Steps to Starting a Small Business: #6 Setting Your Rates

A fast easy way to start a small business is to sell your services.  If you’re good at writing, you can become a freelance writer.  Have a knack for selling, you can freelance your services as a sales person or a telemarketer.  Think you know a thing or two about selling without meeting people in person (marketing), then you too can be a freelance marketing consultant.  The list goes on and one.

If you’re a service professional, then the big question you must answer before you begin practicing your craft is to decide HOW you’ll get paid for sharing your wit and wisdom with others.

Setting your rate is the biggest issue you’ll face in launching a service based business.

Unfortunately, setting your rates is  not a simple matter of “set your rates too low and you’ll be swamped – set your rates too high and you won’t make any sales.”  Ah, if only that were true!

Unfortunately, it’s far too common for people to evaluate your expertise by the rate you charge.  For example, I know of two Virtual Assistants – one charges $25 per hour and one charge $45 per hour.  When you hear what their rates are, do you automatically assume that  the one who charges $45 an hour is “better” than the one who charges $25 an hour?

Setting your rate is a lot more complicated than picking a pie in the sky number and setting that as your income goal.   Your rates HAVE to be based in reality if you want to succeed.

There are TONS of bullsh*t articles out there which will tell you to set your rates with the following formula:

How Much You Want To Make / 50 weeks (two weeks of vacation)/40 hours per week.

So, if you want to make $100,000 a year you simply divide and divide again to come out with $50 per hour.

OOPS!!!  This little formula tends to neglect that if you’re spending 40 hours a week on billable work, you’re probably putting in more than 60 hours a week at the job.  (This is a bitter pill to swallow in a world that buys into the idea of earning six figures in the course of the 4 Hour Work Week.)

So let’s “fix” this formula by substituting 30 for the 40 in the figure above so we can spend 10 hours marketing and promoting our services and 30 hours “working” at practicing our craft. Now the rate is $66.67 per hour.

It’s better – but still not good.  The flaw lies by starting from starting at the end (what you want to make) and working your way back to the beginning (what you need to charge to make what you want).

If you’re a Virtual Assistant and your income goal is $100K per year, you’re going to need to charge $67 per hour to hit the mark.

Here’s the “fly” in that ointment.  Remember when I told you that I know TWO Virtual Assistants – one charges $45 per hour and one who charges $25 per hour?  Did you notice how “similar” those rates are.  Now, if you’re a VA and you’re planning on charging $67 per hour – well, you’d better be able to do something those other two Virtual Assistants can not do!

In other words, you’d better have a Unique Selling Proposition or USP.  That means you better be able to provide a REASON for the rate you’re charging.

The first business coach I hired took me through this whole bullsh*t process.  We picked a pie in the sky number – did the math and VIOLA!    It worked great – on paper.  However, when I went out to drum up business, prospective clients would ALWAYS ask how much I charged.  I would reply by quoting people my “hourly” rate.

Invariably, the next question out of the prospective client’s mouth would be, “So how many HOURS will it take for you to do this?”

See, people didn’t care what my hourly rate was – they just cared how much their website was going to cost.

Oh, and by using the bullsh*t formula, I put myself in DIRECT competition with the hundreds of thousands of high school and college kids who created websites in between beer bong parties.  Fifteen years of successful advertising experience didn’t play a part in that calculation and the fact that I was fast wasn’t reflected in my hourly rate.

Since I’ve been doing this for a LONG time, allow me to share what I’ve learned about setting the rates for your services.

  1. No one cares about your hourly rate except you.  All your client cares about is how much this is going to cost.
  2. In the end, your prospective client is going to mentally measure whether the cost of the project outweighs the benefit.
  3. Your hourly rate should reflect not only the value of your time, but the value of your expertise as well.

The final advice I have on setting your rates is this: When you’re starting out – aim low.

The biggest struggle you’ll face as a beginning freelancer or service provider is filling your practice.  Set your rates too high and you’ll struggle to land clients.  However, if you price your services on the low end, you’ll fill your practice with clients who are DELIGHTED with the high quality of work you’re providing at a bargain basement price.  Before long you’ll  find yourself in the position of having to raise your rates to keep your waiting list reasonable.   Meanwhile you’ll have a STRONG portfolio of work and testimonials to share with other potential clients.

Then, when you raise your rates – you can either raise them across the board or “selectively,”  meaning, you can grandfather in your favorite clients at the old rate and the “pain in the ass” clients will find themselves faced with a rate increase.  Personal note: A rate increase is the most satisfying way to fire a pain in the ass client!

In closing – the absolute WORST thing in the world you can do is to doubt your own worth.  If you don’t believe you’re worth $X per hour – then your clients certainly won’t think you’re worth that either.

What Can You Do “Out of the Box”?

I’ve recently been reminded that sometimes, selling a service isn’t all that different from selling a physical product. When buying toys for Christmas morning, the three little words that strike terror into a parent’s heart are SOME ASSEMBLY REQUIRED.

When it comes to hiring help, the similar phrase SOME TRAINING REQUIRED causes equal dread.


Since I’m not looking for more involvement with the IRS, the last thing I want to do is to hire any “real” employees. I prefer to work with fellow freelancers. I’ll 1099 you… you can 1099 me. When I hire you, I won’t tell you when, where and how to complete the project and you do the same for me. That way, we can avoid W-4, W-2’s and any other W forms that might indicate a more significant relationship than we really have. That more “significant” relationship would mean that I have to pay federal withholding, FICA, Medicare, workman’s comp and the other delights associated with a formal “employer/employee” relationship.

I recently got an email from someone who used to work for a client of mine. She had heard I was busy and wondered if I needed help. After all, she’s eager to learn and I could easily TRAIN her to do what I needed done.

Let me get this straight… I’m busy doing work for people who are paying me money to perform certain services. You want me to teach you how to provide those services. I’m to invest my uncompensated time (which is currently filled performing services for people who PAY ME) into training you so I can then PAY you to do those services for me?

Not that I haven’t tripped lightly down that path a time or two or ten over the past 12 years. At one point, I was burning through sub contractors at an alarming rate. I am surprised how many self proclaimed freelancers I’ve hired who then expected to be trained to do the job they told me they could perform. Something I found even MORE alarming was the number of people who expected me to pay them on an hourly basis as they learned a new skill.

Asking an employer for training is something you can expect as an employee. As a freelancer, you had better come to me ready to work right out of the box with minimal supervision… just as the IRS requires.

As a business owner, you expect to train your employees to do a specific task which they will perform for you on a regular basis. When you hire someone to run the cash register, you don’t hire those people on an “as needed” basis.

“Jan! Hey, it’s me. I’ve got a customer here getting ready to check out. Can you run into the store and ring up this sale for me?”

That’s not how business supposed to work. (Although I have shopped at a couple of stores where that appeared to be the business model.)

I don’t need someone to run the register. I do sometimes need the services of other freelancers to help carry the load. That’s when I recognize the value of trustworthy contractors.