How to cost your time, work out your hourly rate, and avoid the big mistake we all make

Last week I wrote about Pricing for Profit and the fab thread over on The Cake Makery Facebook page. Lots of you have been in touch about pricing homemade, especially about what hourly rate to use, so today I’ve got four thoughts on doing it properly.

(….and we’re all artists)

1. This is about costing your product, pricing comes afterwards

 

Before I get stuck into the detail of calculating hourly rates I want to take two seconds to clear up a really common misconception. I’ll breathe more easily after this and so, I think, will you.

 

When it comes to working out your price it’s not just about calculating your costs and sticking the answer on your price tag. It’s also about looking at what your competitors charge for similar-ish stuff and what your customers are happy to pay.

 

I’ll save the chat about Competitors and Customers for another blog post. All you need to know today is that working out your cost doesn’t tell you what your price should be. Rather it tells you the lowest price you can charge for your product.

 

In other words you can price at more than your cost but you shouldn’t price at less.

 

This is why it’s so bloomin’ important to get the cost right. If you don’t work it out with the right costs in – say you forget ingredients or undercharge for your time – then you’ll set your bottom price too low.

 

And let’s be honest. Because most of us work out the cost, lower it a bit (*sigh*), and call that the price, we’re working for nothing.

 

Today then, let’s get the hourly rate right!

 

2. How much do I want to earn per hour that I work?

 

If you’re serious about making some money out of your business then you need to give yourself a healthy hourly rate. Remember from (1) above, if you don’t put in a proper cost for your time then you’ll set your ‘cost price’ too low. I know, I know I’m labouring the point. But truly, costing too low is the reason we work so very hard for so not very much!

 

Right then, how do we work out our hourly rate?

 

Well the first step is to work out what we want to earn per business hour that we work. This is not the hourly rate we pop in our costings- as we’ll see in (3) below  – but stay with me because this is important.

 

A quick and easy-ish way to work out what we want to earn per hour is to ask ourselves:

 

• How much do I want to earn this year?

• How many hours will I be working in/on my business this year?

 

So let’s say you wanted to earn $30,000 (£20,000) and expected to work 1500 hours then you’d want to be earning 30,000/1500=$20 per hour (£13.33). Remember ‘hours’ is all the hours you work in your business not just the ones you spend ‘making’ or ‘doing’.

 

Have a go at working that out now.

 

3. So what hourly rate do I put in my costings?

 

This is the bit that mostly gets forgotten.

 

I hinted at this in (2) above, when I got you to think about how many hours you work in/on your business in a year. Fact is that you work many more hours in your business than you do on making/doing.

 

All small businesses are different but I wouldn’t be surprised if you spent 50% of your business time on making/doing, 35% of your time on marketing and 15% of your time on other stuff (admin and the like).

 

If you want to make a healthy income you need to include in your costings an hourly rate that soaks up the time you spend running the business too. Eh? An example will help me explain.

 

Let’s say you want to earn $30,000 a year and work 1500 hours. That means (point (2) above) that you need to earn $20 an hour for every hour you work. You spend 50% of your time making/doing and the other 50% is in marketing and admin.

Your business is cake making and each cake takes 10 hours to make. You make 75 cakes in a year.

 

Scenario A – This is what most people do:

 

You want to earn $20 an hour so you use $20 an hour in your costings. As each cake takes 10 hours to make you includes a time cost of $20*10= $200.

 

At the end of the year you’ve sold 75 cakes so (if you priced at ‘cost’) you’d have earned 75*200=$15000 for your time.

 

Um? You wanted to earn $20 an hour for all the hours you spent working but you actually earned just half of that. You worked 1500 hours and earned $15,000. That’s $10 per hour. Sound familiar? It’s because your hourly rate is too low.

 

Scenario B: This is what the savvy pricers do

 

You work out that each year you spend 750 hours making cakes (that’s 1500 *50%). So, as you only get paid when you’re making cakes, you take what you want to earn a  year ($30,000) and divide it by the number of cake making hours. In other words you know you need to charge 30000/750=$40 an hour.

 

Each cake then includes a time cost of $40*10=$400

 

At the end of the year you’ve sold 75 cakes and (if you priced at ‘cost’) you’d have earned 75*400=$30,000.

 

Yikes that’s quite a price hike! Yes, and we’ll worry about that in a minute. But first, remember tip 4 of last week’s post?  I mentioned how some people on The Cake Makery thread said they were charging £15 an hour and other people on the thread thought that was ridiculously high.

 

Can you see now that It’s not?

 

£15 probably earns the business owner about £7 an hour if you factor in all her time. And that’s precisely 81p above the minimum wage . Hardly ridiculously high.

 

4.  But I can’t charge that much per hour for my time

 

I know this calculation of hourly rate can be a bit confronting. It seems like a lot to be charging so I understand you might feel a bit wobbly about it. And no doubt redoing your costings using this rate will hike your prices up significantly.

 

The thing you need to decide is whether you really want to make a healthy income.

 

I popped some thoughts on Last week’s blog about getting paid the proper price so hop back there if you need a confidence boost or a reminder. Especially have a think about whether you are selling to the right customers. That’s another whole topic, but keep in mind that there are people who value what you do. And you’re better off spending time finding them than in making stuff for people who don’t appreciate the work you do. Agree?!

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