Once you establish what goods or services you are selling, you need to put in place rates for those services. Not only do you need to make a living, but so does everyone else on your team. How do you determine your company’s rates? Author Richard Harrington will guide you through things to consider when establishing rates for service.
- Once you know what it is you're selling, you'll actually need to assign some rates to those services so you can make a living. There's a lot of soul searching that's going to happen here. Some of this is going to be really intellectual. Other parts of it are going to be emotional. For example, you need to decide what type of lifestyle do you want to live? How do you want to be perceived? My company is designed to be affordable to non-profits. As such, we try to keep our rates on the lower side, but we still don't want to be taken advantage of so we charge what I consider to be a fair rate.
We also don't put our company in the most expensive part of town so we can remain competitive and don't have a bunch of outside costs that drive our rates up. Now that non-linear editing systems can be setup for around $1 - $2,000 and even a well-equipped system for about $7,000 it really changes things. When I started, video editing systems were easily $35,000. Prior to that, before I struck out on my own, they were selling for $100,000. Well, the typical hourly rate that you can get for non-linear video editing has gone down tremendously.
It's important that you understand all of these factors that will affect rate. Your local market, the cost of the people, the cost of the equipment. There's a lot of things that you have to think through. It comes back to some of the things we mentioned earlier. Make sure you know what you can do internally. Typically, internal costs are going to be easier to control and you can be more consistent with offering a rate. These are internal people that you can develop. People that you can schedule. People that can be brought in for a couple of hours at a time to switch off of their current project to a more pressing need, but those external folks are also going to be a key component here so it's essential that you keep up with those contractors and know if they're changing their rates as to how it will affect you.
That's that whole make versus buy scenario as well. When I'm doing quotes here for things like DVD or Blu-ray duplication, I don't put those on my rate sheet. Rather each time, I need to reach out to a trusted partner, a replicator and get a specific quote for that job. There are things that are really prone to market fluctuation so locking them down on a rate sheet just isn't prudent. It's essential that as you switch to new markets or maybe you have a job that requires travel, that you also do research.
Certain components have to always be researched each and every time to avoid putting your company at risk for extra financial cost. Over time, make sure you attempt to scale up those internal capabilities so you can take greater control over your costs. Now the rates for capabilities are going to require competitive analysis. I recommend that you try to look at websites for companies in your area. Often times, companies will post their rate sheets online, particularly if they do work for the federal or state government, they're often required to.
This is a great way to research some of your competition. Now if you can't find people in the local market who are sharing information, look for cities that have a similar cost of living and try to find those or perhaps other genres that are similar. Photographers, graphic designers, web folks. These people often have similar equipment needs and skill levels and can give you some guidance on how to set your rates. Those similar industries are worth researching and often times there are industries much larger than the video industry. The print industry for example, frequently publishes salary surveys and information about rates and services.
You also need to think about the financial needs of your company. Most of my employees are only doing billable work 40 - 60% of the time. There's tasks like maintenance, putting the studio back together after a shoot, which while you've kind of worked that in, it's not directly billable back to the client. Or maybe there's things like business proposals or travel. You have to remember that not every single working hour is a billable hour. So the rates that you put together need to accomplish that. Even if you're a freelancer, you never work all of the time, even if it might feel like it.
It's important to remember that that work isn't 100% billable. So you need to build in some pad so you can make a good quality of life. You need to think about things like overhead. The equipment, maintenance, contracts, your rent, electricity, telephone bills. All of these things will drive up your cost. Having laptops for everybody. Having desktop computers that are powerful enough to get the job done. Having electricity, air conditioning. Now that I've recently become a building owner, paying my taxes and accounting for things like furnaces that fail.
There's all sorts of potential problems that you need to build into your plan to make sure that you're charging enough for your services and that's where savings comes into play. You will hit dry spells. You will have unexpected things that happen. You will need to save up for big purchases. Building in some savings into your rates is essential if you want to maintain viability as a company. You might think that setting rates sounds pretty complex, but really there's only three things to think about as far as categories go.
The three major components are going to be the people, the actual talent that's doing the work. Your video editor, your director of photography, your audio engineer, all of these people expect to get paid for their time and they also need equipment. Some crew members bring their own gear and when you hire them, they're going to charge you for that equipment. Other times you might have your own gear that they're going to be using. Well, that gear needs to be paid for unless you know how to get free equipment. Finally is the facility where the work occurs.
A lot of folks don't think this through, particularly with cottage industries. Maybe you're starting your business at home, but you need to start thinking about what happens when you outgrow that. Well there's rent, there's insurance, there's utilities, there's the facility and the equipment that's needed to keep the infrastructure. All of these things cost. If you're moving into video project budgeting or evolving from being an independent contractor or a freelancer, you have to start thinking about more than just your time. What about the equipment and the location where the projects or work happens? These are all equal components that need to be budgeted for.
A couple of other things to think about. Make sure you charge for the assumptions. We charge for creative design. The creative design process is simply those kick off meetings. Sitting down with others in the office to work through the big ideas. The creativity time to come up with concepts. Well, those have value. A lot of folks think that that time spent being creative or coming up with the ideas isn't billable. Well I was just sitting there in the shower and it came to me.
Now, you have to be reasonable here, but it's important that you accommodate for all steps of the process. A lot of folks forget to charge for shipping. You've got to get things delivered back to the client. Couriers for in town. Putting things on an airplane for overnight express shipping. In my company we always try to pass the shipping charges back to the client. Often times we keep it simple, asking for the client to provide shipping labels or giving us their account number for these delivery services. This is far simpler than having to sell the service and then track it, get a bill from one vendor, apply it to another bill for the client, and put in things like mark up to accommodate all of that accounting time, but you can run your company how you want.
Just make sure you're not forgetting to charge for some of those assumptions. One other one for example is storage and archiving. Making sure that you have backups of material. Did the material get transferred from your field shoots into more than one location, using a concept called 3-2-1 backup making sure that you have three copies in two locations. Well these are all extra steps and costs that have to be considered. It's critical that you think through all of the necessary steps and that you build these in.
On our line item budgets, you'll see things that a lot of folks would normally skip. For example, are you feeding the crew? Well, then you need to charge for the food or build that into the rates if you don't want to call it out as a line item. All of these little things you do that keep the company running and keep your employees and contractors happy, well they're costs and you need to figure out if you're charging for them individually or applying an additional overhead to all the rates and services so that you can run the company in a manner that you like.
- Evaluating outsourcing and partnering options
- Setting your rates
- Incorporating material and overhead costs
- Scoping the project
- Estimating the production time
- Collecting data with time tracking
- Creating a quote or proposal
- Setting payment terms
- Creating an invoice with Word or Pages
- Dealing with billing and collections