These two things are not the same.

  • How you calculate your target rate
  • How you actually price

How you calculate your target rate

This is maths. You need to take everything you spend across the business (on people and other things) and then add the profit you want to make and divide it by all the billable time you expect to do.

That gives you an amount of money per hour (or per day, depending on how you like your maths).

As you grow and have people on different salaries or who bill different proportions of their time, then you need to make the maths more complicated to make sure everyone is covering the right amount proportional to what they cost.

I have a spreadsheet for this. Get in touch if you want it.

This is your target rate.

It doesn’t matter if you do time and materials or value pricing, retainer or fixed fee, you need to know this number.

How you actually price

Maths is good for calculating your target rate and making sure you are profitable.

Maths is bad if you are trying to explain your pricing to a client or even quickly working out yourself what you should be putting in a proposal.

Clients need to understand pricing and you need to understand pricing. Maths makes it harder to understand.

You should actually price using a simple model.

  • A flat rate across the business that beats the target rate
  • A rate card for different roles or seniority that beats the target rate
  • A fixed-price project that, when you divide that price by the time it took, beats the target rate
  • A value-priced project that, when the outcome is delivered, and you calculate the value, and then get paid, and then check how much time it took you, and then divide that by the time it took you, beats the target rate.

These are not the same thing

Calculating your target rate does not mean you are time and materials, it means you are armed with the information you need to grow.

You can still beat your target rate by a lot in your pricing. What this gives you is you now know exactly how much you’re beating it by, and you get a warning if, once everything’s factored in, you’re not beating it at all (which will happen as your business collects more moving parts).

When you add a new person or give someone a pay rise you can know their new target rate and then price them to beat it.

Get in touch for that spreadsheet, and the maths is all done for you.