Good cake isn’t cheap. Cheap cake isn’t good.
For those quoting a “fixed price” for client projects, there are two important things to know when it comes to setting a fair price for the work: your floor and ceiling billing rates.
Calculating Floor Rates
Your “floor” rate is the minimum rate you must charge to justify your time spent working on the project. To calculate your floor rate, you need to know exactly what your “must-have” annual income for the year is. This is the amount of money you must earn to be able to pay your bills and live plus 30% – 50% more to cover your additional expenses such as: taxes, insurance, health care and so on.
For example, if you know:
- your food, shelter and transportation expenses for the year total $50,000,
- your tax bracket is 30% ($15,000) and
- additional expenses will run another $10,000,
then you are going to need to earn a minimum of $75,000 for the year.
The standard year is 50 work weeks or 2,000 billable hours (this allows for statutory holidays and a few days off). Dividing that $75,000 / 2,000 gives you a rate of $37.50 per hour.
However, the reality is you won’t likely be working on billable projects every day of the year because full utilization is rare.
You should plan to have to spend about 50% of your time working on building your business and marketing your services. That $37.50 just became $75.00 / hour. That is your true floor rate. And, if you commit to working on client projects for less than that, you’re going to be in trouble right out of the gate.
If you’re quoting on a fixed-price project, decide how many hours it will take you to do it. Then multiply that by your hourly floor rate to come up with your price. But, make sure you include:
- a restriction on the number of hours for the project and
- a provision for billing additional hourly charges for every hour after that point
as additional clauses in your contract.
Calculating Ceiling Rates
Your “ceiling” rate is where you make the most money, but it’s much harder to judge and assess without experience. Essentially, it’s based on how much your work is worth to your client. This is also known as “value-based” pricing.
For example, let’s say you’re a well-known, popular speaker with a responsive fan base and you’ve been asked to speak at a conference. You know you can put 30 “cheeks in the seats” just by announcing your participation in the event to your list. The event organizer is charging $1,497 per ticket but, without your assistance with promotion, may or may not fill the event. Thus your value is, minimally, $44,910.
It’s reasonable for you to ask for a percentage of that ticket fee as your appearance fee; you should absolutely not be working at these events for free. Many excellent, reputable conferences offer as much as 50% of the ticket price as a commission. Which means, if you’ve got a loyal audience and community to bring to the table, you’re in an excellent position to ask for almost $25,000 as your outright fee up front.
Include your other variables too
You can (and should) negotiate other variables on the back end to increase your earnings beyond that too. Plus, your travel and hotel expenses should also be covered by the event organizer and many pay a per diem for your meals too.
(I always get these expenses paid up front, with all travel (air and ground transportation), hotel accommodations, equipment and other services requirements stipulated up front in the contract, but many speakers simply bill for them after the fact and that can work too.)
Now here’s where you can really see the difference between your floor and ceiling pricing scenarios. If you billed the event organizer for a full day’s work, you’d only get $600 for speaking at the event when, in fact, your ceiling rate would provide many 10s of thousands of dollars more than that. This difference is why you should look at finding (and growing) your ceiling as quickly as possible!
To be fair, you do have to know and understand the industries and companies you’re serving to determine the economic value of the work you’re providing. This helps you quantify and justify the basis for your pricing and creates a compelling argument for why investing in your services makes good business sense.
At the end of the day
Ultimately, your goal with quoting fixed-price projects is to get to your ceiling rate as soon as practical without compromising your floor rate. When you can explain that to your clients with a solid confidence rooted in the numbers (and not your ego), chances are they’ll see the value you’re providing and be comfortable with it.
More next time. Until then, remember to LOVE YOUR WORK, whatever it may be.
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