When you run a business or professional practice, one of the biggest challenges is pricing your services. It’s a dilemma that can stay with you even if you’ve been in business for years.
If you’re just starting out on your own, you’re most likely going to undersell yourself to win clients because you don’t have the experience or brand reputation to charge top-tier rates (yet!). However, this isn’t sustainable in the long run. Even if you manage to cover your costs, it’ll be hard to grow your firm and you may not attract the types of clients you’re after.
If you’ve been practicing for a while, you may be struggling with a price point that made sense at one time. Now that you have more experience, a recognized brand, and expenses like staff and a bigger office space, you’re thinking about raising your rates. But by how much?
This article offers three tips for better understanding the value of your services and setting your rates accordingly.
1. Know the Value of What You Offer
It doesn’t matter how much you charge: there are always going to be clients who protest that it’s too much. Legal and financial professionals in particular find that resistance to their rates is one of the biggest challenges they encounter, along with acquiring new clients and wasting too much time on administrative tasks.
Instead of giving in to pressure and lowering your rates, take a close look at the value you provide. Lawyers, for example, use highly specialized knowledge to help people deal with complex issues like divorce, lawsuits, and starting a business. That help comes at a higher price than, for example, hiring a landscaper. Going lower will reduce your perceived value and ultimately make your practice unsustainable.
2. Determine the Cost of Doing Business
You need to charge enough to cover not only your salary but also:
- Office expenses like rent, utilities, supplies, and professional memberships
- Profits that can be used to market the business more effectively and keep it going during slower billing periods
The strategy outlined below can help ensure that you meet those expectations.
How to Calculate Your Hourly Rate
These steps can help you choose a competitive and profitable hourly rate for yourself or your company.
Calculate Your Cost of Doing Business
Let’s assume you’re a financial advisor who wants to make $85,000 a year in salary. Your expenses average $20,000 and you want a 40% profit margin. This means bringing in another $42,000 ($85,000 + $20,000) x 40% = $42,000). Your cost of doing business is, therefore, $147,000.
Calculate Your Billable Hours
Let’s assume that (taking vacations and national holidays into account), you work an average of 235 eight-hour days a year. That comes to 1,880 hours. However, not all of it is billable: you’ll also be doing some administrative work unless you delegate that out. Let’s assume then that only 60% of your office time is billable, bringing your billable hours to 1,128.
As soon as you’ve calculated the above, divide your cost to do business by the number of anticipated billable hours you expect for the year. In this case, it will be: $147,000 ÷ 1,128 = $130.30/hour. Not bad, right?
According to our Trends Report, most lawyers charge between $200-400 per hour (even if using flat fees, etc.) If you run these calculations and the final rate ends up being lower than what you charge, make sure you’ve taken everything into account and play with the numbers to find a rate that you feel comfortable with.
3. There’s Always Room to Grow!
If your salary is on the mid to lower-end of what others earn in your industry, remember that there’s always room to grow. By gaining more experience and making yourself more valuable to clients, you can justify higher fees. In the legal field in particular, lawyers with decades of experience can earn up to 100% more than those new to the profession. Put your past successes to work for future clients and you’re in the best position to thrive.
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