Most agency owners either guess their hourly rate based on what they "feel" clients will pay, or copy whatever their competitors charge. Both approaches leave money on the table — or worse, lock you into rates that barely cover your costs. The right approach is to work backward from your actual costs and target profit using a simple formula.
Key Takeaways:
- Use the formula: (Annual Costs + Target Profit) ÷ Billable Hours = Hourly Rate
- Annual costs include salaries, overhead, tools, taxes, and benefits — not just what you pay yourself
- Only 60-70% of your team's hours are typically billable; non-billable time (admin, sales, internal work) eats the rest
- Benchmarks vary by agency type: marketing $100-200/hr, design $75-175/hr, development $100-250/hr, consulting $150-300/hr
- Common mistakes: underestimating overhead, ignoring non-billable time, not accounting for growth, and staying at the same rate for years
- Revisit your rates at least annually and raise them when your value proposition strengthens or market rates shift
Here's how to calculate your agency hourly rate correctly — and why most agencies get it wrong.
The Core Formula
The formula is straightforward:
Annual Costs + Target Profit = Hourly Rate
Billable Hours per Year
Everything else is just filling in the numbers. Get those numbers right, and your rate will cover your costs, deliver your target profit margin, and still be competitive.
Let's break down each component.
Step 1: Calculate Your Annual Costs
Your annual costs are everything it costs to run your agency for a year — not just salaries, but the full picture.
Labor Costs
- Salaries and wages — Base pay for everyone on your team
- Payroll taxes — Employer-side FICA, unemployment, workers' comp (typically 15-20% on top of gross pay)
- Benefits — Health insurance, 401(k) match, PTO, sick leave
- Contractors — Freelancers and subcontractors you regularly use
Overhead
- Rent and utilities — Office space, internet, phones
- Software and tools — Project management, design tools, accounting, CRM, time tracking
- Equipment — Computers, monitors, specialized hardware
- Insurance — General liability, professional liability, cyber
- Marketing and sales — Website, ads, events, commissions
- Professional services — Legal, accounting, bookkeeping
- Bank fees and payment processing — Merchant fees, wire transfers, software subscriptions
Don't Forget Taxes
If you're a pass-through entity (LLC, S-Corp), your profit flows to your personal return. You'll pay income tax on that. Factor in your effective tax rate — often 25-35% depending on your bracket and state — when setting your target profit. Otherwise you'll hit your profit target on paper but have less cash than expected after taxes.
Example: A 3-person agency with $450K in total labor (including taxes and benefits), $75K in overhead, and $25K in tools might have $550K in annual costs.
Step 2: Add Your Target Profit
Profit isn't optional — it's what funds growth, buffers against slow months, and rewards you for taking the risk of running an agency.
A common target is 15-25% net profit margin for healthy agencies. Some aim for 20% as a baseline. Calculate your target profit as a percentage of revenue, or as a dollar amount that covers your goals (e.g., a specific amount for reinvestment, savings, or distributions).
Example: If your target is 20% profit on $700K in revenue, that's $140K in target profit.
So: $550K costs + $140K profit = $690K in revenue needed from billable work.
Step 3: Estimate Billable Hours Realistically
This is where most agencies go wrong. They assume every hour worked is billable. It isn't.
Utilization Rates by Role
- Billable roles (designers, developers, strategists doing client work): typically 60-75% billable
- Project managers: 30-50% billable (the rest is internal coordination, client communication, admin)
- Account managers: 40-60% billable
- Owners/principals: 20-40% billable (sales, strategy, ops, admin dominate)
Non-billable time includes: sales and proposals, internal meetings, admin, training, vacations, holidays, sick days, and the gap between projects.
Calculating Billable Hours
- Total available hours per person per year: 2,080 (52 weeks × 40 hours)
- Subtract: 2-3 weeks PTO, ~10 holidays, sick days → roughly 1,800-1,900 available hours
- Apply utilization: 65% of 1,850 hours = ~1,200 billable hours per person (for highly billable roles)
For a 3-person agency where two people are 65% utilized and one (owner/PM) is 40% utilized:
- 2 × 1,200 = 2,400 hours
- 1 × 740 = 740 hours
- Total: ~3,140 billable hours per year
Example: $690K needed ÷ 3,140 billable hours = ~$220/hour as your blended agency rate.
