Calculating your billable rate is both important and challenging. As a professional service firm you sell an inventory of hours and skills. However you bill your clients — at the end of the day you sell time. You need to make sure that your inventory is properly priced.
Your goal: get the most return for your inventory of time and skills. Set your billable rate too high, you won’t sell enough inventory. Too low, you won’t generate the revenue you need to cover your costs, grow your business, and generate profit.
A good place to start is using the average range of $100 to $175 per hour for creative work. However, billable rates are different based on your market, specialization, and experience. Let’s explore methods you can use to analyze your billable rates so they are “just right” — maximizing demand and profits.
There are several methods for finding your billable rate. We are going to look at three different methods that you can use to calculate your billable rate: billable rate survey, salary multiplies, and trial-and-error.
Billable Rate Survey. One of the best ways to quickly set your billable rates is to conduct a billable rate survey — interviewing people about how much they charge or how much they are willing to pay. Best of all, you can focus your interviews on agencies and clients that reflect your specialization, experience, and market.
However, this method presents some ethical challenges. Competitors don’t want you to know their rates. In fact, most agencies have non-disclosure agreements with employees and clients that prevent anyone sharing their billable rates. Unless agency owners are willing to share billable rates, employees and clients can’t help.
Also, asking prospective clients how much they have or would pay puts them in an awkward position. They have an obligation to get the best deal possible. Even if they provide you with a number, it probably will not represent their true threshold to pay for your services. Remember, a survey is only useful if you can trust the results.
So how do you ethically collect billable rates.
Salaries Multiples. You can also set your billable rate by multiplying salaries divided by employee utilization rate. This is an effective method because it ties your billable rates to your clients’ cost of hiring a full-time person. The multiple is your “reward” for providing your client with flexibility, managing the employee, and being able to recruit and train highly skilled workers.
Another benefit is stability. While salaries will vary based on market, multiples are fairly consistent. This means if your agency spans multiple markets, you can quickly adjust your billable rates based on adjustments to market salaries — adjustments for the cost of living and local competition.
According to AIGA the average salary multiple for Graphic Designers is between 3.5 to 4.00. It is important to note that salary multiples will vary within your creative agency. Typically, agencies can charge higher salary multiples for more junior employees, and lower salary multiples for senior employees. Here are AIGA’s recommendations:
To find billable rates using the salary multiplier use the following formula:
Billable Rate = (Annual Salary/Target Billable Hours)*Industry Multiplier
When using salary multiples it is important to be consistent in how you calculate annual salary and target billable hours.
Trial and Error. While you can use industry standards to set your billable rates, you will always need to refine them. Your creative agency is not the industry. Your agency is unique. There are two rule of thumbs that indicate that you need to adjust your billing rates — up or down.
Billing Rate Too High. Your billable rates are too high if you are constantly discounting your rates. As much as possible, your billable rates need to represent reality. Too many agency owners set their billable rates based on ego, and not what they can actually charge their clients. This leads a variance between billable time and chargeable time — what they actually invoice.
They might invest 20 billable hours at $250 on a project, and only charge the client for 10 at $150 per hour. They act as if the project is $5,000, while it is only invoicing for $1,500. However, they feel good about billing an above average rate, because they do above average work. Their clients agree they do great work. Unfortunately, no one is willing to pay their above average rates. Don’t let your ego set your billable rates.
Billing Rates Too Low. If clients don’t have to think about your proposals — they immediately accept — then you might need to increase your billing rates. When thinking about pricing economists use a tool called marginal value versus marginal price. This requires that the buyer has to think about if the value of the project is higher than the price. The price isn’t low enough for the answer to be obvious.
There are some ethical issues with Trial and Error. Don’t change your pricing often. This can be seen as manipulating prices, or price discrimination — changing prices depending on how much people are willing to pay. While, price discrimination is an economically sound practice — it allows companies to extract the maximum value from customers — it is societally frowned upon.
In conclusion, your billable rate is the first step to running a successful creative agency. It determines the types of client you will work with — volume and quality, the salaries you can offer employees, and whether or not you will have profits to reinvest in building the agency of your dreams. Spend some time every year analyzing your billable rates to make sure they are both competitive in the market, and can support your business/dreams.