Note: This transcript was auto generated. As our team is small, we have done our best to correct any errors. If you spot any issues, we’d sure appreciate it if you let us know and we can resolve! Thank you for being a part of the community.
Verbatim text
Lee:
Welcome to the Agency Trailblazer podcast. This is your host, Lee, and on today’s show, it is you and it is me. We are having a conversation about pricing. At the end of this episode, I want you to have a list of activities that you are going to undertake so that you can really evaluate both your hourly rate and what you are charging on a per package basis. I’m going to talk you through each step that you need to consider. So before we carry on, please go ahead and grab a notebook and pen as well. Check out the show notes because there are going to be some bullet points in there for you to follow. If you are already a premium member of Agency Trailblazer, don’t worry. We also have a fully fledged spreadsheet available to you. Just go to agencytrailblazer.com, log into the dashboard, go to the library section, and you’ll see the full video walkthrough as well as the spreadsheet that you’ll need to complete to be able to sort out your pricing. Again, if you are not a member, that’s fine. We are going to walk you through what you need to be considering when it comes to calculating the hourly rate and understanding how to price those projects up.
Lee:
Okay, so First of all, our first step is going to be understanding how much time we actually have available to work, i. e. To also bill. What I mean by that is this. In a year, there are 365 days. Brilliant. However, you don’t work 365 days a year because that wouldn’t be a life. There are at least two days of every single week that you are not working because that’s a weekend, that’s time with a family, etc. But also you want to be considering the fact that you may only want to work eight hours a day rather than 18 hours a day, which is what I used to work. So understanding what a lifestyle that you want for yourself and for your team is absolutely paramount to working out how many working hours you actually have available to, A, work, and B, of those hours to build. So I will give you a number which you can write down. And there are 230 available days on average you can be billing and working. Out of all that, if you’re working on, say, an eight-hour day, that means there are 1,840 hours in any one given year available to you to work.
Lee:
That’s based on the idea of you working five days a week, 9:00 till 5:00, and having at least four or five weeks off of holiday, and also considering you having those weekends off as well in public holidays. A approximately 230 days of work that you’ll be doing in an entire year. The rest is hopefully going to be play and chill, which means 1,840 hours, 1,840 if that’s how you say your numbers. The Next thing you then want to consider, we’ve worked out that you want to be only working that many days per year, we have to consider what can we bill, what percentage of those hours can we actually start to bill as an agency. In In the real world, let’s consider a few different job roles. First job role would be the founder, the owner operator. Say that’s you. You own the agency that you’re operating, which means you have to do a whole load of duties that are not automatically billable. For example, there might be marketing activities, you might be creating content, you may be looking after your employees, you may be doing HR, you may be doing accounts, you may be doing contracts, et cetera, working with different departments.
Lee:
So there’s a lot of work that you will be doing as the agency owner that is not directly billable to a client. Equally, perhaps you have a web developer who works for you. That web developer will not necessarily be able to work on completely billable hour by hour work from 9:00 till 5:00, five days a week on all of those 230 working days that are available. For example, the web developer may go over on a project, there may not be enough work on particular days, or perhaps the web developer is off ill, etc. There is all of things to consider when it comes to those calculations of hours. What we do as a business is we assign a capacity percentage to each and every one of our employees. We work out what is their capacity to work on billable work. If we think of those 1,840 hours that are available, if I, as the founder of the business, only can work 40% of my time on billable work, then I need to do a calculation and work out how many hours a year that would be. A simple calculation based on me, 40% of my time on billable work means that in a whole year, I can work on average 736 billable hours.
Lee:
So that’s 40% of the 1,840 hours. Now, with my web developers, my graphic designers, et cetera, I can increase that because they’re not working on as much admin as I might be. I could probably give them a rating say, 60% capacity. So 60% of the 1,840 hours that are available to them will be billable. So that would mean that my web developer and my graphic designer, if they both got the capacity of 60%, that means they We’re going to be able to work each on 1,104 billable hours in an entire year. If you add all that together, say we’ve only got the three employees, me and two other then that would mean we have 2,944 billable hours that we can sell to our clients. And that’s really, really important that we understand that realistic number of 2,944 hours. If you’re going to go ahead and times all of the days of the week and forget holidays and full eight-hour days, et cetera, then you’re going to have an overinflated number of hours that you’re going to be using for the calculation conversations of your hourly rate. So number one, we start with our lifestyle. What lifestyle do we want?
