ML 0060 :: Determining Your Base Rate

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Determining Your Base Rate   →
Determining Your Rate – Hourly Billing or Flat Bidding?

What to Bill For Your Time?

If there is one question that every creative pro has been asked at one point or another in his or her career it is:

“How much do you charge?”

Often this question is followed up by,

“Hourly or Flat Rate?”

Indeed, at nearly every conference I speak at I get asked these questions, or often on social media sites like Twitter and Facebook you can find the debate raging about these topics. If you follow forum websites like Creative Cow or our favorite, Lift, Gamma, Gain you’ll inevitably see these topics discussed as well.

For some of you who work at facilities, these are questions you don’t really need to worry about. The specifics about what and how to charge are often handled by management leaving you do what you love – grade!

However, if you’re a freelancer or own a small shop, you probably wrestle with these questions. In this Insights article (the first in a two part series on how to answer these questions) I’ll start with some advice about how to determine your base rate.  Once you know what your time is worth, figuring out how to plug that into different methods of charging is pretty straightforward.

The Big Disclaimer

As we start let me be really clear about one thing – every market is different, every client is different, skills and experience, equipment and potential workflows all differ, so the rates that you set should reflect these and a number of other factors – including ones discussed in this article.

End of Disclaimer!

The Market Approach

Perhaps the easiest place to start to determine your rate is to see what others in your area are charging.  Not only is this good general knowledge to have about your market, but also it can help you in part, determine the ballpark your rates should be in.

Determining competitive market rates can often be as easy as visiting a competitors website to see if they publish their rates online. If not, you’ll have to do a bit more grunt work like:

  • Crossing your fingers that someone you know at the facility will tell you.
  • Ask a client that’s worked at the facility.
  • If you’re really sneaky calling the company with a request for a quote (just note this duplicity is often not appreciated especially if the company finds out! But it’s done all the time).

The problem with this method is it often doesn’t give you a real accurate measure of rates in the market for several reasons:

  • Published rates are often not the final rates given to an actual client.  For example, I will often give hourly discounts to clients based on the commitment of work (see Volume Approach) or if it’s a client I really want to work with but their budget is a bit tight.
  • Sometimes market rates are artificially high (see Psychological Approach) to lend an air of expertise to a company – as the saying goes “if costs more it must be better”.  In my experience it’s pretty easy to tell when a rate is artificially high for this reason – it’s 30%+ higher than everyone else in the market.

If you’re going to use the Market-Based Approach to set your rate, then to get a true sense of what your market is charging for a service try to find the rates of at least 4 companies of varying sizes and average those prices together.

The Psychological Approach

A few years ago, I met with the owner of a very nice finishing shop in major media market and we got to talking about how business was going and he said “it’s going great, starting to compete with the big boys in the market!”

Upon further discussion I learned that their rate for color was $900 an hour!  Pretty good if you ask me!

Here is the thing – I could understand that rate if there was a large investment in high-end equipment, the colorist had 25+ years of experience and a large following of clients, or they had additional services like back rubs everyday at 4pm!  For this company  – none of these things were true.

After talking more with the owner of the company about how they were going after some really big projects I figured out how he determined their rates – the psychological approach.

This approach is similar to the Market approach in that you first need to figure out what others in your area are charging. However, in in the Psychological Approach you don’t average the going rates but rather toss out all but the highest rates and match your rate near those or even go well beyond the other high rates in the market.

Why do I call this the Psychological Approach?  When you don’t have high priced equipment, large salaries, real estate or other overhead to support but you still charge a very high rate this is usually to let clients know that you think your work is amongst the best and can stand up with other major facility’s work. By charging a high rate you’re letting high-end clients know that you ‘think facility’ and work are a perfect match for their high-end projects.

In my experience, especially with a talented sales team and moderately good creative team, this approach can work but often the rate is heavily discounted on a regular basis – in other words the rate is all about perception.

I have also seen high rates blow up in the face of facilities that can back up the rate. If a facility is charging nearly $1000/hr then chances are there are a myriad of other services that they provide, from catering supervised sessions, client service professionals that can make literally anything happen, to equipment and services that can complete any project.

It is this extra stuff that a lot of facilities don’t have.  By simply charging more you might psychologically seem like a high end facility in the eyes of a potential client but the lack of some services might mean you quickly have to lower that rate to something more realistic.

The Volume Approach

Another popular method for determining a rate is the Volume Approach.  In this approach you’re concerned of course about covering your overhead (discussed next) but really you see your services and your facility as being able to push a tremendous amount of volume.  Meaning you can grade a ton and do it quickly!

