Know Your Worth: Find Out How Much Should You Be Earning (And Actually Make A Profit)
Do you know your worth?
Being a freelancer or consultant is more than charging an hourly rate. Find out how to make money and feel good about asking clients to pay up.
Know Your Worth & Take The Emotion Out of Negotiation
Consulting fees are often thought of as mystical numbers. Clients often balk at the costs of fees because they have a project that, “only takes a few minutes to do” and can’t understand why “you charge so much.”
Instead of getting angry that potential clients “simply don’t understand your talent”, focus on the bottom line and let that drive your business decisions instead of the emotional knee jerk reaction of wanting to eat and survive another day.
Many consultants and solo entrepreneurs struggle to ask for money. In my book, The Money Formula, I explain that subconscious beliefs often block us from engaging in the behaviors that bring us financial success. Activities like budgeting, financial planning, and even sticking to a budget are difficult to do.
Once you’ve taken a moment to understand why you may feel confused, triggered, or overwhelmed by the mere thought of charging clients for your work, take on the task to determine consulting fees.
Know Your Worth & Stops The Struggle
I work regularly with professionals and subject matter experts who struggle to do two things:
- Finding the right customer or employer
- Getting paid without losing money
The first is pure marketing and branding. The second is doing your numbers.
The second reveals two important truths:
- Your ability to understand just what it takes to do your job.
- Your knowledge as to what it takes financially to live well and comfortably.
Doing your numbers forces you to take a look at these truths. And, they reveal fundamental mistakes in your management and decision making. Fixing these fundamental mistakes is easy with the technique about I’m to teach you.
Know Your Worth With This Formula
I am going to teach you a technique for calculating your cost of living and the costs to do your job.
A Grain of Salt & Advice To Employees: If you are an employee, the costs involved to support you so that you may do your job are paid for you. Therefore, you should not include them in your own personal calculations when determining what you should be paid.
However, you should know how much it costs to employ you (employment taxes, benefits, operation costs) so that you know what your employer is paying for your opportunity to show up to work. Employees often underestimate these costs and under appreciate their employers. Often, employees are resentful that they are paid “so little” but forget that they assume no financial risk or legal liability to operate the business on the clock and while they are off the clock. In essence, want more of the pie? Assume more of the risk.
What Is Your Worth? Start With Your Cost.
There are 2080 hours in a year. (52 weeks*40 hours)
There are 1880 working hours in a year, when you subtract 10 national holidays (80 hours), 2 weeks vacation (80 hours), and 1 week of sick times (40 hours).
Step 1. Calculate your monthly personal cost of living and multiply it by 12 (months). I recommend including everything it takes to live as well as what it takes to save and invest money for education and retirement. This varies from person to person.
Example: $11,000*12 = $132,000
Multiply your annual sum by 1.23 for taxes
$132,000 * 1.23 = $162,360
Divide this annual sum by 1880
Example: $162,360/1880= $86.36
$86.36 is your base hourly rate. This rate will ensure that your family will have a roof over their head, clothes on their backs, and an opportunity for a bright future. If someone is paying you to just show up and they assume all of the business operating costs, you’ll need to make this on an hourly basis to assure that you’re able to meet your financial obligations.
Step 2. Calculate your monthly business burden and include those annual expenditures, too. This obviously varies from business to business. Include everything it takes in terms of taxes (based on projected revenues) insurance, labor costs, employer paid taxes, savings (for future investment) supplies, rent, etc. Then, tally them up into an annual expense.
Example: If you’re a consultant or a small business owner, you may have a small operating budget. Let’s say your annual operating costs are $24,000 per year.
$24,000/1880 = $12.77
Step 3. Determine your minimum hourly rate to do the job so you don’t lose money.
$86.36 + $12.77 = $99.13
You will then calculate your projects or jobs on a case by case budget.
Step 4. Research the market rate for someone in your field. You discover that you may be over market rate because your operating costs are too high or that a bigger business is beating you with operating costs because they’re operating at scale. Or, your cost of living is too high and you need to reduce costs.
Or, you may find that you’re right on market. Or, maybe that you’re actually under market price, which puts you at a price advantage.
Side Question: Am I in the wrong business?
You may discover that your numbers just don’t add up. Maybe your cost of living and business expenses do not match what the market is willing to pay for your work. Then, you have two options: 1) Pivot what you have into a higher paying specialty or job. 2) Temporarily reduce your expenditures to match market rate so you’re not operating at a loss. And, in the meanwhile, look for ways to increase your competitive advantage (additional certifications, education, training, or move to a location or align with a market with demand).
Step 5. Determine Your Profit Margin
Once you have determined market rate, you can determine what your profit margin is. You might find that your costs have squeezed out any profit. You’ll have to look for ways to reduce costs or increase market value in relation to your competitors.
Or, maybe your costs are on point and you have margin for profit. You can decide with testing how much profit you can gain without turning off clients. And, depending on how much value offering and demand you’re faced with, you can get away with charging extra for convenience.
Step 6. Know Your Worth & Never Lose Money
Remember, your profit margin is always negotiable. Hard costs are not.
When you know your worth, nobody can talk you out of getting what you need to be financially free. When you know your worth, you will align yourself with clients and customers who appreciate what you have to offer and will respect your fees.
I have known cheap clients. I have known clients who have tried to guilt me into charging less. I have known clients who tried underhanded ways to break my policies. I’ve made a lot of mistakes in charging the appropriate fees. My main problem was that i didn’t know my worth. But you don’t have to if you know your worth.
Above anything else you do, knowing your numbers is your business. Knowing your worth is not the job of your clients or your employers. Because there are employers and clients out there who will try to squeeze you out of profit. They will make you feel like you’re replaceable or not as good as you know yourself to be. Therefore, you must prepare yourself to meet complaints and hardball negotiations with hard costs.
On the other hand, you may find that you are indeed incompetent, unprepared, or simple unqualified to offer the value that your cost of living commands. However, this is not at all a bad thing. Simply put, it just means YOU have to make temporary adjustments to your expectations and your financial reality while you make efforts to improve your value offering in relation to your costs. In fact, smart business men and women will do what it takes to keep their business going. They are not attached to comforts and ego displays of wealth that often cause financial undoing in those who fail to adjust.
Above all, there is no shame in having to make temporary cut backs. In doing so, you’re simply relieving pressure from yourself so you can afford to make changes and pivot to new opportunities.
Do You Know Your Worth?
Finally, try this formula to see if you’re charging what you’re worth. Discover if you are losing money because you don’t know your worth. Why? Because not knowing your numbers is a big problem with a simple solution. Therefore, take 30 minutes to sit down and do your calculations. You’ll thank yourself later.
This formula is a general strategy that was taught to me by Cheryl Brown who consults San Diego business owners for free to become government contractors. She helps business owners make winning contract proposals without having to lose money in the process.