Lee:
We want to work 230 days, say 9:00 till 5:00 or less. And we only want to be working on billable work at so much capacity each, which gives us our overall number of billable hours, realistically, that we want to be able to ship per year, as it were, as an agency. Understand our lifestyle, understand a realistic number of hours so that we can then start to base all of our calculations on those targeted hours per year. Now as an agency, we understand our capacity to be able to deliver the work based on the resources we have. We now need to start to understand what money we need to be earning to be able to operate as a business, but also to generate a profit. So the next stage is to start to write down all of the financials. And that would include all of the salaries, rent rates, your accountancy costs, your office supplies, your technology, maybe your marketing budget, software licences, anything that you can think of that are your costs. A very quick shortcut would probably be to Go ahead and look at last year’s accounts and take a look through the schedule of accounts there.
Lee:
You should be able to see all of the different costs that you have incurred, et cetera, across all of those different categories. Maybe connect with your accountant and have a look at that. But if you can put together a budget of this is how much it costs us to operate for us to be able to have take home pay for everybody, pay all of our bills, pay our taxes, and have a couple of quid, as it were, left at the end of the year, then you need to be able to calculate that number. That’s the next important number that you need to calculate. What I’ve put together is a very small example where we’ve got a founder who wants to earn 50 grand a year. We’ve got a web developer that’s on 25 a year and a graphic designer that’s on 40 grand a year. Then I’ve put a few different rates in there, like taxes and rent and office supplies, et cetera. That totals about £152,000 in an entire year. That that imaginary company needs to turn over to be able to survive. That’s an important number because we know that’s our break-even point, but it’s also our survival number.
Lee:
We can understand that if we can ship 2,000 944 hours at a rate that allows us to meet that 152,000 target, then at least we will not go bust. However, that is not a good idea. We need to know what our turnover and our break-even point is so that we can then understand what our targets are going to be. The next step is understanding what are the targets, where do you want to be as a business, how much turnover would you prefer so that you can continue to invest and to grow your business. Remember, your agency is not your job. You’re not there to own your own job. You’re actually there to grow your business so that you can continue to be there for the clients that you are serving. It is your responsibility to yourself, to your family, to your employees, and to your clients to make sure you are running a profitable business. What you want to do with that break-even number is put another percentage on top of that, say 40, 50%, to give yourself a calculation of how much extra that will be profit you want to make as a business.
Lee:
In our example, I put 30% on top of that 152K, which is giving us a 194K as a target to turn over for this imaginary business. For this imaginary business, With the hours that they have available, they are aiming to sell either hours or projects, whatever it’s going to be, £197,000. That’s going to pay all of their costs. That’s going to bash through that break-even cost, and that is going give them a 30% profit that they can either reinvest in the business or go to Disney World with whatever it needs to be. Now, once you have that number, you can do a very simple calculation, which is essentially that number of 197K, divided by all of those hours that you’ve calculated you have available as realistic billing hours. Remember, we said that there’s 1,840 hours per person in available, but based on them operating at specific capacities, we actually got down to a number of, for all three people could only work on 2,944 hours in an entire year. It’s a simple calculation of grabbing that number and your target number and doing a division. So 197K divided by 2,944. And that’s a real simple calc of 67 pounds per hour.
Lee:
Or it’s actually 67 and 12 P, according to this calculation that I have. So that will help you understand an hourly rate that you could start to look at and work on. Now, this is where you now need to sanity check that hourly rate. 67 is actually, in theory, too low for, I think for most companies, it’s too low for this company, in particular, this imaginary company, because that means that they have to 100% sell every single one of those 290 Sorry, 2,944 hours for them to make that target. If they then compare the hourly rate of 67 pounds against other people in the industry, I’m pretty sure they’ll soon start to realise that the average rate for a agency that has staff is nowhere near as low as 67, but it’s at least 80 to 90 to 100 to £150 an hour. A good example would be our other agency that I run with my business partner. An hour, I only rate over there is £110 an hour. That’s still competitive within the industry that we’re operating in. Remember, what we’ve done here is we’ve got our target number of 197,000. We’ve We did that by the realistic amount of hours we think we are able to work at at full capacity.
Lee:
We’ve got a number of 67 pounds. However, realistically, looking at our industry, we think we can charge insert number here. I’m going to say for this example that we’re going to decide on 95 pounds an hour in this industry for this imaginary business. So quickly, let’s recap where we’ve got to so far to get this hourly rate. Step one, we decided on what lifestyle we wanted to live. So that’s the amount of hours that we want to actually work in an entire year, the holiday, etc, both for ourselves and for our employees. Then what we did was we calculated our capacity and the hours that we have available based on those capacities. So that gave us a total number. Then what we did was we looked at all our costs so we could understand how much it would be to survive as a business. And then we marked that up to include a total turnover that would allow us to be a profitable and growing business. Now, with that profitable, growing business number, we calculated that a base rate, that’s a base hourly rate, simply by dividing that 197K, divided by the amount of hours that we believed we could sell in an entire year.
