Episode: 87 |
Will Bachman:
Pricing Your Time:


Will Bachman

Pricing Your Time

Show Notes

Every independent professional needs to determine his or her internal billing rate, that is, what is your time worth to you, in dollars.

Most independent professionals I’ve met have not thought this through, and this leads them to spend time on low-value activities that should be outsourced.

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Will Bachman: What is your time worth to you? Hey. Welcome to Unleashed, the show that explores how to thrive as an independent professional. Unleashed is produced by Umbrex and I’m your host, Will Bachman. Every independent professional needs to know a number. What is your time worth to you? Let’s call this your internal billing rate. This is not the number that you charge your clients. By definition, your internal billing rate must be lower than the rate to your clients. Here is what I mean by the internal billing rate. It’s the number that you will pay to free up an hour of your own time.
Let’s take an example. Let’s say that you buy a product at a real bricks and mortar store. When you bring it home, you realize that you don’t like it. Maybe you bought a charger for some electronic device that is the wrong cable. It’s just completely useless to you. Should you return it? It depends.
Let’s assume that you know it will take you exactly an hour to go back to the store, wait in line at customer service, hand over the item, get the return processed, and come back home. You don’t have any other errands to get done in that direction, so you’d be making the trip for the sole purpose of getting the refund, so one hour of your time for X dollars. What is the dollar value above which you should make the trip, and below it, you should just throw the item away?
Now, some people might say, “That is wasteful to throw that thing away.” I can understand that point of view. It’s how I was raised. But that view point doesn’t recognize the value of our time, which is our only non-renewable resource. I rarely hear the opposite reaction of, “Why, that would be so wasteful to throw your time away like that.”
It’s a useful exercise to decide your number above which you make the trip, and below it, you throw the item away. That dollar value is your internal billing rate. Let’s take a couple of extreme cases.
I think we can agree that if the item cost one penny, most of us would agree that we shouldn’t spend an hour returning it. On the other hand, if the item cost $10,000, I would return it and probably most of us would as well. If it cost $1, most of us would probably not spend an hour returning it. If it cost $1,000, most of us would probably make the trip. For most of us here on the show, the internal billing rate is probably somewhere between $1 and $1,000.
In my experience, many independent consultants have not gone through the mental exercise to arrive at their internal billing rate. Not knowing this number or casting that number too low leads them to lose money. If you haven’t gone through this exercise, the number at which you probably return the item is too low.
Let’s say the cost is $20. Now, it seems kind of wasteful to throw away $20, and maybe it is, but if not, if your internal billing, if your billing rate to clients, your external billing rate is $200 an hour, perhaps in that marginal hour when you could be returning the charger, you don’t have client work that you could be billing. You’d say, “Well, I wasn’t going to bill a client $200. I was going to make zero. So, $20 is a good savings for that time.” But you should not treat your time as having no value, obviously. Because when you’re working in your business, you can’t be working on your business. You could be creating content, you could be using the extra hour to strengthen relationships, improve your internal processes, building your skills. There’s all sorts of investments you could be making in your business that spending that hour is preventing you from doing.
Now, you might think about coming up with an internal billing rate by using a percentage of your rate to clients. That’s one approach. If you charge clients a fixed project rate instead of a daily or hourly, that’s fine, just figure out your effective hourly rate to clients. The percentage discount you apply to your client rate to arrive at your internal billing rate depends on a range of factors and one of them obviously is utilization. In the extreme case where you have effectively unlimited demand and you could bill every waking hour, in that case, you should probably raise your rate to clients. But let’s set that aside for a moment. Let’s say that you’re billing every possible hour that you want to, that you possibly can. In the cases where you’re able to bill every waking hour, your internal billing rate ought to be close to your client rate because if you’re billing $200 an hour and you take an hour off to go return a charger that costs 20 bucks, you just lost 180 bucks.
Under more common utilization scenarios, independent professionals might decide that their internal billing rate is somewhere between 25% and 75% of the rate that they charge clients. Coming up with this number impacts many decisions beyond just a trip to the store, which is a practical example, but let’s think about some other ones.
If your client billing rate is $200 an hour, perhaps you’ve decided that your internal billing rate is $75. That means that you should be looking for things to do and outsource them if you can find someone else to do it for $75 or less of your time. Maybe you’re creating PowerPoint pages and you learn that you can have someone else do that for $30 an hour. Now, you might say, “Well, if I’m spending 30 bucks and hour, then that’s just money out the door that I could be saving.” But if you spend it, the professional visual production person might be even twice as fast as you. Even though you’re paying them $30 an hour, if they’re twice as fast and they produce better quality charts, what takes you an hour at an internal billing rate of $75, that person can do it in 30 minutes at a cost effectively of $15. It’s a no brainer just to outsource that task because every time you outsource one hour of your PowerPoint time, you’re going to save 60 bucks, 75 minus 15.
There may be other areas. Any area where you can set up a system or a process that’s repeatable and you can outsource that to somebody else and free up your time, you should do it if that person, that other person, can do it for less than your internal billing rate.
This exercise also makes transparent to me the cost to me of goofing off. If I spend an hour reading The New York Times or The Washington Post, boom, that costs me an hour of my internal billing rate. I can say to myself, “Was reading that, those articles in The New York Times, really worth those dollars?”
I have not yet met an independent professional who was outsourcing too much to his or her virtual team, but I’ve definitely met a lot of folks who place too low a value on their own time and they outsource too little. What are your thoughts? Have you come up with an internal billing rate? Has that changed your practice? I’d love to hear about it. You can email me at Unleashed@Umbrex.com. If you thought this was helpful in any way, I would love it if you’d share it with a friend or share it on social media or LinkedIn. If you visit our website, Umbrex.com/Unleashed, you can sign up for our weekly email where you’ll get transcripts of this episode and every episode and some bonus features available only to subscribers. Thank you for listening.

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