One of the questions I get all of the time is “How much should I charge for my services?”  Of course, my answer is almost always, “It depends.”  So, let’s talk today about what that depends means.

There are actually two questions when it comes to pricing, and this is especially true for smaller businesses.  The first is what do I need to charge. I’ll help you figure this out in a little while.  The second is what the market will bear?  This is a tougher question, and I’ll tell you what I think.

Some simple steps for knowing what you need to charge.

Most of the time you just come up with a price, see if people are willing to pay for it and think that’s the price you should be charging.  In my opinion that is the worst way possible for setting prices.  Before you even think about setting a price, know what you need to run a business that creates enough profit.

So, here’s the formula that I use when I think about setting my price.

  • I always start with how much money I need to make. This includes how much money I need to live on, having an emergency fund, having money for growth and money to fund my retirement plan.
  • I then look at what my expenses are for running a business.
  • I add these two things together, and now I know what the minimum is for my business to be economically successful.

Here’s an example:

Living expenses………………………………………………………………………………… $100,000.00

Emergency fund………………………………………………………………………. $75,000.00

Marketing……………………………………………………………………………….  $50,000.00

Retirement Fund……………………………………………………………………… $45,000.00

 

Total Profit need……………………………………………………………………. $270,000.00

 

Business expenses……………………………………………………………………  $75,000.00

 

Total cash needed…………………………………………………………………..   $345,000.00

 

Hourly utilization rate needed at 2,000 hours/year……………………………… $172.50/hour

 

Never charge by the hour.

You’ll see that I’ve transferred the amount of cash needed to an hourly amount.  This is just for a start at what you need to charge.

The problem with charging by the hour is you are trading dollars for hours, and you’ve severely limited the amount of money you can make on an hourly basis.  The problem comes to the forefront when you quote an hourly rate to a potential customer.

If you need to make $200 per hour, some customers will balk at this amount.  If they don’t balk, all of your customers will try to limit the number of hours you spend.

Instead, let’s say that you think the job will take five hours.  Most of the time you will know with 95% accuracy how long something will take.  And, let’s say that you decide to quote the work at $1,500.00.  You might be surprised to learn that your clients say yes, even though your hourly rate is 33% higher than you think you need.  This is because your customers look at the project cost and compare it to the value they think they’ll get.

Get yourself away from thinking about hours spent and start thinking about what the value of the job you’re doing provides your potential customer.

Remember, you don’t have 40 hours a week for paid work.

Here’s an issue I see come up over and over.  You think you actually have 40 hours per week to work with your clients.  If you have staff around you, who can help with marketing, administration, and sales that might be true.  Most smaller businesses don’t have that luxury.

You’re probably the chief cook and bottle washer.  You have to be involved in everything.  At some point, this might change, but for the time being it’s you and maybe some part-time help.  You don’t have 40 hours per week.  You might have 20 or at the most 30 hours per week to work with customers.  The rest of the time you’re going to be involved with non-revenue generating activities.

In future newsletters, we’ll talk about this issue, but for now, we’re just dealing with pricing.

Let’s go back to what we need to receive as a minimum hourly rate.  Remember that need to produce $172.50 per hour.  Well, it’s not really that number, it’s much higher.  If you can do 30 hours of billable work a week, you’re going to need a higher utilization number.  Instead of $172.50 per hour, you’ll really need $230.00 per hour. (30×50= 1,500 …. $345,000/1500 = $230.00)

With this example, the minimum utilization you’ll have to get is $230 per hour, and the chance is you’ll really need at least $100 more per hour to be profitable and have time to work on your business.

Too often I see companies not charging nearly what they could.

This is where testing comes into play.  If you quote your customers a price of say $1,500 for something that should take you five hours, and you never hear the word no, I can promise you that you’re too inexpensive.

The key here that you need to hear at least 10% of the time that your price is too high.  At the same time, if 50% of the people you speak with think your price is too high, then you have not created a work product that provides enough value in the eyes of your customers.

The key here is to test your pricing.  Don’t just choose a price and let it go at that.  You must test to see where you’re getting pushback and then decide what percent of your potential customers to you want to get pushback from.

Do you provide enough value to charge the prices you want?

This is a big question I want you to really think about.  The more value you provide, the higher you can charge.  All of the customers you’ll have in your business will always evaluate what you charge versus what value you produce.

If you can find a way to provide a guarantee for the work you do, you’ll go a long way towards getting rid of price objections.  In many businesses, this is a difficult thing, and if you’re willing to be brave, you’ll find a way to put a guarantee in place that will benefit both you and your customers.

With my own customers, I see them willing to pay for solutions.  It could be they want to become operationally irrelevant, it could be they want to achieve financial freedom, or it might mean they want to get more customers in the door.  If you’re in my business and you have solutions for these issues, customers will hire you.

Think about what your customers are willing to pay you for and then develop solutions and products that will get your customers what they want.  If you find ways to do this and you charge the right prices, you’ll have a successful business that will help you achieve both your personal and financial goals for your company.

Why don’t you let me know what you think about pricing?  Just hit return and let me know what you think.  Yes, I do read all emails, and I even will reply to what your idea is.


Topics: profit, pricing, Sustainable Business, Business Strategies, what to charge, Innovation, Sales, setting prices

Posts by Tag

See all

Subscribe Here!