Lee:
That gave us our base rate of 62, I think it was, or 67. Then we looked at the industry rates that other people were charging. We also did a bit of a sanity check on us trying to ship 2,944 hours, and we decided on a rate that was competitive in our industry, in this imaginary industry, of £95 per hour, which also allows a little bit of wiggle when it comes to selling the amount of hours we might need to sell in an entire year. This has helped us calculate that magical elusive hourly rate number. Now, the magical thing about increasing that hourly rate from the base rate of 67 pounds per hour to 95 is it has dramatically reduced the number of billable hours that we need to try and sell in an entire year to be able to hit that 197K turnover target. And that would just be down to 2,080 hours. So that means that there are three resources available. There’s me, the founder, there’s my web developer and my graphic designer. And in the grand scheme of things, if I’m charging £95 per hour in an entire year, I only have to make sure I have sold and worked the equivalent of 2,080 billable hours to meet all those targets, to make that to be in the position that I want to be.
Lee:
If you think about it, the amount of work that you put in to sell an hour at £67 is the same amount of work you’re going to put in to sell an hour at £95 pounds. So you might as well make life a little bit easier for yourself and find the rate that allows you to operate as a business, still allows you to be competitive in your industry, but also makes your life as easy as possible when it comes to not having to focus on piling it all high, selling it cheap, just so that you can meet your relevant targets. All right, so how do you use this to now start to price up those packages? Because you’ll have heard of the old adage that we don’t want to be selling at time for money. Why have you just spent the last 15 minutes, Lee, telling me how to work out my hourly rate? Well, it is important to understand our early rate because then we want to be able to use that to understand how we can price our projects as well. It’s really important that we have a visual on our business. We understand what we want to achieve.
Lee:
We understand what our costs are, what our targets are for profit, and what that all divides to based on the capacity so that we can use those numbers to build up some package prices, which makes it even easier for us to productize our services and meet the targets that we’re looking at achieving. If you were to say to somebody, Right, you’ve now got As your three-man company, you have to sell 2,080 hours. It’s still a big job. You’ve still got to try and work out if I can do a little bit here and a little bit there. And that’s not really going to work for an agency. What they need to be able to do is package up and productize their services. So for example, an agency might have a branding package, a web design package, and a care plan package. So you’ve got web design and build, sorry, and a care plan. So let’s look at this. Branding, web design and build, care plan. So what you can now do is look at those projects and come up with an average project price for those products that you sell and calculate what a base rate would be.
Lee:
So let’s talk about branding and you guys can probably work through your own examples. But if we were to look at a branding, and at any branding project, we’re going to have at least a day of discovery. We’re going to have, say, three days of doing the concepts, et cetera. We’re probably going to have another day of revisions and then a final wrap-up day of doing the final documentation, the branding document, et cetera. That actually equates to around 46 hours worth of effort, of billable effort, to do that branding project. That would bring us a base rate of around £4,000 for a branding project. If we then look at the branding project based on the value and everything else that we’re also providing, which is the years and years of experience, our experience both in the industry but also as designers, then there is a percentage that we can add on top as well there that represents the value that we’re providing to the client. The client won’t be able to do this design or brand. They don’t have the years that we’ve put in there. We are able to mark this up as well to make the price that’s still attractive, but something that is going to ensure that we are a profitable business.
Lee:
Perhaps we might mark that up, that calculation up by 30% to give us a final price for a branding package of approximately five and a half grand. Now, the great thing about this is it allows you to work out all of your effort. You can then have confidence in what you are charging for the packages that you have to offer. Also, it’s going to help you meet that target that you have for the end of the year because these are grouped together. So approximately five and a half grand for a branding project is actually the equivalent of around 60 hours. So if you wanted to set yourself a target of selling eight of those in an entire year, that represents 360 odd hours of effort, ie, 45 grand of the turnover target that you might have as a business. So if you’ve got a turnover target of 197,000, you can focus your business on ensuring that you sell at least eight branding projects in an entire year with a base rate, a base sales rate of about five and a half grand each so that you can hit a 45K target for that particular productized service.
