I just heard (on a podcast) the head of marketing at jumpup.com, a great site from Intuit, talk about the 65/25/10 rule.  This rule was to offer some type of guidance on how to bill for your time once you make the jump to becoming self-employed.  It was originally suggested by one of the members at jumpup.com.

Basically, the member was struggling with how to bill for her services after starting her own venture.  After some time, she figured it out, and offered this model: of your total hours to be worked in your new venture, 65% of your time should be spent on billable client work, 25% should be spent on business development, and 10% should be spent on the administration in your company.

She used this model to create her new hourly billable rate.  Here is an example: Before making the move to self-employment, you made $65,000 in your last job (including salary and all benefits).  And now, you assume you will be working 50 weeks during the year for 40 hours per week, or 2,000 hours per year.  This will equate to 1,300 hours being spent on billable client work (2,000 hours x 65%).  Divide your last compensation package ($65k) by the hours to be billed (1,300), and you arrive at how much you can bill for your time – which comes to a whopping $50.00 per hour. 

At least it’s a model, but a few cautions:

-this calculation only gives you what you were paid last year.  But bill-for-time service industries typically have some type of mark up on the rate they are paying themselves in salary.  This is because their hourly billable rate now has to cover their wage AND their overhead costs to run the business.  Should the $50.00/hour be marked up 2.5 times to arrive at $125.00 per hour as a billable rate?  Maybe so, but it may depend on the industry…  

-the industry you are working in has a lot to do with how you calculate your hourly rate.  Some industries allow for a certain amount to be billed depending on the market.  For example, an attorney may bill out at $200/hour in a certain city, while a graphic designer may only be able to get $100/hour at the most in the same city.  It depends on the market rate in that industry.

-niche work can sometimes bring higher rates, if marketed properly.  An attorney billing out at $200/hour for general practice work may be able to charge $300/hour for high end health care work.  Likewise, the graphic designer in our example may be able to bump her rate up to $150/hour if specializing in 3D renderings for engineers and architectural firms.

-what if you work more hours than 2,000 hours per year (which you most certainly will if you are self-employed), and don’t get 65% of your time billed out (which is hard to do – administration is so freakin’ huge)?  Let’s say you work 60 hours per week for 51 weeks, or 3,060 hours per year.  And let’s say you only get 55% of your time billed out.  Now use the $65k you got paid from your last job and divide it by 1,683 billable hours during the year (3,060 x .55).  Now you get a whopping $38/hour.  You don’t want this calculation to lead you into charging $38/hour, when you should charge $75/hour. 

Just some things to think about when using “scientific” methods to calculate your rates – sometimes it’s more of an art!

Thanks, Jason M. Blumer