How to work out your hourly rate

Markup and margin are different numbers

This is the single most common pricing error in small business, and it is arithmetic rather than opinion:

• Markup is a percentage of your cost. Cost $100, markup 30% → you sell at $130.
• Margin is a percentage of the selling price. Cost $100, price $130 → your gross margin is $30 ÷ $130 = 23.1%, not 30%.

So adding 30% to your cost gives you a 23% margin. To achieve a 30% margin you have to divide by 0.7, which gives a price of $142.86 — $12.86 more than the markup approach. On a year of sales that gap is the difference between a business that pays you and one that quietly runs at a loss. The Markup & margin calculator converts between the two so you can see both figures for the same job.

Start from the income you need

business.gov.au: Choose a pricing strategy recommends cost-plus pricing — total up what it costs you to supply the product or service, including overheads, taxes and GST, and then add your markup or margin. For a service business, that means building the hourly rate from two piles:

1. What you need to take out of the business — the income that pays your rent, covers leave you do not get paid for, and funds your retirement, since nobody else is contributing super for you. That last point is easy to skip. If you would want $100,000 in super over a working life, the contribution has to come out of your rates, because as a sole trader there is no employer paying it — see Do sole traders have to pay super?.
2. What the business costs to run — insurance, software, subscriptions, the ute, tools, accounting fees, phone, and the workspace you use. These exist whether or not you have a job that week, which is why they belong in the rate rather than being absorbed job by job.

Add those together and you have the amount the business must generate. Now comes the honest part.

Divide by billable hours, not working hours

A 40-hour week does not contain 40 billable hours. Subtract quoting, invoicing, chasing unpaid invoices, travel between jobs, buying materials, bookkeeping, and the time spent learning the thing you are about to charge for. For many sole traders the billable share is somewhere between half and three quarters of the week — and a business in its first year is usually at the bottom of that range, because everything takes longer.

Where GST fits — and where it doesn't

If you are registered for GST, the GST you collect is not your income. On a $100 job before GST you invoice $110 and keep $100, holding $10 for the ATO — ATO: How GST works sets out the mechanics. Two consequences for pricing:

• Do not add GST twice. If a competitor's price is $110 including GST and yours is $100 before GST, you are quoting the same number.
• The threshold changes your margin, not your rate. When you cross $75,000 of turnover, if your customers are consumers and you cannot raise prices, the 10% comes out of your margin. Decide how you will handle that before it happens, not in the quarter it does.

The costs people forget

• Unpaid time. Quotes, travel and admin are real hours. If you do not price them into the rate, you are working them for free.
• Leave. No work, no pay. The rate has to fund the weeks you are not invoicing.
• Super and insurance. Nobody pays these for you as a sole trader.
• Bad debts. Some invoices will not be paid. A small allowance in the rate is cheaper than discovering this in a lean month.
• Super on employees. At 12% (ATO: Key superannuation rates and thresholds: Super guarantee), a $30 an hour worker costs you $33.60 before you count anything else. Price labour at its full cost.

Once you have the number, put it in front of the customer in a form that does not invite negotiation on every line: a fixed price, a package, or a quote with the scope written down. Our templates are listed at our templates. A quote template is not on sale yet.

Set the rate with the arithmetic above, then sanity-check it against what your market actually pays. If the number you need is far above what customers will pay, the answer is usually to change what you sell — a fixed-price package, a faster service, a different customer — rather than to quietly work for less. Working for less than your costs is the one pricing decision that cannot be fixed by winning more work.