tech-company, business-plan, finance, earningsWe are a small company that provides services to overshore clients. The team consists of contributing members which work is charged to clients, and non-contributing members like finance lady, QA, sometimes project manager and CEO.
It means that contributing members have to earn for their salary, non-contributing members’ salary, all office costs + margin.
What is the best way to calculate the “ideal” hourly rate which will allow the company to exist for a long time, but also to have money to cover “rainy days”?
I have made dozens of calculations, but am now trying to see if there is a better way to calculate our hourly rate.
There unfortunately is no such thing as a means to calculate an “ideal” hourly rate.
What you need to do in practice is find a balance between costs and price that keeps both sides happy. Business have two types of costs:
Your hourly rate, as you’re already aware, needs to cover the associated variable costs plus some.
How big “some” is entirely depends on the market you’re selling into and how you’re selling into it, but you could summarize the basic rule of thumb as: however much your clients are willing to pay. This may seem bloody obvious but it really isn’t most of the time - businesses tend to engage in all sorts of mental masturbation to determine their hypothetical platonic price.
In practice, there are three ways to price things:
Market-driven: in some cases the market dictates the price rather than the other way around. Your goal as a seller is to then provide the good or service at that cost with some sort of profit, and scale enough to make the aggregate profit meaningful. This is typical of commodities. (Generic offshore IT sweatshops, as an aside, are a commodity, so be sure to differentiate yourself if you’re into that line of business.)
Cost-plus: means you figure out your variable costs and slap a margin on top to cover fixed costs and rainy days. Most businesses do this in a way or another. Competition plays a part in how big a margin you can get away with, but there are plenty of other factors that play a role including how desperate your clients are to get what you offer, how convinced they are that you’ll deliver, and a slew of psychological factors like their mood that day. (When dealing with industrial goods, a good starting point is to try to sell at double your cost unless you end up with a figure so out of whack that you can’t say the price out loud with a straight face.)
Value-driven: occurs when clients are buying ROI. That is, they’re comparing the value they’re expecting with their investment - without pondering much, if at all, on your underlying costs. This is the most profitable way of pricing, but requires pretty sophisticated marketing and sales so few businesses do it. The bare bone version is someone telling you “your revenue will increase by $x if you pay us $y” with $x > $y and you nodding in agreement because you’re so convinced that they’ll deliver.
The line between cost-plus and value-driven is rather thick and fuzzy in practice (and let’s get real, there always is a slight market-driven component lurking somewhere). Companies do some degree of both through marketing, branding, sales…
However it’s labeled, it all feeds into the same ideas: communicating expertise, reliability, a proven ability to solve the specific problem your client is wondering about, etc. and educating your client about it all. The greater your ability to radiate all of these things, and the more confident your clients are that your abilities are genuine, the more you’ll be able to charge.
Two tips:
Charge by the day (or in half-day increments) rather than by the hour if you can. Doing so removes a lot of client micromanagement (“You really spent 5h on this?”) and comes with client interaction time and project management time built-in.
Steer conversations away from time spent as much as you can; focus on the deliverables and the client results they allow instead. You’re selling solutions; not your time.
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