How to set your agency's hourly rate: a simple formula

Most agencies set their rate by looking at what competitors charge and rounding to a number that feels fair. That is a guess. A rate that is too low looks fine for months, then shows up as a quiet problem: you are busy, the invoices go out, and there is still not enough left at the end of the month.

A better starting point is to work backwards from what the business needs. This post gives you the formula, a worked example, and the number that moves the result most.

The formula

Your minimum hourly rate is the money the business must earn in a year, divided by the hours you can actually bill.

Minimum hourly rate = (target take-home + yearly business expenses) ÷ billable hours per year

Billable hours per year = hours per week × (52 − weeks off) × billable share

Billable share is the part of your working time that clients actually pay for. Admin, sales calls, hiring and invoicing are real work, but nobody pays for them directly, so the rate has to cover them.

A worked example

Take a small agency owner with these numbers:

• Target take-home: $80,000 a year
• Business expenses (software, insurance, equipment, and money set aside for tax): $12,000 a year
• Working week: 40 hours
• Time off: 6 weeks a year
• Billable share: 60%

Billable hours per year: 40 × (52 − 6) × 0.60 = 1,104 hours.

Money needed: $80,000 + $12,000 = $92,000.

Minimum rate: $92,000 ÷ 1,104 = $83.33, so round up to $84 an hour. That is $672 for an 8-hour day.

This is the lowest rate that still reaches the target. It is a floor, not the price you should aim for.

The number that moves the rate most: billable share

Change only the billable share and keep everything else the same:

• 40% billable: 736 billable hours a year, minimum rate $125 an hour
• 50% billable: 920 billable hours a year, minimum rate $100 an hour
• 60% billable: 1,104 billable hours a year, minimum rate $84 an hour
• 70% billable: 1,288 billable hours a year, minimum rate $72 an hour

The same agency doing the same work needs a rate that is $53 higher at 40% billable than at 70%. Often, a rate that feels too low is really a billable-share problem.

Find your real billable share

Do not guess this number. Track your time for two to four weeks, every task, including the work you cannot bill. Then divide billable hours by total hours.

If you use HireOrSell, timesheets let you clock in and out against a project, and each entry can be marked billable or non-billable, so the split is easy to read back.

Three things to check before you use the number

• Is the target realistic? Your take-home goal should come from what you need, not from what feels comfortable to quote.
• Did you include every expense? Tools, insurance, equipment, training, accounting, and the tax you set aside.
• Are your weeks off honest? Public holidays and sick days count, not only the holidays you plan.

What if the number feels too high?

If the result is above what your market pays, you have three levers, and raising the hourly number is only one of them:

• Raise your billable share by cutting admin and finding where time disappears.
• Change what you sell. A fixed price for a clearly defined result can earn more per hour than selling hours.
• Lower expenses or the take-home target, if you can do that without hurting the business.

Do not simply copy a competitor. Their costs, team and billable share are not yours.

Try it with your own numbers

The calculator on this site does exactly this arithmetic. Enter your five numbers and it returns your minimum rate, your rate per day and the revenue you need each year: Hourly rate calculator.

Review the number every year, and again whenever your costs, hours or goals change.