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Small Agencies: How to Calculate Your Hourly Rate

Jul 3, 2019

Making the move from working as a salaried employee to running your own web agency isn’t easy. Every step of the way presents unique challenges. As a freelancer or web agency owner, one of the first questions you will have to deal with is how to calculate your hourly rate.

We’ve developed a free online hourly rate calculator that streamlines this process for web agency owners. Try it out now and find out how much you need to charge your clients in just five minutes.

For small web agencies operating with between one and three employees, identifying a target revenue is the first step towards calculating an appropriate hourly rate. If you set an income goal, accommodate expenses, and accurately predict how many hours you’ll work per week, you can arrive at an accurate idea of just how much you’ll need to charge your clients.

Determining exactly how much your time is worth can be tricky. It should come as no surprise that marketers have done a great deal of research on pricing psychology, but in order for any of their tactics to work, you have to know what your income target is in the first place.

Step One: Set An Income Goal

The first thing you need to do is set a reasonable goal. Many freelancers, entrepreneurs, and web agency owners will actually set out on the path to establishing themselves in the marketplace without seriously considering how much they wish to earn at the beginning.

This is understandable, in a way. Bootstrap culture is predominant in service-based industries, and it gives newcomers the idea that if they delay rewarding themselves, they’ll have greater opportunities to grow later on. The problem is that without a clear goal about how much you need to live comfortably, you run the risk of personally falling victim to harmful market trends, bad decisions, or plain old bad luck.

So how much should a web agency owner actually make? One easy way to set a goal is to simply start with your existing annual salary if you’re employed and considering quitting your job. If that’s not the case, look around you and determine how much web developers and designers make in your area – a developer based in Alva, Oklahoma can’t charge as much as one based in New York City.

In general, new freelancers can make between $35,000 and $55,000 per year while experienced, highly skilled web developers can make between $65,000 and $115,000. You know your level of experience best, try inputting different ranges into our online hourly rate calculator right now to see where you stand.

Step Two: Accommodate Expenses

For your web agency to make ends meet, you’ll need to set a reasonable target revenue that will provide enough income for you to cover your expenses while making enough profit to live on. While this sounds simple enough, calculating your expenses accurately is difficult in practice.

Some of the monthly overhead costs you will have to compensate for include:

  • Rent. If you don’t work at home, you will have to make enough income to cover renting office space. If you do work at home, you should still carefully determine exactly what percentage of your home is dedicated to work-related activities so that you can deduct taxes on it.
  • Hardware, Software and Hosting. Every business relies on equipment and infrastructure. Web agencies need high-performance computers, specialized software licenses, and high-quality hosting, and these costs will add up over time.
  • Employee Salaries. Web agencies with employees will need to factor in salary costs as well as any other related costs and benefits that come along with the agency’s compensation package. Freelancers and one-person agencies should calculate the costs of working with contractors and white label agencies.
  • Advertising and Marketing. How will your customers find you? Small web agencies typically don’t have huge advertising budgets, but they still regularly spend money promoting their services. Those costs must be factored into your overall revenue goal.
  • Internet and Telecom. Infrastructural services like Internet and phone service must be factored into your revenue goal. For web agencies, faster Internet connections directly impact work performance.

In most cases, adding up all of these figures will result in a significant sum. These are your operating costs. It represents the bare minimum you need to keep your agency’s doors open on a monthly basis.

On top of this sum, you should consider annual and one-time expenses. These can take a significant bite out of your planned profits, so be sure to be thorough with them. These include:

  • Equipment Maintenance and Improvements. Your equipment won’t last forever. Most computer manufacturers design their hardware to last 3-5 years, which is about the same amount of time it takes for their components to become obsolete. Most professionals plan for new computer purchases every two years to stay up-to-date with the latest technology.
  • Legal and Accounting Fees. As a business owner, you are responsible for paying taxes and covering a broad range of administrative and bureaucratic costs. Hiring a certified public accountant is a value-added time-saver that you absolutely should invest in.
  • Contingency Costs. You should always plan ahead for a rainy day. In the web agency world, that could mean suffering a technology-related setback, a cyberattack, or unforeseen administrative costs – who knows? Setting aside 1-3% of your total revenue for contingency costs is a good idea.

Calculate Your Annual Billable Hours

One of the major mistakes that web agency owners make is assuming they can bill clients for 100% of the hours they work. In reality, you have to spend a significant amount of time generating leads, writing proposals, marketing, performing administrative tasks, and more – these are all non-billable hours you should record and reduce.

At 40 hours per week, 52 weeks per year, you have a grand total of 2,080 work hours per year. First, cut off your planned vacation time, at least a week’s worth of sick days, and the 7 U.S. holidays that almost everyone takes off. If you calculate three weeks’ vacation per year (15 eight-hour days) you’ll end up with 1,864 billable hours per year.

If you assume you’ll be able to bill clients for 75% of that time, you will have approximately 1,400 billable hours per year. Divide your target income by this figure and you’ll have a clear idea of exactly how much you need to charge to cover all of your expenses while leaving enough room to live comfortably on.

Need help figuring out how to calculate your hourly rate accurately? We’ve developed an easy-to-use hourly rate calculator. Simply fill in the fields with your estimated revenues and costs to find out how much you need to charge your clients!

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ronik patel

After building my web agency JD Softtech in both Boston and Ahmedabad, India, I wanted to find a way to help other agencies.

So we took our team of highly qualified website developers and web designers and launched UnlimitedWP, a white-label WordPress partner for growing agencies.

If you’re frustrated by how much time working in WordPress takes, consider UnlimitedWP.com.

For one low monthly fee, you can create and assign an unlimited number of tasks to our team of WordPress experts—with a typical turnaround time of 24–48 hours.

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