The Business of Design: How to Calculate Your Hourly Rate While Building Financial Prosperity
Despite the illustrious and storied history of the design industry, many graphic design, and creative professionals struggle to be viewed as a valuable, and strategic business resource that brands should invest in to achieve sustained growth, and success.
I believe the struggles many creative professionals face are a combination of three factors:
- The primary emphasis design curriculums place on the “craft” and “language” of design
- The lack of emphasis placed on designers to learn business fundamentals and finance
- The lack of emphasis creative professionals place on continuously learning “how” their creative solutions are strategically deployed and shaped by technology, platforms, channels, and algorithms
The result is many designers’ fighting a constant uphill battle often negotiating from a place of defensiveness, as they try to communicate their prices to help a brand achieve tangible business results, without providing the appropriate context of how they will do so.
This is never more evident than the inability for most creative professionals to answer one of the most profound, yet basic questions, “How much do you charge?”
The volatility I see many designers provide in their hourly rates has often left me perplexed. It is precisely why I’ve decided to embark on this journey of sharing my perspectives, learnings and experiences that have helped me climb the ladder of success as a creative leader.
During my 15-year career, I’ve had the opportunity to work in many creative environments from in-house, to small boutique agencies, to global agencies, to running my own 7 figure agency with 10 full time employees.
My goal in each article is to use this spectrum of experiences, to change the design industry in a way that helps designers elevate their intrinsic value.
Each article will look to simplify the business of design, so all creative professionals can apply these learnings and evolve into an invaluable asset for any client or brand they work for.
We will being this journey by looking at how we accurately calculate, and answer the question, “How much do you charge?”
Before we go any further however, I feel it is important to stop and address three stigmas I passionately believe hold every designer back from realizing their true value.
What you do is subjective.
NO! What you do is not subjective at all. What you do is objective and calculated. Design is rooted in psychology, consumer behavior, analytics, understanding strategic imperatives, achieving business goals, and keeping up with technology in a way that informs the meaningful stories we create and experiences we build.
What you do is craft.
NO! What do you is not a craft. What you do is a purposeful discipline that takes technical precision, constant evolution, continuing education, and an artistic flare to ensure your clients are always relevant in their competitive landscapes.
You are a freelancer.
NO! You are a design professional who must account for all financial variables, just as any other business does. You must always ensure you can sustain your operation, prep for long term financial stability, and target a profit level that will help you grow.
Your mindset matters, and overcoming these stigmas provides us the foundation to begin calculating “how much do you charge?”
Let's Begin...
Erase the term “freelancer”, "contractor" or "permalancer" from your mind. Instead, let’s think of you as an "independent agency" with one full-time employee, yourself.
When businesses or brands set their prices, they are not arbitrarily picking numbers out of thin air. They are calculating an array of business variables that determine their baseline costs while adding in profitability for growth.
They also greatly consider their total available market, or TAM, but that’s another topic for a future article.
As an "independent agency", you must factor in the same key variables which include:
Operational Overhead Costs:
These are your baseline costs such as mortgage, rent, auto payment and insurance, utilities, wifi, food, gas, credit card bills, student loans, banking fees, taxes, etc.
Costs of Goods:
These are your costs to run your operation and produce the solutions you deliver including leased equipment, cellphone, software costs, third-party vendors, production costs, shipping costs, etc.
Benefits:
These are your costs to protect and prepare yourself for the ladder part of your career. They include things like retirement plans, savings accounts, life insurance, health insurance, disability insurance, etc.
Free Spend:
This is the money you need to enjoy life within your means.
Profitability:
This is the projected amount of money you are targeting to earn after all expenses are covered.
How to Calculate Your Baseline Price and Profitability
Let’s go ahead and apply dollar figures to the first 4 variables to illustrate how we calculate the baseline price, or hourly rate we need to charge.
It is important you calculate on both a monthly, and annual basis. Let’s assume the following:
- Overhead costs equate to $6750/month or $81,000/year
- Costs of goods equate to $1,500/month or $18,000/year
- Benefits equate to $3,000/month or $36,000/year
- Free spend equates to $1,250/month or $15,000/year
In this model, our annual expenses as an "independent agency" would total $150,000.
Using $150,000/yr, lets reverse engineer our annual expenses to determine our baseline hourly rate. Assuming you take two weeks off, you would divide $150,000 per year by 40 hrs per week by 50 weeks per year.
This would equate to a baseline hourly rate of $75 per hour which you must charge to cover all your agency “expenses”, or your salary.
Now let’s discuss profitability.
Most businesses look for average annual profits of 10-20% each year after expenses are paid.
As an independent agency you have the unique opportunity to target anywhere from 10-100% profitability.
This will depend of course on the type of client you are working for, their respective budgets, the complexity of a project, and/or the reputation you build as a creative professional who can deliver business results consistently.
With profitability in mind you should, can and MUST add anywhere from $7.50-75 per hour, on top of your baseline hourly rate, to realize long term growth and financial prosperity.
On an annual basis, assuming you can sell your services to a variety of clients, and work 40 hours per week, for 50 weeks, you can charge anywhere from $82.50-$150/hr and net with $15,000-150,000 in annual profits.
This does not account for any overtime you may choose to work.
Approaching what you charge from this perspective provides a framework for you to be extremely successful, knowing you have accurately calculated your baseline price.
It is important to note that this formula can be applied to an agency with 1 employee or 200 to determine baseline costs and profitability. What is critical is having a complete understanding of your monthly, and annual finances, so you can always map your estimates to cover your operations and achieve your financial goals.
Next Steps...
The next step is to become a trusted, and reliable resource that clients consistently want to work with. Remember the business of design is a long game, and your ability to “charge more” will come by consistently delivering tangible business results that move your clients brands forward.
For now, let’s take the first step together, and approach how we charge in a more business centric, and consistent manner, that elevates how we are seen and valued by the clients and brands we partner with.
Looking Ahead
In future articles we will build on the calculations of how much we charge and apply it to mitigating risk by negotiating within your profitability, building transparent estimates, scaling through a trusted network, and diversifying your technical knowledge to establish and expand your strategic design value.
In the meantime if you have any questions please reach out at [email protected]
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