More Hourly Rate Magic...

I thought one last post about hourly rates might be worthwhile, since there seems to be plenty of interest in measuring and ultimately raising the amount of profit that we make with each hour we invest in our businesses.

Many of the hours we work are dedicated to non-billable activities such as marketing or administration and it’s not easy to measure the return on that investment as a ‘dollars per hour’ figure. However, when it comes to the hours you devote to a billable client there are lots of ways that you can increase your profits. In my business, I do it in two primary ways:

1. Upsells
2. Billable employees or contractors

Upsells are simple enough to understand, but highly underrated. Just by adding a small upsell to each client, it’s amazing how much you can increase revenue. For example, I don’t sell hosting to the public but we always reserve space on our servers for existing clients who need hosting services. We charge an annual fee of $250/domain for hosting, which is higher than the industry average but since our clients already trust us they are happy to pay it. We also offer advisory services (tax, legal, bookkeeping, etc.) to known clients at rates higher than we charge for ordinary development services. We can frequently increase the total revenue an individual client brings in through these easy upsells that require little or no marketing.

From time to time, we compare the actual hours worked (including marketing, sales, operations, and services) to the total revenue that a client brought in (including services and upsells) to determine the absolute ‘bottom-line profit per hour’ for that client. This metric tells me how many hours I actually invested in a project, and how much money I earned when it was all over.

The results can be interesting and useful. We find that some clients bring in less revenue in services, but the hourly proceeds are higher overall due to upsells. We also find that the size of a project doesn’t determine its profitability (as discussed in the last post). Most importantly, we’re able to quickly gauge the ‘value’ of each client by determining how much profit we really made for our efforts, and that helps us to make effective business decisions, such as which types of clients to pursue.

The second way is by sourcing work to employees or contractors. Again, this is a no-brainer but many shops don’t accurately account for the ‘bottom-line profits per hour’ very well. A simple model is to simply roll the margins (or gross profit) for each hour that an employee or contractor works into your own hourly rate. In other words, you combine the two into a single hourly rate so that you can make good decisions about priorities, etc.

Say you outsource a project to a contractor who works for $40/hr. You are billing the client $50/hr for the contractor’s time and $60/hr for the time that you spend managing the project. If you spent 10 hours working on the project (providing client service and interfacing with the contractor), and the contractor worked 32 hours, your total bill to the client would be $2,200. You would then owe the contractor $1,280 so your gross profit on the project would be $920, which works out to $92/hr for your time. Having a simple ‘total gross proceeds per hour’ metric like this allows you to understand which projects are really going to make you more money in less time – and that’s a great help in deciding how to actually allocate your time in the best way possible.

Obviously there are many factors that go in to a solid business decision, but understanding the return that you are getting on each and every hour is a great start. This kind of analysis once led me to eliminate the entire entertainment industry from my target marketing audience, because we discovered that the ‘big projects’ we were winning weren’t as profitable as we thought. If you can measure your real hourly rate based on actual earnings, you have taken the first step to raising that rate.

Replay

Category: business Time: 2006-11-18 Views: 1
Tags:

Related post

  • How to Calculate Your Hourly Rate 2009-02-26

    If you're new to freelancing or business ownership, you may be unsure about how to set your rates. Even if you're a seasoned professional, it's always a good idea to revisit what you charge as you get more experienced, when there are changes in your

  • How Do You Determine Your Hourly Rate? 2010-12-03

    In pricing a service or product it is general practice to not merely charge for the effort spent and the costs involved + margin but from the value delivered down. As an independent consultant, how do you set the price of your work? What is the proce

  • Hourly rate benefits for the customer 2011-04-06

    It is good for a developer to work on a per-hour basis, but it's hard to explain the advantages of hourly rate to the customer. What are your arguments on the hourly rate for the customer? How do you explain him his benefits and how do you argue on "

  • How do I determine an appropriate UX design hourly rate for my location? 2011-04-13

    I'm a Senior-to-Lead level UX designer in New York City, who recently decided to go freelance. I since have decided on hourly and daily rates, but was wondering what others consider a fair fare given their skills and seniority. So in your own experie