Step 4: Compare to Market Benchmarks
Your calculated rate should land in a reasonable range for your agency type. If it's far outside these benchmarks, either your costs are unusual or your utilization assumptions need adjustment.
| Agency Type | Typical Hourly Range | Notes | |------------|----------------------|-------| | Marketing | $100-200/hr | Depends on specialization (SEO, paid, content, full-service) | | Design | $75-175/hr | Brand, UI/UX, and web design typically higher | | Development | $100-250/hr | Custom dev and senior specialists at the top end | | Consulting | $150-300/hr | Strategy and specialized expertise command premium |
Solo practitioners often charge 20-30% less than agencies with teams and overhead. Agencies in high-cost markets (SF, NYC, LA) typically charge 15-25% more than those in smaller markets.
If your calculated rate is below the benchmark range, you're likely underestimating costs or overestimating billable hours. If it's above, that's fine — you may have higher expertise, better positioning, or premium clients. Just validate that your target market will pay it.
Blended vs. Tiered Rates
Many agencies use one blended rate for simplicity: every billable hour is charged at the same rate regardless of who does the work. Others use tiered rates — junior staff at $120/hr, senior at $180/hr, principal at $250/hr — so clients pay for the level of expertise. Tiered pricing can capture more value when senior time is limited, but requires clear time tracking and role definitions.
Common Mistakes to Avoid
Mistake 1: Underestimating Overhead
Many agencies only count salaries and major tools. Overhead — rent, insurance, marketing, professional services, payment processing — often adds 15-25% to labor costs. Miss it, and your rate is too low from day one.
Mistake 2: Assuming 100% (or Even 80%) Utilization
Newer agencies especially assume they'll bill most of their hours. In reality, proposals, admin, sales, and internal work consume 30-40% of capacity. Use 60-70% for billable roles; lower for PMs and owners.
Mistake 3: Forgetting Non-Billable Roles
Project managers, account managers, and ops staff generate little or no direct billable revenue. Their cost must be spread across the billable team's hours. If you have 2 billable people and 1 PM, the PM's cost is allocated into those 2 people's rates.
Mistake 4: Not Accounting for Growth
As you add people, overhead and non-billable time often grow faster than billable capacity. Revisit your formula when you hire, open new service lines, or expand into new markets.
Mistake 5: Staying at the Same Rate for Years
Inflation, rising tool costs, and market rates all move up. Agencies that never raise rates slowly compress their margins. Revisit at least annually.
Mistake 6: Using a Single Rate for All Services
Your blended rate is useful for internal planning, but you may charge differently by service type. Strategy work often commands a premium over execution. Rush work or specialized expertise can justify 1.5x your base rate. Use your calculated rate as the floor, then layer on premiums for high-value or high-effort deliverables.
When to Raise Your Rates
Consider raising rates when:
- Your costs have increased — Salaries, rent, tools, or benefits have gone up
- Your utilization is consistently high — You're turning away work or routinely overbooked
- You've strengthened your positioning — New credentials, case studies, or specialization that justifies a premium
- You've added value — New processes, tools, or expertise that clients get for the same rate
- Market rates have shifted — Competitors and hiring data show rates moving up
- You're onboarding higher-quality clients — New clients who value outcomes over price
Raise rates for new clients first. For existing clients, communicate increases 60-90 days in advance and tie them to contract renewals or scope changes when possible.
Putting It Together: A Quick Worksheet
- Annual costs: Add labor (including taxes/benefits), overhead, tools, and a buffer for surprises
- Target profit: 15-25% of revenue, or a specific dollar amount
- Billable hours: (Team size × ~1,850 available hours × utilization %) — use 60-70% for billable roles, 30-50% for PMs/owners
- Rate: (Costs + Profit) ÷ Billable Hours
- Sanity check: Compare to benchmarks for your agency type and market
The number you get isn't set in stone — it's your floor. You can charge more if your positioning supports it. You shouldn't charge less without understanding exactly what you're giving up (margin, growth, or sustainability).
Conclusion
Calculating your agency hourly rate isn't guesswork. It's arithmetic: know your costs, set your profit target, estimate billable hours honestly, and divide. The formula keeps you profitable and gives you a clear rationale when clients push on pricing. Revisit it at least once a year, adjust for reality, and raise rates when your costs or value justify it.