Calculating your Value

The big question always is, “How much do I charge?” and way too many of us end up undercharging because we don’t know or believe in our value. Here’s how to figure it out.

iStock_000011840676XSmall

This post is a continuation of the series on charging your clients the right amount and adding perceived value.

This is not about trying to figure out the value of a human being. We’re priceless. End of story.

Instead, the question here is one of how much do I charge for the product I produce, especially if most of the cost is actually in my time and abilities?

This may get confusing, but I’ll try to keep it as simple as possible.

The amount you charge for what you do needs to be in keeping with the norm in your industry but also needs to be a realistic amount based on the skills you have developed, your experience, the actual amount of time it takes to do it and the cost of your equipment/supplies.

Your time is valuable

Let’s start with this: here in California (for example) the state minimum wage is $9 per hour.

This means that the minimum anyone can be paid for any job is $9 an hour. Even if they never graduate high school and get a menial job, $9 is the least that a person’s time is deemed to be worth. So let’s start at saying your time is worth a minimum of $9 per hour.

Now lets look at some other things.

If you went to college, your education cost you money. A LOT of money, probably. Let’s guess it cost you about $30,000.

After you leave college, you hopefully work a standard 40 hour week, roughly 48 weeks a year, making your total number of hours worked per year 1920. Let’s round it up to a nice 2,000 though to make things easier.

You don’t want to work until you’re dead, so let’s say you want to work 30 years before retiring and living a comfortable life somewhere where it’s warm but not too hot.

So 30 years at 2000 hours per year is a total of 60,000 working hours in your life after college.

So, your $30,000 education spread between 60,000 hours works out to have cost you $0.50 per working hour.

Yes, your education cost you 50 cents for every hour you will work in your life.

You’d better charge someone for that.

Lost earnings

But that’s not all. While you were at college attending classes and doing homework, you COULD have been working for $9 an hour. So you missed three years of work and therefore lost three years of wages.

2000 hours a year for three years at $9 per hour is…. $54,000 in lost wages.

That’s nearly $1 per hour for the rest of the 60,000 hours you will work. So let’s say that, with interest, your lost earnings while paying for a college education works out costing you $1 per hour for life.

Someone had better pay that for you, too.

Yes, I know you probably had a job while in college, but all that time spent in class and studying could have been spent working. You deserve to be paid for it!

So going to college cost you $1.50 per hour for the rest of your working life (plus interest).

The value of learned skills

That doesn’t take into account what you learned though, the skills you developed and the awesomeness that was taught to you by your professors. So there’s value in that. There’s value in the fact that you went to college and learned how to do something.

That value must be at LEAST double what that education cost you, if not more. So your $1.50 per hour education is worth another $3 per hour, minimum.

Then you need to factor in all the personal time you spent honing your skills. Whatever you do, whether you’re a musician, a computer programmer, a photographer, a writer… whatever it may be, you have spent and probably still spend many, many hours making yourself better at doing what you do.

How you calculate that is up to you, but I figure all that hard work and practice is worth at least a dollar an hour.

So now we’re up to $9 per hour plus $1.50 for the cost of education, plus $3 for the increase in your value due to that education, plus $1 for the time spent honing your skills…. so we’re already up to $14.5o per hour.

Charging anything less than $14.50 per hour is a lie. It’s a lie about the value of your time.

Then you have to take into account your experience, natural talent and a whole host of other factors which add to your value, not least being the difficulty of doing what you do and other people’s willingness to do it.

The less people there are who are willing to do it, the more valuable your time is!

Equipment costs money too

Now let’s look at the cost of the equipment needed to do your work.

Even if that’s just a laptop computer, that computer cost you something, so you need to be charging your clients an amount of money which will go toward paying for its replacement when the time comes.

Don’t say, “well, I would have had one anyway.” Using it for your business puts extra strain on it, meaning it will need to be replaced sooner and probably also means that, when you get a new one, you’ll get a better one than you would have normally because you use it so much for work.

Let’s say your computer cost you $1,000.

The average length of time a computer will last is about 3 years, so at 2,000 work hours a year, that’s 6,000 hours you’ll get out of your computer.

Doing the math, that means your computer costs you $0.17 cents per hour to own – and that’s not including the cost of software, maintenance, electricity, accessories, backups etc etc.

To be safe, it’s probably better to guess that your computer costs you more like $1 per hour.

You need to do that calculation for ALL the equipment required to do your work. Whatever it is you do, things have to be replaced, so work out their hourly cost by multiplying the number of years they will last by 2,000 hours per year, then divide the cost by that number to get your hourly cost.

Don’t forget rent on a building if you pay for that, plus the cost of your phone and internet for business – and what about the cost of the raw materials you use to make whatever you make, or the ink and paper in your printer. The list goes on and on.

…. and I won’t even get started to the actual cost of owning a car that you use for business. If you email me, I can show you that it actually costs you at least $1 per mile to own and run a car – so a 25 mile round trip to a clients’ office actually costs you $25 or more! You need to really think about that when calculating how much to charge a client. Every mile you do while working for them costs you $1… so it had better cost them at LEAST that much!

Do you charge your client for travel time?

An hour of driving at 60mph costs you $60.

NOW will you charge for travel time?

So add all your equipment costs onto your $14.50 per hour and you’re beginning to get to the minimum your time is worth.

A living wage

… and then there’s the extra’s.

So far we’ve calculated your costs per hour, plus minimum wage. Do you REALLY want to effectively work for minimum wage?

Didn’t think so.

So now you need to decide how much above minimum wage you want to earn. How much more house do you want than a person on minimum wage can afford? How about vacations? You can’t afford to go on those on minimum wage. A $2,000 vacation for your family of 4 costs you 1 dollar for every hour you work in the year. What about meals out, weekend trips, a second car?

All those extras cost money.

It’s not greedy to say that you want to be able to take your family on vacation once a year or get your spouse a car to drive the kids to and from school in while you’re working.

My guess is that by the time you add all these costs up, you’re looking at a minimum of $20 per hour – and that’s if you can get a steady 40 hours per week of work.

Factor in down-time and what do you get?

If you’re self employed, there are often times when the contracts just haven’t come in and you’re stuck without any paid work for a day or two or even a week or two.. or a month or two.

So you need to factor in a little extra to cover the lean periods.

It’s not unfair or unreasonable therefore to say that your time is worth $25 or more per hour.

$25. Minimum.

Starting wage.

Plus extra for experience, awesomeness and to add perceived value

So…. Are you charging enough?

 

________________________________________________

Increasing Perceived Value

Perceived value is created not just by the price that is charged for something, but by a number of other factors, too. In my previous post, I wrote about what perceived value is and how important it is to believe in your product’s value. HOW you portray that belief to others is very important, it’s […] Continue Reading....

________________________________________________

Understanding Perceived Value

How much value someone places on your work depends a lot on how much value you place on your own work – and how you portray that value. Last weekend, I took my artwork to an arts fair for the first time, to dip my toes in the waters of selling some of my photographs. […] Continue Reading....

________________________________________________

It’s OK to Make Money

Making money is OK. Really, it is. You can actually charge people for your time and talents. It’s OK! Continue Reading....

________________________________________________

Update – August 2014

Thank you all for your support in my efforts to become a writer. Things have been a little quiet around here lately, so I thought I’d give you a quick update as to why. I have been BUSY. All kinds of busy, but good busy. That last paragraph was probably some of the worst English […] Continue Reading....

________________________________________________