How I set my rates
(And the mistakes I made on my first attempts)
Happy Friday, friends!
If I had to name one mistake I made in my business, it would be setting my rates too low in the beginning. Sure, there have been other mistakes and learning opportunities over the past seven years, but if I’m being honest, the big ones all tie back to my rates.
For example, that time I found myself client-less? It’s because I was spending 100% of my time on client work rather than allocating some of my time to growing my business. And why was I spending all my time on client work? Because my rates meant that I needed to work more billable hours to hit my revenue goals.
I learned a lot from that experience, so let’s break down some common advice I see on fractional and consulting rates, how I initially went about setting mine, and how I do so today.
🤔 Advice That Might Work
There are two methods that come up again and again as a quick way of setting rates. And they might work for you! But spoiler alert: I think it’s worth spending a little extra time crunching numbers (we’ll get to that part soon).
The first method is to apply a multiplier to the typical full-time salary for your fractional role, then work backwards from there to land on an hourly rate. The multipliers I most often see are 1.2 and 1.3. The tricky part here is that salaries are so variable.
The second method is to take your target annual revenue and drop the last three zeros to get your hourly rate - so, an annual revenue target of $250k would translate to an hourly rate of $250.
When I apply these methods to my own business, they land pretty close to my effective hourly rate - but that’s because they just happen to align with my total billable hours target for this year. If I planned to work fewer (or more) hours this year, these methods might not work as well. (We’ll get to billable hours targets in a minute.)
🤷♀️ How I Initially Set My Rates
I’ll be honest - when I first set rates seven years ago, I had no idea what I was doing. Fractional work and independent consulting weren’t as much of a thing then as they are now, so even Google didn’t have very many answers for me.
So as a starting point, I worked backwards from my most recent corporate salary to get to an hourly rate. Then I looked a couple of jobs back - I’d been at an agency, and I remembered what the agency billed clients for my time and my boss’ time, so I used that as a gut-check. And then I added a bit of padding to the hourly rate I came up with.
As I began closing clients at that rate, I started to wonder if I was coming in too low. So I peeked at what other people were earning for similar work on Upwork, and started to adjust my rates up a bit. (Quick note: I don’t think this is a great benchmark - based on my experience as an Upwork client, there are a lot of people undercharging on that platform.) Then for every three “yeses” I got without pushback, I’d raise my rates again.
And I was doing okay - but like I said, my rates were based on 40 hours of billable work per week.