I was asked this recently by an agency who have previously “done the maths” on their rate card, but still weren’t making money. In their case their prices were sensible, but a low level of billable time was what was holding them back.

First of all: your rate card can’t really be “right” or “wrong”, or at least there’s no single mathematical correct answer which won’t be out of date the moment your team profile, servicing offering or client list changes. It can certainly be too low (so you sell a lot of hours but everyone’s running on fumes and you’re still not making money) or too high (where your team is sitting on TikTok all day waiting for the phone to ring from potential clients, who can only possibly be the ones with more money than sense); but within the middle range (where the business makes some level of profit) it comes down to what you’re trying to achieve with the rate card, and understanding the levers when setting it.

It’s then up to you to tweak it in line with the businesses objectives, whether that’s pricing low to increase market share or pricing high for your premium offering.

The two levers

Ultimately there are only two levers you can pull in an agency (or any people-based business) to achieve a certain sales figure:

Lever 1 – how many billable hours do you have available? The average person working five days a week, with (say) 20 days holiday plus bank holidays, has around 230 days per year available to work, so with a 7.5 hour working day that’s 1,725 hours. Realistically, no-one spends their whole time on billable client work. The finance team and the HR folks spend no time on billable work, and the client services team might (for example) expect to spent 70% of their time on billable work. That’s also known as “utilisation” (the proportion of available working time spent on client billable work).

Lever 2 – what are you charging clients for those hours? This might be driven by a premium pricing approach if you have a niche set of skills, or simply by the market rate (you may reach here for something like the Design Business Association’s annual survey). In a not-for-profit organisation it would be driven by “what rate would cover our costs”.

Everything else (marketing, training, strategy etc) feeds into those, ultimately those two levers together indicate the approximate sales figure you can expect.

Bringing those levers together very simply:

Billable hours x rate = sales figure

So in the example above, if I’m the client services person and charged out at £100 per hour for 70% of my time, I ought to be delivering £120,750 of work to clients per year. Add up all those billable people in the same way, and that’s your theoretical sales figure. That then needs to be enough to cover the costs of all of those people you’ve included, plus the rent, rates, Xmas party, post-it notes etc, and leave enough left over for the profit that the business wants to make (commonly targeted at 20%, but that’s a very basic rule of thumb).

Bottom-up vs top-down

Given that billable hours x rate = sales figure, as long as you fix any two of those, you can figure out the third:

Bottom-up approach : I know what team I have, or want to have, and I know what I can charge their time out for. I have a stack of available hours that I can sell at £x. The sales figure is the output.

Top-down approach: I know what sales figure I want (maybe from my growth plan or budget), and I know what I can charge per role (maybe from previous experience or from benchmarking). I keep adding billable people into the maths until I have the right sales total. The team size and profile is the output.

“Tweaking the rates” approach : I know the team profile and I know the sales figure I want to achieve. I mess with the price-per-role until I’ve got a combination of hourly or daily rates which matches up. This one is the least logical in the sense that it ignores market rates and allows for some pretty spurious price-setting.

Some do’s and don’t’s when setting your rate card

• Don’t assume that calculating your theoretical sales means you will make the sales figure you want to. The rate card is all about supply – you still need to find the demand.
• Do be realistic about utilisation. No-one on your payroll is 100% utilised. They’re just not. Freelancers might be, in the sense that they only charge you for client hours worked, but every employee has internal meetings and needs training and development.
• Don’t treat marketing, however direct, as “billable time” in your utilisation maths. Yes it has a value, yes it’s essential, but your prospective clients aren’t paying you to sell to them.
• Do make use of timesheets, when looking both backwards (to see what your team’s utilisation usually is) and forwards (to monitor that ongoing utilisation against the targets you’ve used in your rate card maths).
• Don’t use the old “cost +” approach instead. It’s over-simplistic and doesn’t transfer between businesses (and certainly not between industries). You will meet various advisors and other business owners who will tell you that you just need to take someone’s salary per hour and add a certain %age on top to figure out the rate card, because that’s what they’ve always done in their business. That’s nice for them, but it only applies to their business. Every business’s cost profile is different, and aside from anything else you want to be thinking in terms of roles not individuals.
• Do understand that rate cards apply even to businesses who work entirely on fixed-price projects and retainers (rather than charging by the hour). Your client might never see your rate card, but you need to set it and have it to hand whenever you’re pricing up those projects or retainers and then tracking your team’s actual time spent to make sure you assumptions (and therefore rate card) are correct.
• Don’t confuse “client-related time” with “billable time”. Billable time is what matters here. If you leave the studio at 9am, travel for 3 hours to a client for a 2-hour meeting paid for by them, then spend 3 hours travelling back for 5pm, you have not been 100% billable, you have been 25% billable. It doesn’t matter if they paid for your mileage or your train ticket; if they didn’t pay for the travel time then it doesn’t contribute directly to your sales figure.

In short, the rate card is a tool for you to calibrate in order to achieve the sales figure you want, but whether you only officially review it annually, and whether you actually show it to your clients or not, behind the scenes it needs to be a constantly-evolving matrix based on the latest internal and external intelligence you have.