The Art of Business: Setting Your Rates

Eric J. Adams

In the previous Art of Business, I talked about negotiating the best possible deal with clients. But you can’t begin to negotiate the best deal if you don’t know what is a good deal for you. How much must you earn each hour? What’s a fair profit percentage? How do you factor in vacation time and retirement? How about funding for new equipment? And how do you compensate yourself without pricing yourself out of the market?
You can get a good sense of competitive salaries and wages by visiting www.designsalaries.org, the site of the AIGA/Aquent Survey of Design Salaries 2005. This comprehensive study examined the compensation of 3,685 participants from every region of the United States with one of sixteen job titles, from solo designer to marketing director.
The site’s interactive online feature allows you to sort results by five categories: job title, type of organization, size of organization, client base, and region of the country. The site is particularly useful because it breaks down salary findings into three rankings: 25, 50, and 75 percentiles. This way you can see, for example, that 25% of all salaried art directors nationwide made $50,000 or less, 50% made $62,000 or less, and 75% made $76,400 or less.
But knowing what others earn annually is only the first step in determining your hourly rate. Every designer comes to the table with different skills, overhead, and financial needs.
Solo Calculation
If you’re a freelancer, you don’t have employee salaries and major office overhead to worry about, but you still have plenty to consider.
In his excellent new book Talent is Not Enough: Business Secrets for Designers, Shel Perkins suggests that you start by adding up all of your annual business expenses. You can use the Schedule C from your most recent federal income tax return. But if your tax calculation doesn’t reflect reality, use this list to estimate annual costs:
Business costs
1. office rent (or prorated home office)
2. telephone, Internet access, and utilities
3. business insurance
4. advertising and promotion
5. travel and entertainment
6. professional services (accountants and attorneys)
7. office purchases and supplies
8. yearly depreciation
9. business taxes and association dues
10. health insurance
11. other business expenses
Don’t include purchases of outside services or materials, such as printing, image licensing, or database development. You should separately mark up and bill these to clients.
Now do the same thing for your personal expenses. You probably are all too well aware of your monthly “nut,” but if you need some help breaking it down, here’s a list:
Personal expenses
1. Federal and state income tax
2. FICA (Social Security tax)
3. mortgage or rent
4. food and dining
5. auto and transportation
6. clothing
7. entertainment
8. household expenses
9. retirement account
10. other personal expenses
11. money foolishly spent
For the sake of this example, let’s say all the above business and personal expenses add up to $80,000 a year. That’s what you must make to break even.
Finding the Time
The next step in calculating your hourly fee is to estimate the number of hours you can realistically bill clients during a year. Make sure to deduct time spent on vacation, illness, public holidays, and business-management tasks, such as marketing and billing.
To save you the math, here’s a common estimate:
260 working days (5 days a week, 52 weeks a year)
– 15 days a year vacation
– 8 sick and personal days
– 10 public and religious holidays
– 92 business-management days (2 days a week, 48 weeks)
=
135 available billing days
X 8 hours a day
=
1,080 billable hours a year
At this point, you have two figures: the income you need for business and personal expenses, and the number of hours you have to produce that money. Simply divide your total expenses by total billable hours. This gives you a breakeven hourly rate — the amount you need to stay in business without losing money or going into personal debt.
Using a yearly gross salary requirement of $80,000 and 1,080 billable hours, your breakeven billable rate is $74 an hour.
You’ll probably want to do better. When you have a profit, you can grow your business and provide a cushion for lean times. Perkins suggests a 10% to 20% profit margin. If you calculate a 15% profit margin, your hourly rate now climbs to $85.
But wait, there’s more. What about deadbeat clients who don’t pay, kill fees that kill you, and other unexpected losses that can eat up your profit in one swallow? Let’s add another 5% to insure against business loss. Now you’re up to $89 per hour. For the sake of convenience, let’s say $90 an hour.
But Is It Realistic?
Can you actually charge $90 an hour? That’s a good question, particularly in today’s slash-and-burn competitive environment. In many regards, calculating your ideal hourly rate is an academic exercise. If you’re grossly out of line with the competition, chances are few clients will pay your rate, no matter how precisely calibrated it may be.
If you find you’ve priced yourself out of the market, you have a few alternatives:

1. Work more hours. No one likes ten- or twelve-hour days, but they may be necessary to stay in the game, particularly if you’re just starting out.
2. Reduce your expenses. It’s the easiest way to stay afloat.
3. Cut your profit margin. “Break even” is better than “in the red.”
4. Find clients who pay well and provide lots of work, and you can relieve yourself of marketing (and wasting billable hours). In fact, if you can reduce your business management time to one day a week instead of two, you can drop your break-even hourly rate from $74 to $56 and still turn a profit.

Once You’ve Set It, Don’t Give In
The only thing more difficult than setting a rate is keeping to it, even if it means passing on a few jobs that might help keep the cash flowing but ultimately lose you money.
Just remember that successful companies never (or rarely, anyway) sell their services and products for a loss, and you shouldn’t be expected to either. If your hourly rate is fair and competitive, stick to it.