Have you done the math?

How did you come up with your pricing?

Some base it on what they’d make at a 9-to-5 job. Others just copy what their competitors charge. And a lot of people I’ve talked to admit they just kinda guess.

But if you’re running an agency business, you need to know what your time actually costs. Otherwise, you might be underpricing, working for free, or taking on work that actually loses money.

Fancy people might call this “Break-Even Analysis” or “Effective Billable Rate (EBR) — but let’s just keep this super simple….

You need to know what it costs just to keep the lights on before you can really price anything…

Here’s a simple way to figure it out:

(Total monthly expenses) ÷ (Billable hours per month) = Your true hourly cost

Your monthly expenses need to include everything:

• Your salary
• Employees or contractors salaries, taxes, benefits, etc.
• Software, subscriptions, and tools
• Office space
• Taxes, insurance, and other overhead
• Any other costs required to operate

Then you need to calculate your realistic number of billable hours per month (not total hours worked).

Most agency owners or freelancers can only bill 50% – 60% of their time (remember, you have admin tasks, marketing, meetings, and other non-billable time). Subcontractors or employees might bill at a higher rate, but even then, 70% would be admirable.

Let’s look at an example of a one-person agency or freelancer and do the math…

• Monthly Costs: $10,000 (all expenses, including your own compensation)
• Billable Hours: 80 (working 40 hours a week billing at a rate of 50%)
• $10,000 ÷ 80 = $125

That means every hour you’re doing billable work costs you $125 just to break even and keep the lights on.

Of course, no month goes perfectly… You’ll get buried in meetings, make a mistake that causes you to redo work you can’t bill for, or underestimate how long something will actually take.

Plus, you need to make a profit too, right?

To cover contingencies and operate a profitable business, you probably need to be billing in the neighborhood of $175 to $250/hour.

Of course, this is just the starting point — and all of this has been simplified to fit in an email.

Plus, most of us don’t bill hourly (opting for more profitable strategies like value-based or project-based pricing (which still rely on the foundation of knowing your baseline break-even rates)), and you have to consider other factors like your position in the market, your own growth goals, etc.

But at a bare minimum, you need to know your break-even rate to avoid literally paying to work for your clients.

Have you done the math?

Grab a calculator and run these basic numbers as a starting point.

Are you running a profitable business, or are you accidentally running a non-profit web agency?