Stop using a fixed day rate. There's a better way.

What’s your day rate? It’s your flag in the ground, telling everyone proudly what you think you’re worth. It allows clients to make a quick judgement about you, and immediately know if you have a future together. But it’s not smart.

In fact we think it’s lazy and dangerous. In this article, we’ll explain why we think you should stop quoting a fixed day rate for your work, and what you should do instead.

Introduction

If you’re really short on time, you can skip to ‘How a variable day rate works’ below, otherwise stay tuned and let’s take a peek under the pricing hood…

The fixed day rate has worked well for small businesses. It’s easy to figure out, and easy for a potential customer to understand. But here’s the deal - it can work so much better with a little value-based thinking in the mix.

Before I start, let’s be clear that I’m not talking about ditching the day rate and charging your clients based on value to them alone (commonly known as value pricing). What I am talking about is varying your day rate based on value principles. Crucially, the value part means value for you and value for the client.

Let’s take a step back…

The old day rate

It’s pretty normal for businesses to charge the same rate for every client. And quite often, the rate will remain the same for years - until the business owners pluck up the courage to tell their clients that prices are going up.

If you trade on a rate per day, you’ve probably already done the maths to get to that point:

$$\frac {\text{business cost + profit you’d like}} {\text{work days in the year}} = \text {day rate}$$

For example:

$$\frac {\text{(£52,000 costs + 20% profit) = £62,400}} {\text{240 working days}} = \text{£260 per day}$$

(There are a few assumptions in these figures: your pay, tax savings and other costs should be included).

What’s wrong?

So, what’s wrong with this day rate? It covers your costs and makes you 20% profit a year!

Well, there’s a few things actually. Here’s some of the main failings:

• it doesn’t take into account job-specific issues (complicated briefs or fussy clients, for example)
• it assumes your costs stay the same the whole time
• it doesn’t allow you to determine your return based on the merits of the job
• here’s the big one: it might not be as much as you can get for the work

An inflexible standard day rate is inadequately equipped to deal with the variables that occur across every new project. Treating every project the same can fail to deliver a satisfying return, and often will.

Here’s our solution to the problem.

A variable day rate

The basic principle of a variable day rate is that you quote a different rate for each project, based on what you think the project is worth to you and your client.

How a variable day rate works

Let’s tweak our day rate calculation from above, the formula is very similar:

$$\frac{\text{Business costs + variable profit}} {\text{Working days in the year}} = \text{day rate}$$

Where you say ‘fixed 20% profit’, I say ‘variable profit’. This could be 10%, it could well be 20%, it could 25% or 50% profit. For some jobs, it might even be close to 0%. The point is, it’s a profit that suits the project based on the requirements - but also on your knowledge and feelings for the work.

You might know your client’s budget. You might know that it’s going to be a difficult project to deal with. You might really want the work, and be happy to incentivise your rate. So you can flex your day rate to suit the occasion.

An important point about ‘profit’ versus 'return’

I need to make an important point about profit and return. We need to stop talking about profit, and start talking about anticipated return, which we just call return.

You need to complete the work before you know what your profit is. The project might over-run, at your expense. You might need to do more preparatory work. A disaster might befall your laptop. Until you get to the end of the project, you don’t know what your actual profit will be.

I’ll talk about return instead of profit in future. (Unless I mean 'profit’).

We’ll cover getting your time estimations bang on in another article, but just so you’re not wondering…

It’s important to add contingency by bumping up your times, not by sliding your day rate up a bit. If you’re used to adding a fixed percentage contingency onto a project cost, you need to get into the mindset of adding time on.

By adjusting days’ effort, you’ll distill your thinking about how long the project will take overall, and be able to manage expectations on delivery dates. And you’ll still make enough money.

So get flexible!

In summary, there are compelling reasons to ditch the stubborn day rate and start costing more intelligently. We’ve shown you the basics of how and why this works and laid the foundations for you to start doing it yourself.