Monday, January 31, 2011

How Much Do You NEED To Make?

This is usually one of the first questions I ask people before I start consulting with them on their pricing. Some people don't even know what they need to make before I ask that question, so it's the essential first step to determining what your goals and prices should be. Most newer freelancers just pick a price based on what they think other successful people are doing- but that's the kiss of death. You have no idea how successful those people really are, how much they're working for that price, who is actually buying that price, what kind of expenses they do or don't have, and what other sources of income they might have in order to support their price. This is why the most important question to answer for yourself is: How much do YOU need to make?

What would your annual gross salary be if you worked for someone else? $30,000? $60,0000? $120,000? $250,000? What salary amount do you need to maintain the quality of life you have right now? Just for fun, what salary would you need if you're going to live your dream life?

Once you know what you need your salary to be, you can double it to find the amount of revenue your business needs to make in a year (this is the super simple method for sole-proprieters and for the sake of keeping this easy). If you were working for someone else, everything you make can be taken home and contributed to your household income. If you're running a freelance business, it's good to aim for taking home 50% of your business revenue so that the other 50% can be reinvested, cover overhead, COGS, expenses, upgrades, emergencies, and benefits (note: income taxes may be deducted from your salary and from the business depending on how you account for it.) If you have employees or if you outsource part of your service, you may take home less than half of your revenue, which simply means you need to earn more in revenue in order to take home what you need.

If you'd like to go one step further to help you budget: consider how many weeks you'd like to work each year- so that you can make sure you're leaving time in your schedule for vacations. Do you want to work 50 weeks with 2 weeks off? 48 weeks with 4 weeks off? 26 weeks because you're only part time? Once you know how many weeks you want to work, we can find out what your business needs to make each week.

Now let's do the math... oooohhh.... calculators.... ahhh....
[Annual Salary Needed] x 2 = [Annual Revenue Goal]
[Annual Revenue Goal] / [Working Weeks per year] = [Weekly Revenue Goal]

$60,000 salary x 2 = $120,000 annual revenue goal
$120,000 / 48 weeks = $2500 weekly revenue goal

Want to go further and find out what your hourly rate should be?
[Weekly Revenue Goal] / [Weekly Working Hours] = [Hourly rate]
$2500 / 40 hours per week = $62.50 per hour

What can you do with that number?
Determine if the hours and costs you're investing into a product or service are being covered by the price you're charging. So, if it takes you one hour at $62.50 to fulfill a print order and you have a $2 print cost, $3 packaging cost, and $5 shipping cost and the client paid a total of $25 for the product & delivery, than the hour that you spent on ordering, receiving, and packaging that product just made you lose money on your sale. In order to make that print order worth YOUR time, you should have charged $72.50.

Now, you could have hired someone else to do it at a lower rate- let's say $15/hr, which means you can now just charge for the $15 hour + $2 print + $3 packaging + $5 shipping = $25, and now you've just broken even and not made a dime on that print order. As long as you weren't counting on that print sale as part of your total revenue, you're probably fine. If you count on print sales as part of your revenue to support your salary, than you need to figure out how to make them profitable and how they factor into your revenue goals. If you work with a lab who does print fulfillment, you only need to make sure you've accounted for the costs plus commission for them to produce that product- and you might even have some profit left over because you didn't need to hire someone and you didn't have to do it yourself - saving you both time and money.

Is this scary? Eye opening? Informative? Confusing? Let me know in the comments below!

Anne Ruthmann is a lifestyle & wedding photographer from Boston, MA. She spent 10 years practicing marketing & management in corporate and non-profit businesses before pursuing her passion for photography as an independent small business. She loves helping others find creative and low-cost solutions to business problems. Follow her on Twitter to see her daily adventures and thoughts.


  1. Great points Anne, I really love reading the stuff you have to say.

  2. Blessings for helping put real numbers on our REAL profession Anne :) There is a fine line between a true professional photographer and a fly by night and it's the numbers... Real numbers and the ability, the experience, and the passion for the profession. Hugs!

  3. Awesome. Thanks! I hope you don't mind that I linked to you :)

  4. anne -

    this post has been all but confusing. Painfully helpful. I've only just started with my business... this will DEFINITELY help lead me in the right direction. thank you for sharing so much! I'm gonna go and unf*ck myself now...

