688 per year.
A crew member at McDonald’s would earn £8.31 per hour at the time of writing. Working full time that’s around £16,200 per year. To match the McDonald’s wage you’d need to be charging a minimum of £22 per hour. Not having a bash at anyone working at McDonald’s. Awesome customer service experience!
According to this site, the AVERAGE salary for full time employees in the UK in 2019 was £36,611. So what would your hourly rate need to be to hit that average salary using the above example? £42 per hour would give you an operating profit of £36,809, which is pretty close. Let’s not push it. What if you just wanted to earn £25,000 per year before tax? In the above example you’d need to charge… you’ve guessed it. £30 per hour.
Don’t shoot the messenger! You can work more hours and burn yourself out. You can take less holidays and burn yourself out. You can do fewer quotes and run out of work. You can skip the admin and run out of work because you haven’t updated your web site in 5 years. DON’T JOIN THE RACE TO THE BOTTOM!
A wake up call
Reducing your rate will only have a negative impact on the viability of your business. You may see a short term bump in revenues but long term, you’re killing your business. You’ll develop a reputation for being the cheapest and that’s a hard reputation to shake off. You’re better than that!
Obviously all businesses are different and it’s impossible to say “just charge £x” and everything will be fine. But in the early stages you probably don’t have a clue what to charge. Forget about market rates because they’re probably wrong. Only YOU will know the viability of your chosen hourly rate and even then it will take you 2-3 years to get a feel for things. This article isn’t intended to frighten you off running your own business. The opposite is true. It’s intended to get you charging enough SO THAT YOU STAY IN BUSINESS.
You’re not being ripped off!
Dear customer… As a customer, you might have browsed down to this section without reading all the businessy stuff in between. That’s fine. I just want to let you know, THE WHOLE WORLD ISN’T OUT TO GET YOU! The vast majority of self employed business owners aren’t trying to rip you off. They’re just trying to make a living, like you and me. You almost certainly have zero understanding of the running costs of their business. So when they give you a price for something you either need to trust it’s fair or start asking around for other quotes. When you start the “I just need to get 3 quotes” thing, you’re basically saying “I think you’re ripping me off and I need to check”. It’s not a great way to start a business relationship.
We all love a bargain but legitimate businesses aren’t making a sustained effort to poke your eyes out. By insisting on doing the “3 quote thing” you’re the one causing prices to be high. Business owners can’t make any money while they’re out doing quotes. There’s a cost to that wasted time and ultimately it’s YOU who’s paying for it. Either in terms of higher hourly rates or simply the inability to find anyone prepared to do work for you. When a trade or skill is killed off, since they can’t make any money, THIS is what opens up the market to rogue traders. It’s self perpetuating and massively damaging. If someone has come recommended and has been in business for several years, have some faith in the fact that they’re not rip off merchants.
I’d love to be kept up to date with progress of your self employed journey! Keep in touch over on Twitter @smallbusinesstb -- best of luck!