Lee:
That’s helping you get at least a fourth of the overall target that you’re looking to generate as a business. Then what you can do is look at, say, the web design and build process. For us, we actually go through two stages. We have discovery for the web design, but we also have discovery for the web build itself, which is going to be like what’s going to be included in the build, how is it going to function, et cetera. There’s at least two days there. Designs are going to take 2-3 days. Build is going to take 2-3 days, if not more, depending on the complications. We’re going to need revisions, we’re going to need UAT, we’re going to need amends, et cetera. The total for all of that could come out at about 90 hours. So if we were going to add that 30%, that would give us a sales base rate of around 11K for a web design and build project. So as an agency, we would be looking at a minimum rate of around that 11,000K mark. Based on that, we could set ourselves a target of one website a month over a year.
Lee:
That’s 12 websites in a year, which sounds pretty reasonable to sell as a product. That’s going to give us £133,000 of turnover as well. Add that with the branding. We’re already well on our way to meeting those targets. Now, if we consider, finally, something like a care plan, again, we can use that £95 an hour rate to calculate what our ideal care plan price would be. If you think of a care plan, especially the one that you might be offering reports on, doing testing for, and maybe doing amends, etc, then you could be investing about three hours a month into that plan. So if you think of updates, take maybe half an hour. Testing of those updates will probably take an hour. You want to be able to do a report, etc. But equally, you might be doing amends to the website content amends. That’s about three hours worth of work. So if you were to do the same calculation, you’re looking approximately at, say, three and a half grand per a year for a medium to upper-level care plan. If you could ship, say, just five of those at three and a half K, then you’re looking at 17,000 pounds turnover in an entire year.
Lee:
We are now rocking way up to that overall target. If we already consider, say, reoccurring revenue, maybe we have three of those care plans carrying over from the previous year, that’s a further 10Ks worth of revenue for the entire year, which allows us to meet our target and actually blow it out of the water, and we’ll hit around £206,000 per year. What did we do? Let’s recap. We worked out that hourly rate, which then we were feeding in to a productised plan. We were estimating for a branding, for a website build, and for a care plan, how many hours were going to be included. We used that £95 rate to calculate that up. We then used the 30% on top that to give us a base sales rate, which ensures there’s profit in there, ensures there’s growth, ensures there’s value, but also gives us a little bit of wiggle room as well with regards to either pricing or also covering us if the project goes over slightly. And then what we did was we set some sales targets for each one of those productised services based on those prices so that we can look at a piece of paper or a spreadsheet, whatever needs to be a report and see this is what I need to do this year to meet all of my targets and be a profitable business.
Lee:
And we worked out there for that all we need to do is 8 branding packages, 12 websites, 5 care plans, and retain at least 3 care plans from last year. And we will turn over £206,000 as a business, thus making that 30% profit, thus allowing us to make our plans for the following year. I hope this has helped you start to understand how, A, you can work out an hourly rate, and B, how you can use that hourly rate to then create some general productised project prices. Also, having that hourly rate on top of this will allow you to price up any of those extra change request, change controls, or projects that are outside of the scope of your standard products. It also ensures that you’re protecting yourself from selling too many hours, thus going over the capacity that you already have to deliver. If you are lowering your prices and trying to sell as much as possible, then you’re actually putting pressure on you and your team to go over capacity and sell more. Whereas if you can find a rate that is above that base rate per hour and also allows you to be competitive, then that’s going to allow you to find that sweet spot of a rate that will ensure you are profitable, that you can use to calculate for your projects, and that is not going to push you over the capacity that you already have as a business.
Lee:
Very often, we are forced to start to get freelances involved, etc. And before long, all of those costs just get out of control. Whereas if we could create targets based on the capacity that we have, based on a carefully thought out hourly rate, then that is going to help us succeed, as opposed to responding, as it were, or firefighting as things hit us. Now, what’s really important as well is that we have to understand right back to wait a minute to see transformation. I recommend you listen to episode 200. You have to understand in all of this, your identity, what your mission is as a business, who it is you’re serving, what problems you are solving for those people, et cetera. Understand your industry, understand the rates that people charge in your industry, et cetera. All of that identity piece is really, really important for when you are working out these prices. Equally, so is value understanding how valuable you are, how freaking awesome you and your team are, and why you are worth paying money. So again, listen to episode 200, if you’ve not already, just to encourage and to inspire you before you hit with this project on trying calculate that hourly rate that’s more realistic and setting those project prices and setting some targets for the up and coming year.
Lee:
If you have any questions, we have a free Facebook group. Sorry, you can check that out over on agencytrailblazer.com/group. And don’t forget, if you are a premium member, we deep dive in a video in here as well as offering you a full spreadsheet so that you can calculate all of these for yourself. You can check that out if you’re not a member over on agencytrailblazer.com. All right, folks, if we don’t see you either community, we will see you in the next episode.
