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From Internal Rate to Client-Facing Rates

I mentioned in the previous lesson that your internal hourly rate is NOT what you should be charging clients. There are a few more adjustments and calculations we need to do before we get to a client rate.

You are not going to get paid for every single hour that you work. Recall the brow wax example from lesson 1: If the salon can wax each person’s brows in 90 seconds and charge $10 for it, and do that non-stop for an hour, that would be $400/hour. But they can't do that. There's the buffer time around each appointment for the welcome, discussing the service, and ringing them up at the end. And there just isn’t a constant stream of clients for brow waxing, much less for photography or web design or personal yoga lessons.

In addition to the time you spend actually doing the work, you have to spend time on marketing and promotion for yourself, emailing prospective clients or getting on a call with them, answering questions, writing proposals, sending contracts, and more. All of that client development process happens before they give you a cent.

Your prices need to cover the time spent getting the project, not just doing the project.

Once you book a client, you have to send invoices, probably schedule some calls or send some initial emails to get what you need to get started, set up whatever project management system you have, and do other onboarding tasks. This will either be your time, which you can no longer spend doing billable work, or a VA’s time that you have to pay for. Either way, that time costs money. You can (and should) build that into your pricing a little bit, especially after they signed a contract with you. I tend to do as much of the onboarding as possible after the contract has been signed and the first payment has been made so that I know I’ll be making some money for that time.

You also have the general accounting, bookkeeping, education, networking, updating your web presence and social media, etc. that you need to run your business. But none of it is directly linked to a specific project so you're not able to bill one specific client for that time. Instead, you have to build that into your overall pricing structure.

In my experience, the ratio between billable time and non-billable time is about fifty-fifty. This means you need to double your take-home rate to account for the time you spend getting projects and running your business. That’s right, I said double. If you don’t believe me, track every minute you spend on your business for the next month or two. Then take the income you generate in the same period of time and divide it by the time spent working. Is that rate anywhere close to your internal hourly rate? For most business owners, it isn’t, which is why you cannot just use that internal rate for clients.

Next is taxes. Everybody's favorite! You're gonna have to pay federal, state, and local taxes. Please consult a tax professional about what exactly your tax responsibility is going to be. A decent rule of thumb is to set aside 20-30% of your income for taxes. Stick 25% onto your doubled internal hourly rate, because you pay tax on the gross amount you bring in, not what lands in your pocket after expenses and nonbillable time. This is the minimum hourly rate you need to charge clients in order to have your internal hourly rate land in your pocket after taxes and non-billable time.