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If you owned a retail store, a restaurant, or sold products online, figuring out pricing would be relatively straightforward: take the price you pay for the product, add in all of your indirect overhead costs, and add in your profit margin. If you expect to make a 50 percent gross margin, and your total product cost is $20, the retail price would be $30. Simple, right?
But if you’re selling a service, it’s different. You aren’t buying a product and reselling it. You’re not paying a set amount for something, so it’s not nearly as easy to measure your costs. Your “cost” is the value of your time and knowledge and/or your staff's time and knowledge. That’s all well and good, but placing a value on time and knowledge is pretty subjective.
Despite the subjective nature of service pricing, we still have to look at our numbers. No matter how small your business is, you have overhead costs. Service industry business owners might not be so vigilant controlling costs when its' only small amounts of money. But the costs of doing business can be quite significant when you add them all up.
Paying $20 per month to use an email marketing service is a relatively inconsequential amount of money, for instance, but what about all those Chamber of Commerce and other small business association memberships? You'll have ongoing expenses, too, for your phone service, Internet access, and office supplies. You might have to take clients out to dinner, upgrade your software, or have a computer repaired or replaced. And what about the money you pay an employee or virtual assistant to answer your phones, send out invoices, and do other chores? These and other costs of running and managing your business all need to be accounted for, even though they can't be allocated to any one job.
The bottom line is that you’re not as different from product oriented business owners as you might think. You, too, need to keep track of and control costs.
First, Set Goals
How much do you want to make annually and how many formal hours do you want to work to reach that goal? This is more of an “in a perfect world” type of goal but it will at least get you started. If you want to make $75,000 this year and you want to work 40 hours, and don't plan to take any time off for vacation or holidays, you only have to charge about $36 an hour to reach that goal.
Does that seem a little low? If you have specialized knowledge, and charge $90 per hour and worked 40 hours per week, that’s almost $184,000 annually. Much better.
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Second, Look at Industry and Regional Trends
Every professional organization keeps detailed data on industry trends. You can find information on plenty of blogs but if you’re in a professional business, you should belong to your industry’s professional organization. Ask them for these figures.
If the market and your geographic location (if you work locally) will support $90 per hour, you know that making a six-figure salary is within reason.
Third, Think About Non-Billable Hours
If you’re charging by the hour, time is money. Non-billable hours include anything you do with your 40 hours a week that can't be billed to your client, and therefore produce zero income. Some examples: paperwork, traveling, networking to market your business, talking to vendors or partners, etc. These non-billable activities can easily take up as much as 50 percent of your time. If that’s the case, your $184,000 salary just got slashed to $92,000 before you account for any out-of-pocket costs for running your business.
Who are Your Clients?
Let’s look at two types of service-oriented entrepreneurs. The first is somebody who owns a house cleaning business. He works with busy professionals that want somebody else to clean their home instead of committing precious time to doing it themselves. Most of his clients are people slightly above the average American income.
Second, a corporate IT Consultant that advises businesses on network security. Her clients are larger businesses that rely on her to keep its data safe.
Obviously, the first entrepreneur can’t charge as much because his clientele is more money conscious. If he tried to charge $150 per hour, he would have very few clients. The IT consultant’s clients are people who understand that losing data is far more costly than the money spent to protect it. She can charge a lot more. Consider your client base.
SEE ALSO: Six Strategies to Get Paid What You're Worth
As you gain experience and notoriety, your prices will go up but understand that at the beginning, you probably won’t be paid what you’re worth. Most consultants will start at a lower cost than the average and slowly raise prices. Don’t get too greedy too soon but don’t undercut yourself either.
What is Your Main Business Goal?
If you’re charging by the hour, your consultancy service is likely your main source of income but if you’re using your consultancy business to sell other products, you might charge a lower rate on the service side to make sales on the product side.
Service oriented people know that diversifying their offerings allows for better price control. If you’re being paid to speak at events, write books, and you’re selling products related to your service, you know what seasoned service pros already know—charging by the hour is a hard way to make money and their hourly prices have to be higher.
Sometimes it comes down to knowing the market, knowing your competition, and falling in line with industry averages. Then, you organize your business around those rates. Each service field is different with some fields more price conscious than others. Know your industry, keep up with current trends, and you’ll reach your goals.
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