When you are running your own service-based business, knowing the right amount to charge customers can be one of the hardest things to figure out.
So many entrepreneurs make the mistake of pitching their services too low, either to be competitive or the price per hour for what they would be worth if paid by an employer. This can be a fatal error in an emerging business as well as physically and mentally draining.
If you don’t charge the right amount for your time, expertise and value provided you will run yourself into the ground trying to make your business successful. Not only that but the expenses and overheads of running a business quickly eat into any revenue you do make, leaving you with a less than ideal take-home income – even when you are implementing Profit First!
How to price services so your customers are still willing to pay them
There is a fine line between charging a reasonable amount for your work and charging more than customers are able to pay, or that the market demands. If you set your fees too high, then you might also be dooming your business to failure.
The best way to work out how to price your service is to factor in all of the following:
- Your overhead costs plus a percentage (which should cover your reasonable wage plus profit)
- What the customer is willing to pay
- What your competitors are charging
So, let’s find that wonderful happy medium.
A Simple Guide On How To price services
Know your overheads
When you run your own business, you can’t just think in terms of what your services are worth per hour. Your pricing needs to factor in what it costs overall to run your business.
Overheads + Rate + Profit + Tax = Price = Sustainable Business
Take a look at your accounting software to review the cost of all of your expenses over the past 12 months. Review the costs that are tied to non-negotiable expenses required to run your business.
Divide your total annual expenses by 250.
250 being the number of weekdays in the year, minus 2 weeks holidays.
Then divide by 8 to divide your daily expense total by available working hours.
(Total Annual Expenses / 250)/8 = overhead cost per hour
This will give you a ballpark figure of how much it costs you to run your business per hour.
Overheads include rent and utility bills if you are running your business from home, IT and website costs, marketing, petrol, banking and credit card charging facilities, storage, staff, insurance etc.
2. Consider tax
We won’t be getting into the nitty-gritty of how you should be taxing yourself as a small business, but you do need to factor your business’ tax into your calculations.
If you are a company then you should factor tax into your overheads. If you are a sole trader then the tax would be factored into your wage (because it will come out of your personal income). There needs to be the allocation for GST as well if applicable.
3. Clock ALL of your hours
Record the number of hours you are really working, not just the ones you can identify as being specifically on that client’s product or job. All entrepreneurs and small business owners are guilty of not doing this.
Consider the time you spend bookkeeping, marketing, personal training, any background research or preparation time, administration, and all the rest!
Clocking all of your hours will give you a better idea of billable hours available. Plus, it might shock you into realising just how many hours you are working and prompt you to look for ways to streamline this. I guarantee it will raise your awareness of the TRUE cost to run your business.
4. Factor in wage extras like leave allowance and superannuation
Your take-home wage, running by the Profit First methodology, is around 50% of your real revenue. A percentage of that is your holiday pay and superannuation.
If you look at the Profit First equation and revenue distributions, how much revenue do you need to bring in to your business to achieve your ideal take-home pay?
Your ideal wage should probably be a median estimate of a number of things, including
- Your cost of living
- Your additional costs if you were sick or unable to work
- Allowances for annual leave
- Allowances for superannuation (super offers a great tax deduction to solopreneurs!)
- Income tax
- What you would be earning per hour if you worked for an employer externally in your industry.
- Your ideal lifestyle
The Business Queensland website has a very helpful calculator for service-based businesses that can help here:
5. What will your customer pay?
Market research can help you figure out what your target market is currently paying and is willing to pay for your products or services.
The result might be too low for your needs, which can mean you either need a higher paying target audience or marketing that convinces your current audience that you are worth more. Tiered pricing or value adding extras that are low cost to you but high value to customers is a great way to do this.
You can also consider the timing for premium prices; for many services and product-based businesses, there are peak times of the year such as seasons or holidays where you can make more money. Your pricing structure needs to cover your entire year’s wages and ability to earn.
Undertaking market research can highlight what your competitors charge for their services, and consider this cost when you are pitching your own prices.
Large companies and mass producers will be able to charge far less than you, and you can’t reasonably compare with them and make a successful and sustainable business. If this is the case, use your “small-ness” to your advantage by promoting one-on-one service, one person to deal with, local supplier etc.
6. Accommodate for value
Pricing isn’t all about just covering your overheads, it’s about positioning your business for growth. As part of this, I would recommend moving from a “charge by the hour” pricing model to a value pricing model.
Pricing sets the bar for the perception of your business.
Low cost = low quality (but often made up for by ease of use, disposability, easy access etc).
High cost = high quality.
If you’re currently offering a high-quality product or service paired with a low price point, we need to talk!
Pricing also aligns with the value you provide.
If you do work that raises the customer’s profile, income or lifestyle, that is an extremely valuable service to the customer and should be priced accordingly. Surgeons and lawyers charge high because the value they provide to customers is high (no jail or better health = very valuable service!).
Review your prices regularly
Setting prices isn’t a set and forget it thing. I recommend reviewing your prices every 6-12 months.
Maintaining this check-in with your prices also offers you the opportunity to check in on your expenses and pinpoint areas where you could reduce your overheads.
If you are still baffled by the whole pricing thing, book in a Pricing Strategy Session with me where I can work with you to set sustainable and profitable prices for your business.
Profit First can benefit the growth of your business from DAY ONE!
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