The fee-setting debate: when you know what to charge, you'll know how to succeed - Finance

Home Office Computing, Oct, 1993 by Linda Stern

In the places where we hang out-home-office forums on CompuServe and GEnie, local business networks, lunchtime meetings of professional groups-- the debate always gets spirited when talk turns (as it usually does) to money and fee setting.

Two camps emerge quickly: The "I am worth top dollar and l demand top dollar and won't consider anything less" camp, versus the "I can work cheap because I work fast and use low-paying jobs to fill in between my better paying clients" group. Both sides are fairly assertive. Yet it's my observation--and this may end up relaunching the whole debate--that it's the people in the first camp who succeed in their businesses.

"Anyone can stay in business for two or three years and think they are doing well. But can you be doing what you are doing now, 20 or 30 years from now, and still be doing well? That's how you define a stable business," says Cameron Foote, editor of Creative Business, a Boston-based newsletter for independent graphic designers and copywriters and a staunch advocate of assertive and realistic pricing.

"It is very difficult for anyone to build a stable business and support himself in the long term without charging at least $50 an hour," he states flatly, though he concedes that in regions with a lower cost of living, lower rates may prevail.

Yet many people charge much less than that, believing perhaps they lack the experience to command higher rates or simply figuring that any work is better than none.

"I had an [online] argument on my hands once," notes Janet Attard, system operator for the Home Office/Small Business Roundtable on GEnie. "It all started because I suggested not taking certain jobs because they just aren't profitable."

Home-based businesspeople in particular err too frequently on the side of underpricing their services, suggests Attard, who runs business forums on GEnie and America Online and is author of the newly published Home Office and Small Business Answer Book (Henry Holt).

"Most home businesses forget they have to pay for their time," she says. "They have to account for theft overhead and they have to account for the time they are going to spend marketing." Many folks feel they can set lower fees because they have lower overhead than a big business or because their lifestyle is so easy and fun (the "I don't have to commute or wear panty hose" school of price setting).

That's nonsense, of course. I'm sure you already know that fees should not be reduced because you're having fun, or wearing comfortable clothes, or using your own office instead of someone else's. They should reflect your level of professionalism.

SETTING FORMULAS

So just how do you set those dignified rates? Particularly for those of us who sell services, not things, it can be difficult to price our time correctly.

There are a few formulas, but allow me first to present my husband's personal favorite, the "YECH" system, devised by Ken Norkin. Norkin runs his own advertising copy business upstairs (I'm downstairs) and crunched many numbers before setting fees in his business, KN Creative. Now he is often asked to speak to small-business groups, and when someone asks him how to set fees, he says, "YECH!"

As in You, the Environment, Competition, and Hunger.

* You. How experienced are you? How good are you? What do you offer?

* Environment. What will the market bear? Where dO you live?

* Competition. Is there any? What do they charge?

* Hunger. How badly do you need the work? The client?

Flippant as Ken's questions may sound, they provide the basis for an externally driven fee schedule. If you're leaving a company, think about what that business charged for your services. Then figure out what the market will bear by joining professional groups that conduct earnings surveys and by asking friends who are in business what they have paid for similar services. Chances are your colleagues have formed a local network, perhaps only informally, where they can get together and chew over fees and services. Join, if you can.

HOW MANY HOURS CAN YOU BILL FOR?.

Once you've got a general idea of what the going rates are in your community, it's time to figure out what you really need to earn. The best way, says newsletter editor Foote, is to add up all of your real expenses and your salary needs and divide by the reasonable number of billable hours in a year.

Real expenses include insurance costs, self-employment taxes, retirement contributions, overhead like supplies and telephones, and all the other costs of being in business for yourself. A short cut, suggests Foote, is to add between 25 and 33 percent to your target salary to cover such costs. If, for example, you want to make $50,000 a year, add another $14,000 or so to cover your expenses. Your target earnings should be $64,000.

To earn that income while billing on an hourly basis, divide it by the number of hours you can realistically expect to bill in a year.

The short answer, Ken tells me, is 1,000 hours a year. Here's how he gets there: There are 2,080 hours in a typical work year (40 hours a week, 52 weeks a year). Subtract 100 hours for two and a half weeks vacation, 80 hours for 10 popular holidays, and another 40 hours for one week of sick leave. You're left with 1,860 hours in a year. Consider that marketing will take up 20 to 25 percent of your time (that's another 419 hours or so), administrative tasks like accounting and reading trade journals another 5 percent of your time (93 hours a year), downtime when you're willing to work but none is available could be 15 percent of your time (another 279 hours), and you'll lose or waste 15 minutes a day (58 hours). You end up with 1,011 billable hours to squeeze your salary into. Round it down to an even 1,000, and that $64,000 target mentioned in the previous section comes down to a $64 hourly rate.