When you own a small business, it’s up to you to determine your own service pricing. This decision can make or break your business! Here’s how to price your services and earn a good living.
It happens all the time. A new business owner plans to open and they get their first potential job. Then they sit there, full of anxiety. What should they charge? If they charge too much, will the client go somewhere cheaper? If they charge too little, will they be earning enough to keep the business open?
There are a lot of ways you can undercut yourself when you set your prices. Let me encourage you, there are ways to set your prices that will help you earn what you deserve.
How To Price Your Services Or Products
Whether you have products or you are a financial coach, pricing is the most important thing you will do for your business. I have some valuable tips that will help you with service pricing. You’ll discover how to set prices that will help your company grow.
#1 Don’t Be A Discount Queen
It might be tempting to offer sales in order to attract new business, but when you discount things without considering why, you could be losing money on the deal.
I’ve seen business owners run sales and not even know that they were either not making a profit or even losing money.
When you run sales, do it sparingly. It will have the biggest impact this way. Discount products that are hurting your inventory to keep. Run appreciation sales on your services once a year to reward loyal customers that bring you more business.
If you do discount your products or services, be careful that you aren’t losing money on the deal.
#2 Consider All Costs
This is one of the most important steps in pricing your services. You need to calculate your cost of sales (COS).
Make a list of everything that goes into creating your product or delivering your service. This includes your time, the cost of hiring or outsourcing help, and any tools you used to make it.
For example, a photographer’s costs might include:
- Camera bag and equipment
- Subscription to photo editing software
- Transportation costs
- Personal wage
#3 Calculate Your Overhead Percentage
Your price also needs to include the costs associated with staying in business. I like to think of overhead costs as everything over your head (kind of like a roof over your head).
Freshbooks has a very detailed guide that explains it. These costs include taxes, utilities, office equipment, and office space rent.
Direct costs are costs associated with each project – gas, filing fees, your time. Indirect costs are the overhead ones listed above.
To calculate your overhead percentage, you will divide the indirect costs by the direct costs and multiply by 100.
#4 Avoid Lowballing Your Prices At First
It might be tempting to offer super-low rates at first in order to undercut the competition and attract some customers, but don’t do it. If you do, it will be more difficult to raise your prices later. You might even attract customers that are price-sensitive and raising your prices to a livable wage could make you lose business.
Instead, set your prices at what you want them to be right out of the gate.
#5 Charge By Project
Another mistake a lot of small business owners make is by charging hourly rates instead of by project. When you charge by the hour, you’ll have less of an opportunity to upsell.
If you charge a package price it will incentivize people to buy in bulk. You can also encourage additional add-ons to the package that you won’t be able to add when you charge hourly.
#6 Charge for the Value Provided
When you are trying to figure out how to price your services, consider the value of your service. A photographer with professional training for newborn photography will be able to charge a new mom more than someone that doesn’t have any experience with newborns.
This is also why it’s important to invest in your training and education. Become valuable to your customers.
#7 Don’t Compete By Price
Yes, it’s important to monitor the marketplace and make sure you are pricing yourself fairly, but don’t try to compete by price. As entrepreneurs, we should be supporting each other, not trying to undercut each other by price.
Use the prices of others to motivate you to offer something additional that they don’t. Take more training, gain a niched skill.
#8 Don’t Confuse Rate and Price
It’s easy to do, but don’t confuse your personal rate with the price you charge.
If you want your rate to be $100 per hour, don’t set your price at $100 per hour. You have to consider the overhead and the COS as well. Once you factor those in, you might not be earning much more than $75 per hour.
Instead, if you want your rate to be $100 per hour, calculate the costs first and include your rate in those costs. Then, charge $125, not $100.
#9 Consider the Market Demand
If there isn’t a demand for your products or skills, then make some changes so you can charge more. For example, in the current market, there isn’t much of a demand for printing paper flyers. If that’s your business or skill, consider pivoting to offering social media graphic design instead.
#10 Look For Ways to Upsell
Upselling is one of the best ways to increase your income. Don’t include extras in your base package price. Keep them out and offer them to your clients as valuable options. This is why lots of photographers don’t include the rights to print photos in the base package, they offer it for an additional fee.
#11 Invest in the Business So You Can Increase Rates
Look for ways you can invest in your business so you can increase your rates. A new software program might make you more efficient. Some continuing education will give you more authority and knowledge. Offer quicker turnarounds and other value to your clients and they won’t mind paying more.
#12 Determine Your Ideal Customer
Keep your ideal customer in mind when you set your prices. When you are always offering discounts and setting super-cheap rates, you will attract that kind of customer. Let’s take the photographer, for example. The big-box corporate photography studios that always send out $10 package coupons attract different customers than specialized photographers with extensive training.
#13 Make A Written Fee Agreement
When you do set your fees, don’t forget to create a fee agreement and have everyone sign it. Be really clear and answer all questions upfront. This will help you avoid any arguments or confusion later on.
How to Determine How Much Your Labor is Worth
The biggest question people have when they are setting their rates is, “how much is my time worth?” Thankfully, there is an easy formula so you don’t have to stress out about it.
- Pick your annual salary – You can compare your profession with that of other professionals on Glassdoor.com.
- Add up your overhead – all the bills and expenses that go into your business
- Choose a profit margin. Salary isn’t profit, it’s an expense. Most businesses do 10-20% margin.
- Determine billable hours. If you work 40 hours per week with a 2-week vacation, that is 2,000 hours per year.
Here’s an example of that math.
Terry wants to earn $75,000 per year as a self-employed accountant. His annual overhead is about $15,000 per year. He wants a 10% profit and thinks he will work about 2,000 billable hours each year.
- Salary + Overhead: $75,000 + $15,000 = $90,000
- Multiply this total by 10% profit margin and add this amount to his salry: 10% of 90,000 = $9,000. $90+9,000=$99,000.
- Divide the total by the annual billable hours to arrive at the hourly rate. $99,000/2,000=$49.50 per hour
Conclusion: Final Thoughts On How To Price Your Services
When it comes to pricing your services, there really isn’t one set formula or number that everyone goes by. Don’t be afraid to set your prices high – you might be surprised at what people will pay. The market fluctuates, so let your prices increase to match. Network with other entrepreneurs in your field so you can get an idea of how much people generally value what you do. All in all, this is an evolving process, just keep your values in mind.