You’ve started your own design business and you’re flying solo. Now you need to pay the bills. Although there are a number of ways to price design work, knowing your hourly rate is a good foundation. Calculating accurate rates can be difficult and a lot of designers don’t know where to begin. So, here’s a handy step-by-step guide.
1. Understand the needs of your business
Understanding what your business needs is essential. Start by making an honest assessment of your needs and wants, not only in business, but in your life. This will help you define the two main factors of your business: annual expenses and working hours.
This will change over time. Right now you might be happy working in a dungeon for 100 hours a week so you can afford a two-month holiday. But in the future, other ambitions may arise: buying a house, raising a family, or hiring employees. The sooner you work out what your business needs, the easier it will be to confidently deliver an hourly rate supported by an understanding of your goals.
2. Calculate annual expenses
Annual expenses are the total yearly expenditures associated with running your business – from your salary to overheads such as a regular supply of coffee, electricity, internet and water bills. It’s probably a good idea to take superannuation into account as well. It’s a sensible investment so you’ve got something to fall back on when you’re old and wrinkly and all the pixels blend into one and what are those darn kids doing there? Get off my lawn.
Again, be sure to make this work for you. Here’s a case study of a senior designer working as a one-person studio.
- Salary: $70,000 (based on the average senior designer salary across NSW, QLD, SA, TAS VIC and WA before tax. You can view other average design salaries here)
- Superannuation: $6,500 (this is roughly 9.5 per cent of your annual salary)
- Overheads: $12,000
- Total = $88,500
3. Figure out your annual time
Don’t compare your life and work ethic to someone else’s. Do you want six weeks of holidays or do you need to work 7am to 3pm so you can spend more time with the family? Ask yourself these questions. And, more importantly, answer them.
- 52 weeks in a year – 4 weeks of annual leave = 48 weeks
- 48 weeks x 5 work days per week = 240 days
- 240 day – 10 public holidays = 230 days
- 230 days x 8 work hours a day
- Total = 1,840 working hours
4. Estimate productivity and work out billable hours
Be honest when estimating your productivity. You don’t need to pretend that some hours won’t be devoted to social media, copious amounts of coffee or business development … goodness knows I need a little Emma Stone lip-syncing or random studio dance parties to get me through the week.
Research shows the maximum billable hours a studio or freelancer can consistently achieve is 80 per cent a week, but let’s operate of 70 per cent a week to be safe.¹ Billable hours are the number of hours per period (in this case a year) your business can expect to work and be paid for. This is your working hours multiplied by your productivity.
- 1,840 working hours x 70 per cent (0.7) productivity
- Total = 1,288 billable hours
5. Determine hourly rate
You’ve done the hard work. We’re almost there. Your hourly rate is your annual expenses divided by your billable hours:
- $88,500 (annual expenses) / 1,288 (billable hours) = $68.71
- Total = $70 hourly rate (rounding up)
6. Add profit margin
In this case study, the hourly cost to run a one-person studio is $70. This is the break-even cost, which means the amount you’re earning is equal to the amount you’re paying to run your business. It’s important to add a profit margin because, well, it allows you to make a profit. This should be the primary reason to go into business. Without profit, you just have a job, albeit one that you created, but little else.
Adding a profit margin is important for a few reasons:
- It allows you to live comfortably.
- It allows for tax deductions. If you’re not making a profit it’s considered a hobby and you can’t claim stuff for tax purposes from your business.
- It allows you to stay competitive. Profit can give you leeway on price points and the ability to offer discounts to smaller clients or not-for-profit organisations.
- It allows for future investment. You can sit down and figure out the needs of the business now but, as mentioned, these will change. Profit can translate into money for future investments, staff, buyouts or things like holidays, vacation homes or early retirement.
- $70 (hourly rate) x 20 per cent (0.2) profit margin = $14
- Total = $84 final hourly rate
Again, this is a case study, and if it hasn’t been iterated enough, hourly rates are based on personalised business needs. A higher hourly rate doesn’t necessarily mean larger profits. Don’t compare yourself to the masses, start looking at the individual — you.
¹ Greg Branson, The Business of Design, Design Business Council, Melbourne.
Some of the information in this article has been referenced from Greg Branson’s book ‘The Business of Design.’ A valuable resource for any designer, the book can be purchased here
Image by Magdalena Ksiezak