Pricing is a tricky business. It’s one of the most important yet difficult decisions entrepreneurs face. You don’t want to set your rate so low your business won’t thrive, but you don’t want to scare off your clients either. Here are some things to consider:
Is it more honourable to give or to receive?
You might assume it’s more honourable to give. After all, we were brought up on expressions like give and you shall receive. Without disagreeing with the integrity of the sentiment, have you ever thought you deserved more for work you’ve done but didn’t ask for it, and felt somehow lessened and devalued afterward? Dr John Demartini says in his book How to make one hell of a profit and still get to Heaven that when you do something for nothing, or less than it’s truly worth, you lower your self-worth. At the same time you rob the recipients of dignity and responsibility by making them feel consciously or unconsciously indebted to you.
Every time you try and receive something for nothing, or try to give something for nothing there’s an imbalance, which creates a hidden agenda that holds you back. For example, let’s imagine that you have a client, who after many reminders still has not paid you for the work you did 2 months ago. I would guess that whenever you come into contact with the client, instead of thinking about the issue at hand, your mind is on that unpaid bill, right? You’re feeling resentful because you haven’t got what you deserve. Your enthusiasm wanes, the quality of your work goes down and takes your creativity and self-worth along with it. Not just with that one client, but with all of them.
Let’s apply the same concept to setting prices for our time, our efforts and our services. Ask yourself “How can I give to others what they would love to have, while at the same time receiving what I would love to have? How can I fulfill us both?” Because ultimately, we receive what we think we deserve. No more. No less.
What’s the value?
Simplistically, the pricing of your services will depend on how much value you place on your work. And until you value it, don’t expect others to. One way to start valuing your service is by asking yourself these questions:
- How unique is your offering? The more differentiated your service is, the less competition you have and the higher the value of your offering.
- How well trained are you? The more trained and certified you are in your area of expertise, the higher the rate you can charge.
- What’s your public profile? If you are considered an expert, especially if you’ve authored books, are a regular industry speaker or are frequently invited by the media as a resource person, you can charge a higher rate.
- What benefits do you provide? If you are going to save the client money because you deliver a faster service, or can guarantee superior business results, that benefit should be included in the price.
More often than not, entrepreneurs are afraid to charge the real price for their services. While a lower price can initially draw clients to you, it has a number of off-putting implications with regard to credibility, capacity and loyalty. In general, if you have a good value proposition and a healthy sense of self-respect, you can charge any amount you wish and you’ll be working with a better level of customer than if you rely on discounts and low fees.
How long will it take?
To work out your hourly rate, you have to know how complicated the task will be and how long it will take you to complete it. You also have to know how much of your time you can charge for, versus how much is proposal writing, hunting for new clients and filing paperwork. In general, up to 50% of working hours can be eroded by non-billable administrative tasks. Sobering.
Assuming that you are able to work for 40 hours a week and 45 weeks a year, (3 weeks vacation, 16 days public holidays and 4 sick days/family leave/study leave/moving house/you choose) you would have 1800 hours of workable time. Subtract the hours you can’t charge for and you’re left with 900 billable hours.
One way to bump this up is to leverage your time. Instead of consulting to your clients one-on-one, find ways to group non-competitive clients who have the same needs and interests, and effectively create eight to 10 times more billable hours.
What does it cost?
Make a list of all the expenses you pay to operate your business, even the smallest. Include electricity bills, website hosting, bank charges, insurance payments, marketing costs, client gifts and entertainment, accounting fees, equipment depreciation, pens, plastic sleeves and post-its. Add them all up to get to an annual figure.
Now do the same with your personal costs. Include them all: rent, food, school fees, child-care, gym membership, telephone, your annual renewal to Toastmasters and Fang’s trip to the vet.
How much profit?
Ah, now here’s the thing to help you build a reserve for when business slows. You might think you don’t need to add in a profit margin because you’ll be drawing a salary, but the additional margin is essential for future growth. If you’re in the consultancy business you should aim for fairly high margins, around 75-85%. You should be able to achieve them because overheads in this category are typically low. For the sake of our calculations here, let’s view it like this: How much profit would you like to make in a year, to spend on that expensive coaching course in London or to take the niggling family on a holiday to Bali? Write that down.
And the winner is?
- (Annual business costs + annual personal costs)/billable hours per annum = break even hourly rate
- (Annual business costs + annual personal costs + annual desired profit)/billable hours per annum = ideal hourly rate
Think the rate is too high?
This is the only rate at which your business will be successful, because it’s based on actual costs and needs. That said, there is no cut-and-dried formula in pricing your services. If your customers find your pricing too high, you can do one of three things:
- Target customers with bigger budgets.
- Lower your prices and work twice as hard as your competitor who earns double what you do because she charges more. Guaranteed to scare you back into the old 9 to 5 corporate world.
- Find a different service to take to market that allows you to charge the rate you need.
The key to setting the right price for your service is simple: your respect for yourself and your business.
