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Freelancer or new entrepreneur: how do I calculate my hourly rate?

Blog  — Tue 20 Feb 2024

After a turbulent period, it is now time to take stock. The Netherlands officially emerged from recession in the first quarter of 2024. However, Covid, deferred VAT, NOW schemes, volatile markets, high costs, and increasing debts have affected many entrepreneurs. What if you are just starting out now? That's perfectly fine, as long as you avoid the typical pitfalls. It all starts with your hourly rate.

Determining an hourly rate should not be guesswork. Choosing the right hourly rate is one of the most important decisions within your business. But don't worry. Fortunately, you can always adjust it later. Let's take a look at a healthy rate.

Determining the absolute minimum

A good rule of thumb is to take a market-based and current annual salary as a starting point. The CPB calculated the median income in 2024 at € 44,000. Then multiply this by 1.75. This brings you to € 77,000. Then divide this by 1,630. This leaves you at € 47.24, excluding VAT of course. A splendid starting point. If you work for less, you might as well be an employee.

But how did we actually arrive at this? What is that 1.75 and 1,630? Here's how it works; You probably know that as an employee you have a gross and a net salary. You can think of it the same way as an entrepreneur. Not every euro you earn is profit in your pocket. You have expenses in your business, and you need to consider expenditures or missed income that as an employee you often don't even know about; vacation days, non-billable hours, business expenses, insurance, pension, etc. By multiplying your desired annual salary by 1.75, you allow room for these matters. But it can be even more precise. We'll come back to that later.

The 1,630 is the total number of hours in a year that you can work. This is above the 1,225 hours that the Tax Authorities require from you to be seen as an entrepreneur by law. This quickly leads you to an hourly rate that forms the minimum and can already work quite well. But, of course, we didn't start a business just to earn an average income. So let's puzzle further.

Dealing with the cunning buyer

As a newly minted entrepreneur in a sales role, it can be challenging to get used to the fact that customers exert pressure on you. That's the game. And their role is to come out as cheaply as possible. Seasoned buyers, in particular, can give you sleepless nights. But remember; you're better off turning down a job than working below your hourly rate.

The latter not only demotivates you, but it also leaves no room for setbacks within the project and your business. Additionally, customers sense that applying pressure works, and they will apply even more pressure next time. Just as they choose you, you also choose your customer. So choose wisely and don't let yourself be fooled.

A little margin on your hourly rate can help in negotiations, but always stand firm after it's given away. This way, your customer feels the hard limit, yet it feels like they've achieved something. A win-win.

Avoiding intense competition

We only discuss this as the third point. Strange, right? It might seem that competition mainly determines your hourly rate, but that's certainly not the case. There are plenty of "entrepreneurs" who set too low an hourly rate and therefore go bankrupt in the first 2 years, have too few reserves, or realize later in life that they will have a meager pension.

A common reason for short-lived entrepreneurship is a classic example; blindly spending what's in the business account and not having visibility on taxes, creditors, and other creditors through bookkeeping. But even a good year followed by a lesser year may require extra reserves to get through. Also because taxes are often calculated based on the previous year.

Anyway, back to competition. Of course, you shouldn't price yourself out of the market, but you absolutely shouldn't blindly bow to pressure you think you're feeling from customers or competitors. If your hourly rate is unrealistically low, you're the only one who will ultimately suffer. That impossible competition that seemed so difficult will naturally disappear by the next fiscal year or the next recession. And customers don't benefit from that. They are better off investing in a good relationship with long-term continuity. Losing a supplier is too risky for their own revenue.

Strategically leveraging your added value

A higher hourly rate than your competition can be perfectly fine. As long as you can explain to the customer why it's worth it. Talk about your unique added value, experience, expertise, and the stability you can provide in the coming years.

Also, never forget that an entrepreneur doesn't ask what it costs but what it's worth. Determine your position in the market and move calmly with it. This often allows you to keep your hourly rate much higher than the minimum calculated at the top. And you need that to build up your nice reserves in your business and personally. Those will be needed in leaner times. The market moves in waves, so after every peak, the next trough will naturally come.

Work with facts and long-term planning

As an entrepreneur, you have to think about everything. Balancing the right hourly rate may be the most important. With Daxto, you have the precise figures for this, but you can also calculate it by hand, of course. With healthy buffers, you can not only cope with inevitable setbacks but also work towards a healthy future for yourself, your business, and your customers.

So take the time to map out your costs, even on longer and very long terms. Also, always keep enough "fat on the bones" for setbacks. So don't be tempted to undercut the rate of the cheapest. Take responsibility for your own financial health. Entrepreneurship is entirely up to you. And now, get to work!