Service Pricing Strategy: 3 Steps to Finding your Average Billable Hours Target
So how many working hours in a year can you really expect to sell, even if you could sell them all? What if you are a sole practitioner not yet ready to hire help? Your billable hours and your billable rate determines whether your family will thrive, survive, or dive. In this article, we'll determine how you set your billable rate using target family income. In other articles, we'll cover other methods such as value pricing. Working full time at a regular job is 52 weeks a year at 40 hours a week, so there are maximum 2080 working hours in a year. Some of us actually remember working at a straight job, the kind that used to have a salary.
1) Subtract days we need to take for vacation days, education days, Sick days or other large blocks of time that reduce our available billable hours.
2 weeks vacation (at a minimum) - subtract 80 billable hours
2 weeks of holidays (in your own business you may end up doing paperwork those days) - subtract 80 billable hours
2 weeks education (realistic, even if you just do some educational research on the web) - subtract 80 billable hours
2 weeks sick time (again, realistic if you have kids, a spouse, parents or actually even get sick yourself) - subtract 80 billable hours
So now we are at 44 weeks at 40 hours or 1840 billable hours in a year, if we could actually charge clients for every hour of the week, which is unrealistic.
2) Calculate overhead time spent building, managing, and administrating your business.
Typically, these are items performed every week, and reduce your available billing hours on a regular and persistent basis. How many hours do we need for overhead? What's a realistic amount of time each week for:
Marketing and sales to get clients
Collecting money from clients
Answering customer service questions
Re-work for service (which you may not be able to bill)
Keeping records (for the IRS, for later customer questions, for analysis)
Researching new methods to help clients
Copying, faxing, emailing, filing
Even if you are good at sales, efficient at paperwork, and fast at implementing new ideas, you are probably looking at 10 hours a week here (more than one day a week).
So within that 40 hour week, you now have 30 average billable hours. That is, if you have no down time between client projects. A reasonable estimate for down time is another 15%. This is time within a project that can't be billed because the client is not ready for your next step, or between projects when you are looking for billable hours or not yet started. This 15% applies if you are in a field with good reasonable demand that doesn't get persistently rescheduled (such as when you are waiting for equipment to be delivered or other client delays). Some of that down-time can be absorbed by your overhead projects. That is why you can't always set aside specific times of the week for your overhead (or end up spending nights and weekends). So we will use 10% for our down time estimate, or 4 additional hours a week. That leaves 26 average billable hours available in a full working week. Over 44 weeks, that is 1196 average billable hours in a year. This should be your target for an average work week; one with no holidays, sick days, or vacation days.
3) How much you want to make determines your billable rate.
If you want to bring $100,000 a year into your family before paying personal taxes, and you have 30% benefits expense (we'll discuss in another article), you'll need to charge $109 as your billable rate for an hour. If your clients won't pay that billable rate, it's time to roll up your sleeves and find another way or your family won't eat! (This is where people call me and we find a way to solve this problem.)
If you think my estimates are too high, then tell me, what would you give up first? I appreciate your comments.