Setting pricing for your business is REALLY important. Nowhere is it more vital than when you’re trying to figure out what to charge for services in your solo start-up or partnership. If you don’t get it right, you’ll tank your business even as you grow and sell more – or just tread water forever and die of exhaustion.
So how do you do it? What’s the secret to setting prices your customers will pay but won’t send you to the poor house? Here are three things to think about:
1. Determine What Market Pricing is For What You Offer.
Want to decide whether your business idea is viable? Is the service you want to provide and the price you’re going to charge for it going to get you where you want to be, financially?
Before you start your business, do your research! If you are operating in a specific city or metro area, find out what the range in market rate is. There are several ways to do this:
- Industry Organizations: contact your industry group(s) and ask them what the going rate is for your service at your experience level or in the particular niche of customers you want to serve. For example, a graphic designer who specializes in websites may have a different hourly rate than one who specializes in direct mail or environmental graphics. For the graphics industry, the local chapter of AIGA would be a good place to start.
- Local College/University: continuing the same example, talking with instructors at your local university, technical college or community college could be very helpful. Especially at the 2-year college level or with adjuncts (as I am), instructors are more likely to be out there in the “real world” making a living in their industry every day. Call the appropriate department and start asking questions.
- Call Around: this is something I would not send emails for, as tempting as it might be. Look up a few firms that are working at the same level of clients and work quality that you want to be, and call them up. You may get turned away a few times but sooner or later you’ll find someone who will be happy to share market rate information with you.
2. Figure Out How Much You Need (or Want) to Make.
So, how much money are you looking to take home? What’s it going to take for you to quit your day job, feed your family and pay for that vacation to Europe? Start at the end and work backwards.
Say your goal is to bring home $100,000 a year. Above and beyond your take home pay, you’re going to have additional costs to include in your overall total. Some of these include:
- Office Expenses. Even if you have a home office, you’ll have some costs. A new printer, a decent chair, paper and ink, internet, postage.
- Taxes. Like death, these are unavoidable. Estimate to pay about 20-25% taxes overall, after deductions from your business expenses.
- Transportation. Will you use a vehicle for your business to make deliveries, go to meetings, and the like? Even if you’re using your existing car, expect to pay more for gas, maintenance and parking.
- Marketing. Unless you don’t want to ever grow, you are going to have some costs for marketing and advertising, even if it’s just buying prospects lunch or coffee.
3. Decide Which Way You Want to Bill.
Would you rather bill your customers by the hour for each hour you spend on a project, or determine the overall time involved and the value to your customer and charge them a flat fee? Both ways have advantages and disadvantages.
Businesses that charge hourly may get better returns on repeat business or “change orders” that happen during a project, but also may find it harder to raise their rates as they need or want to. It can be tricky to navigate those waters, especially with existing clients.
On the other hand, charging a flat fee per project may allow you to better scale your business by charging something closer to the perceived value your customer feels they are getting from your services. When billing this way, watch out for those extras, additions and revisions that inevitably creep into projects. Keep a tight rein on project scope and be sure your clients have signed off on exactly what you are delivering.
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