If you subscribe to this approach you’re less concerned about what the market is doing, you’re not worried that you are perceived as a high end shop – you simply care about a large continuous streams of work.  In this approach, at the end of the day, you can afford to have a lower rate because you’re confident you’ll be working all the time.

In my opinion, to base your rate solely on the fact that you think you’ll be a high volume business is dangerous.  Nearly every person in postproduction will tell you that there are busy periods and there are slow periods. If your rate requires a continuous flow of work then when business gets slow it’ll get financially tough, very quickly.

With that said if your rate is solid you can apply the volume approach as needed – for example a client comes with a 13 part TV series because you have a good rate you may be able to discount because of the bulk commitment.

The Cover Overhead Approach

Probably the most practical approach to determining your rate is to figure out your true cost of doing business – often referred to as zero-based budgeting.  So many freelancers and small shops I know aren’t actually charging enough (based on their volume) to truly cover their expenses.

As you can guess, the goal of this approach is to know what your expenses are, so when you set your rate you can:

  • Cover the cost of existing equipment as well as necessary upgrades
  • Cover the cost of your time, i.e paying yourself!
  • Make a profit

There are lots of ways to calculate the true cost of doing business and thus your resulting rate.  Director of Photography and all around good guy Vincent Laforet recently had a great blog post on this subject.

I love the spread sheet in Vincent’s example – pay special attention to some of the things on the list that you wouldn’t immediately think of including – insurance, travel, meals, marketing, taxes, etc.  Your list may have more items or less but the important part is to spend your time building your list of expenses.

A couple of tips:

  • Take a look at your online bank account statement and sort by deductions.  Look for the items that come out regularly on a monthly basis – lease payments, credit card payments, mobile phone bills, and other monthly expenses
  • Think of things that are probably not monthly – things like paying your accountant for tax prep each year, and quarterly insurance premiums
  • Remember to always include paying yourself in your expense list

At the bottom of Vicent’s spreadsheet, he gets to a day rate of $645 and how many work days per year are needed to meet the costs on the spreadsheet.  As a colorist, a day rate is a useful data point but probably not a rate that you’ll use very often.  In the example spreadsheet the actual hourly rate is about $80/hr.

Now to be clear, the day rate and hourly rate are cost of doing business, or in other words to pay for overhead and allow you to break even.  The rate doesn’t take into account profit – needed to grow your business. It’s just the baseline under which you don’t want to fall.

Combining Approaches To Get to Your Best Rate

All of the approaches that I’ve mentioned so far in this article have their advantages and disadvantages.  My personal approach and the one I recommend that you take is to combine these approaches by ranking the methods in the order that makes the most sense to you.

Here is how I would rank the approaches and how I’ve determined my rate:

1. Cover Overhead Approach

2. Market Approach

3. Volume Approach

4. Psychological Approach

To get to my rate, I first determined what I need to cover overhead (to be honest I padded it by 10%).  I got to an hourly rate of $145/hr billing a full 8 hour day at that rate for 210 days per year – which is great considering there are about 250 working days per year. However, 210 days solidly booked throughout the year is probably not realistic and remember the Cover Overhead Approach just has you breaking even.

Next, in my market, the average rate for Resolve color correction is $250/hr – a decent rate.  So, I knew I wanted to be somewhere around that number.

Psychologically I wanted to be closer to $300-$325/hr. I knew this would place me above many of my competitors but it’s a rate that’s high enough to let big budget clients know that we take our facility and work serious enough to perform at the level to meet their needs.

However, I knew that the bulk of our work was high volume – TV series, political work, etc. So I could probably drop the rate a bit so that the majority of clients wouldn’t feel sticker shock especially when bringing a lot of work to the facility.

For 2013 our standard hourly rate is $290/hr.  This rate allows us to not have to pray that we get booked solidly 210+ days per year, but allows us when needed to offer significant discounts. It allows us to be competitive in our market without being exponentially higher than competitors and is a high enough rate to stand out to clients with higher budget projects.

You’ll notice I said the rate for 2013.  I think it’s really important to revisit your rate every year.  That doesn’t mean you have to raise it each year but it’s a good exercise to see if the rate is still working for you and in your market.

Next Step: Hourly or Flat?

Now that you’ve determined your rate, in the next article of this series we’ll talk about how to actually quote – at an hourly or flat rate?

-Robbie

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