  5. Anne,

    The numbers as an employer need to calculate the real cost of having an employee. So your $15 figure is missing the taxes and insurances required to hire an employee such as Work Comp, Employer Liability, Soc Sec and Medicare and the cost to do payroll.

  6. Flash Frozen - I completely agree - I didn't go into such great detail here because I wanted to keep it simple, but yes, there are many more numbers involved that need to be considered when working with an employee. That $15 figure could actually account for the costs involved with having an employee leaving more like $8 for your employee as take home, or you could actually pay your employee $15 and include the employee costs in your overhead numbers. It's all in how you choose to account for your expenses.

  7. Rachel - you made me bust out laughing so loud I scared my intern. ;-)

  8. Ursula - links are lovely and much appreciated when quoting our work!

  9. This is some good stuff to think about. Unfortunately, not many of us take the time to think about it. Thanks!

  10. Well, that's what I'm here for... to challenge people to think about it. ;-)

  11. There are so many different ways to look at it and this was a new perspective for me, thanks Anne. We have generally setup our pricing starting with hourly (and then add costs) but thinking big picture and end goal is great as well. Awesome.

  12. Aaron - I like using this to help determine exactly what that hourly should or could be. If you can account for the amount of time it takes you for each project you like to do, than you can determine the appropriate costs to complete the project and if you'll be over or under your projected hourly income goals.

  13. Interesting and easy approach! Thanks! I was doing it in a much more headache-y and complicated way by adding up factors:
    1) Cost of living: Rent, Electricity, Insurances, Phone, Internet, etc.
    2) Experience: years I've been learning and working in the field in which I gained experience (broken down to an hourly rate of money spent).
    Add both together and break it all down to 8 hours 5 days week. It's a scary big number.

  14. These are definitely "GOAL" numbers, right? Not everyone will be able to meet their goals in their first few years of business, which is why it's also important for people to know what all of their household expenses are to determine the bare minimum they'd need to earn from their own business in order to be a sustainable and supporting business.

    I actually have MUCH more detailed pricing posts on this blog, but I was finding that people weren't reading them- so I'm providing some quick and easy ways to tackle the problems and just get people to realize what it takes to run a sustainable business and support themselves while doing it. If it scares some people out of trying to run a business, than I've probably saved a lot of people time and money right up front. If it doesn't scare someone away, than at least it may help them realize what it's going to take to get where they need to be.

    I'm not quite sure how you quantify years of experience. You can have 30 years of experience as a photographer, but that still doesn't mean your work is going to be worth more than what someone else is willing to pay for it. Likewise, you can set your pricing to whatever you'd like it to be, but that doesn't mean someone else is going to pay the price you're asking.

    Obviously this is just a super easy way to help people figure out where they should be if they want to make a living as a self-employed person and where their business is or isn't bringing in enough to sustain itself.

  15. I'm a bit confused on how income tax plays into this. I'll ask my accountant, too- but would you mind clarifying that sentence on income tax a bit more? Will doubling the amount you want to make still account for taxes? My mind is a bit foggy/dense at the moment. :)

  16. That is a great justification on why we have to charge a premium for what we do. It makes good sense!
    Thanks Anne!

  17. If you receive a salary from a company other than yourself - you pay income taxes on your personal salary and the company that pays you generally pays your social security, retirement, healthcare, etc. So, when you work for yourself, you decide exactly where all of those items come from when you do your accounting. This particular post is not about accounting, but rather about goal setting in order to set yourself up to be prepared for all of the things you need to pay out in your business.

    I've created an easy budgeting method which includes income tax, which you can check out here:

  18. Hello, reality... thanks for this. Needed it. ;-)

  19. (Really late comment here)

    I try to set it up so that I can obtain my annual total revenue goal just by shooting a certain number of weddings at $x per wedding minimum.

    Is this okay? I thought this would account for all the hours I work during the week, so that as long as I take into account the cost of producing a given product, taxes on it, and my desired profit on it, I wouldn't be losing money regardless of how long the order took.

    Does this make sense at all? Is it just another way of achieving what you said up there, or a totally different way of looking at it?

    Thanks for the post btw, very eye-opening :)


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