Before I became an entrepreneur, I would sometimes look at the prices of coaches and other people who offered their services.
Their hourly rate seemed so high! I would calculate “oh, so if this person is making 150 USD/hour and they work 40 hours per week… that’s a lot of money!”
In my head, every solopreneur was on their path to being a self-made millionaire in a few years.
What I overlooked was that there’s a difference between someone’s hourly rate (the number you see posted on a website or brochure) and their effective hourly rate.
What is the effective hourly rate?
Unlike your advertised hourly rate, your effective hourly rate takes into account all the unpaid work you do in your business.
To calculate your effective hourly rate, take your yearly income and divide it by the hours you work each year.
If you don’t have enough data for a full year, you could also take your latest monthly income and divide it by the hours you worked that month.
You can even do this on a weekly basis. For instance, if you earned 800 USD this week and worked for 40 hours, your effective hourly rate is 20 USD.
Why is it important to know your effective hourly rate?
After becoming an entrepreneur myself, I realized that service professionals do a lot of unpaid work. Creators, freelancers, coaches, and consultants often spend many trying to get clients, particularly when they first start their business.
But even once entrepreneurs have a steady stream of clients, they still have to do unpaid work in their business (or pay someone else to do it for them).
Common unpaid business tasks include:
- anything related to building and maintaining your business infrastructure (your website, your email service provider, etc.),
- admin work and bookkeeping,
- learning new things, and
- responding to inquiries from new clients.
Given the time and effort that goes into marketing and other unpaid tasks, my previous assumptions about what entrepreneurs earn (based on their publicized rates) were completely off. Plus, unlike most employees who get paid vacation, entrepreneurs need to finance their own vacation time.
If your hourly rate is 100 USD and you work 40 hours per week but only 20 of those are what lawyers would call “billable hours,” your effective hourly rate is 50 USD.
That’s a huge difference and it’s an important one.
What should do you once you know your effective hourly rate?
If you want to earn enough, you need to factor your unpaid work into your pricing.
Many service professionals charge people by the session/for each meeting. Hourly pricing is a workable and customary approach for concrete, one-time services like massage therapy.
However, it doesn’t work well for anything that includes more frequent interactions with customers in between formal meetings.
After people get a massage, they often don’t interact with their massage therapist until they get the next massage. In contrast, less concrete services (coaching/consulting, etc.) often involve more interactions between client meetings.
For instance, when I work with a coaching client, I prepare for the call, write a summary email afterward, and offer email support between sessions. With a “charge by the session”-model, any extra work done before or after calls would be effectively unpaid.
These days, everything I do to support my clients is part of my coaching package. I tell my clients that they get email summaries and support from me and that is factored into my pricing.
This model can work well for everyone — the client can feel comfortable reaching out whenever they could use support and the entrepreneur can take the time to help them as best as possible because they get paid adequately.
Which services providers have the smallest difference between their hourly rate and their effective hourly rate?
Few service providers do close to 40 hours of paid/billable work a week. For most, the number is much lower.
The main exception to that are therapists and other providers whose services are sometimes covered by insurance. I know many therapists who do 30 or more client sessions per week.
This might have to do with different business and payment models. Perhaps because it is a more established profession, it seems to be easier for therapists to get clients. That means that they probably spend less time marketing and more time serving clients than many other service professionals.
In contrast, for many self-employed coaches and consultants, 30 billable hours each week would amount to too much work. If I saw 30 coaching clients each week, I wouldn’t get much else done.
If you want to know how much you are making per hour, you need to do a quick calculation to discover your effective hourly rate.
Once you have this number, you can make decisions and adjustments based on accurate assumptions. Perhaps you need to raise your prices. Or spend less time marketing (can you automate something?). Maybe you need to rethink your entire pricing strategy and stop charging people by the hour.
As the saying goes, knowledge is power.
That’s very true when it comes to your hourly rate. To make sure we earn enough, it helps to know our numbers.
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