  • Price/hourly rate filter radio - input correlation 2014-01-26

    I was faced the following problem. We have a search engine in our web application that makes it possible to filter results by selecting a single filter from each set, with four-five sets given - let's say, we can choose one language from ten given, o

  • List all times in the day at a half hour rate 2015-05-07

    Shortest answer wins. It must be sorted, and in 24hr time. The final line does not have a comma. Output should be as follows: '00:00', '00:30', '01:00', '01:30', '02:00', '02:30', '03:00', '03:30', '04:00', '04:30', '05:00', '05:30', '06:00', '06:30'

  • Why more bandwidth means more bit rate per second? 2014-01-25

    In the infamous Shannon-Hartley theorem the bandwidth of the channel is measured in Hz (Hertz) but the channel capacity is measured in bps (bits per second). So, either I'm missing something obvious or there's a dimensional mismatch in the equation..

  • Do you own your tools? 2011-02-04

    A colleague of mine wrote a post a while ago asking Do you own your tools. It raises an important question. Do you? I answered way down in the comments. As an independent, I do own my tools. Even when I wasn't independent, I had my own (fully license

  • Flat Rate vs. Hourly: Fast work = lower pay? 2013-09-13

    I'm new to designing graphics for clients, I normally did things just for myself or for friends when they needed something done and I had a free minute. I've also worked at a retail store that does "desktop publishing" and offered a 24 hr turnar

  • Rate per hour vs overall budget? 2012-05-22

    This is the scenerio: The customer fills a web form, requesting for basic information such as description of what he/she needs done, and the budget or rate per hour. This can be analyzed by testing both options and seeing A. How fast are form submite

  • Why does more bandwidth mean higher bit rate in digital transmission? 2014-03-30

    I understand that similar questions like this one have been asked before on this site, listed below. However, I am confused about the answers. If I explain what I think I understand, can somebody please point out where i'm wrong? why-more-bandwidth-m

  • What is your hourly SharePoint rates in us dollar 2014-06-03

    I am fairly new to development but I like to day dream about future, Anyone who would like to share there hourly rate either for development or adminstration in US dollars would be thankful. May include your location of country too. --------------Sol

  • Five Rate Questions You Need To Answer 2010-07-23

    When was the last time you reviewed - or changed - your rates? I've just started a new financial year, so a rate reassessment is on my agenda. Hourly rate questions may be a constant source of consternation for the freelancer, but there are several r

  • Why are more programmers not freelance these days? 2010-12-04

    Leaving the whole pie to only a few of them, amplifying the huge differences between the two status. Pay is a (huge) one, not having to do overtime is another. I leave the question open to hopefully get many great answers on all the different subject

  • Charging by the hour/project 2011-01-06

    This is related to a question I asked earlier - How to end a relationship with a client without pissing them off? What are your obligations when charging by the hour vs charging by project? If you agree to take on a project, give a rough estimate tha

  • Outsourcing Artwork: Hourly or Per-Project? 2011-01-11

    I've hired people to produce art and graphics before, but only ever at a per-job rate and that has worked out well. This question is for both artists and the people who hire them: As a buyer, are there any situations or types of projects you've exper

  • Rates for UI design - On what basis should I charge? 2011-02-16

    I was hoping I would find some people in the industry that could help me decide what's the best price to charge to design (in this case) business cards. What are standard prices for professional designers? From a firm point of view? From a freelancer

  • What are good rates for freelance graphic designers? 2011-02-16

    I was hoping I would find some people in the industry that could help me decide what's the best price to charge to design (in this case) business cards. What are standard prices for professional designers? From a firm point of view? From a freelancer

  • Should you charge clients hours spent on the wrong track? 2011-03-03

    I took up a small CSS challenge to solve for a client and I'm going to be paid on a hourly rate. I eventually solved it, it took 5 hours but I spent roughly 25% of the time in the wrong track, trying a CSS3 solution that only worked in recent browser

iOS development

Android development

Python development

JAVA development

Development language

PHP development

Ruby development

search

Front-end development

Database

development tools

Open Platform

Javascript development

.NET development

cloud computing

server

Copyright (C) avrocks.com, All Rights Reserved.

processed in 0.556 (s). 13 q(s)