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Setting your rate is more of an art than a science. There is not going to be a perfect formula.
Work backwards from your last salary
For easy numbers let’s say you make $100,000/yr. Let’s say you take two weeks of vacation a year. That puts you at $2,000/week, working 40 hours a week, that makes an hourly rate of $50/hr.
These initial numbers assume 96% billable time. You likely will be taking vacations, unpaid sick leave, and may just not have work. Say you are in reality at 85% billable time (about 8 weeks not working for whatever reason), at $50/hr you would now be making $88,000/yr, which is a cut in what you were making before.
To keep roughly match your previous salary, you would need to make your rate $60/hr. That assumes your 85% billable time, and your estimated take home would be $105,600.
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Find out the “market rate”
Working off our original numbers we know that $60/hr your base line. That doesn’t really mean anything to the industry though. It is a rough estimate for keeping the same standard of living you had at your salaried position.
Market value for what you do is just what companies are paying contractors for your skills. One of the easiest ways to just to ask. Ask your peers, as recruiters, look around online and see what you find. However, the big caveat is that location matters. What someone will be willing to pay in New York, is not very helpful to you unless you live in New York, or are specifically targeting New York companies.
If the market rate is much higher than your base line, that is great! For example if you find out that market rate for your skills is between $75/hr and $90/hr, you know that you can find a number in that range and go with it.
It isn’t quite so simple though, there are certainly a decent amount of companies that aren’t paying market rate. They are looking for a bargain, and hoping you are the one who will give them one.
If you find that all of your engagements are asking for lower than market rate, it could either be that your market sources were off, or the company didn’t understand your skill set. Those are both things that improve with experience.
Personal Experience
As you get some billed hours under your belt, you’ll start to get a feel for your rate. You are also responsible for increasing your rate as the market changes and as you get more experience.
Sometimes there will be a client who you find that you are willing to take a bit less than market rate for, and other times there are clients where you know that it will take at least the top of market rate to work for.
Bottom Line
Setting your rate will always be an experiment. Your hourly rate should always be more than what your salary converted into hourly would be. If you are just starting out these guidelines should help you get in the ballpark of where you need to be. Have some of your own rules you use for setting your rate, let me know on twitter!