It’s often the first question when you start up a business: “what should I charge for my product/service?”. This is true, regardless of the industry – be it catering, art, babysitting, graphic design work or wedding photography.
You can’t charge too little if you want to accrue profit in order to grow. You can’t charge too much or you’ll risk competitors being able to undercut you or steering away potential business.
At Zervant, we firmly believe in data. Price with your head and not with your heart – we’ve created a pricing tool which draws from millions of invoices sent through Zervant. It’s still in early development but may be useful to find ballpark figures.
Having said that, let’s get on with the job in hand and work on a pricing plan that fits you and your company.
Do your homework!
There’s a few key things you must know before taking a data-first approach to setting your prices. First, consult your business plan.
Know your costs. Make sure that you are entirely aware of all your overhead costs and the COGS (cost of goods sold) for each of your products/services. You can work backwards from an average price point and adjust this in line with your overheads. Remember to factor in profit and growth to your pricing.
Take this thought-process example: if you plan to take two weeks of holiday per year, that leaves you with 50 weeks of working time. Working five days a week and 8 hours per day equals 2000 billable hours a year. Then, factor in hours that you can’t bill to the customer – such as bookkeeping, marketing, updating your skills.
This will leave you approximately 1300 – 1500 hours per year you can charge for.
Using the recognized business school formula, you can then figure out how much to charge per hour based on how much profit you want to make:
Labour and overhead costs + desired profit / total hours worked = the minimum hourly rate you need to turn a profit
Types of charges
It may be that you only have one way of generating revenue, depending on your business model. With service businesses in mind, depending on the individual client, you may have to be flexible in your policy – so be prepared for all eventualities.
Fixed project cost
Here, you agree on a price before the project begins and then stick to it, no matter what. You need to cost this extremely well and build in all overhead costs in advance, as well as estimating how long the project will take you.
As the name suggests, this is where you bill the customer per hour. Common in some industries, it can be off-putting for some customers, as they are unsure how much the project will end up costing them. However, it does give the provider more flexibility.
Pay up-front or upon completion
Asking for payment up-front can make customers a little uneasy, as they then have no leverage if something goes wrong. Often, companies will ask for the payment to be split – a down payment at the beginning, with the rest due when the project is complete.
Check market conditions
It is crucial to check what your competitors are charging, as this will make it easier to settle on a price for yourself. Remember, though, don’t compare yourself to larger, more established firms, as their economies of scale allow them to charge lower prices and undercut the competition.
Instead, find companies similar to your own to compare with.
Do your competitors have lower costs? Do they have fewer overheads? Do they specialize in just one product? Do they complete the work in less time? Each company has set its prices for a reason, so dig a little deeper to find why they have settled on that amount.
However, do remember that while using other company’s pricing as a barometer, you have no idea how well they are doing – they could be charging a fortune and getting no work!
Entrepreneur Imogen Roy says of this subject:
Your pricing has to sustain your business or freelance lifestyle. You need to price in your salary, costs and expenses, taxes, pension and savings. And you need to be making enough profit to invest back into yourself and your business so you can get better, and thus raise your prices and work less.
Place yourself accordingly
Before deciding on how much to charge, you will need to place yourself in the market. Are you cheap and cheerful or are you a premium commodity?
This is a very important aspect, as you don’t want to get stuck in the middle and become nothing of either, as this will scare off customers who know what they want before they come looking for a service.
With our business plan template we include a multi-dimensional perceptual map. With a tool like this you might discover where your brand sits in the spectrum between expensive and cost-effective, between premium and cheap etc.
Start small and scale up
Charging a below-average rate in the beginning can be a positive way of bringing clients on board.
This will allow you to gain a client’s trust and let them see what you have to offer. It also builds you a portfolio of work history and a bank of satisfied clients that can offer testimonies of your work and spread the word among their contacts.
It is often said that if a person receives good service, they will tell one person, but if the service is below par they will tell ten – make sure you are in the former!
While it is perfectly fine to set your prices a little lower when you start out, remember to make sure you can survive. If you do plan to do this, bear in mind that this is not a long-term strategy. It is better to be known for excellent work and justifying your cost rather than offering yourself on the cheap.
Depending on the service or product, customers may actually look for a more expensive option. Being cheap does not automatically mean more business.
Costing, as we have established, is crucial to your business.
Remember that you are in this to make money for yourself. Building profit allows your business to grow and diversify but, perhaps more importantly, safeguards you and your business’ future.
Richard Taylor, founder of software development firm ISArc, told The Guardian newspaper that:
Your profit margin is what keeps you afloat and pricing well allows you to forward plan, whether that’s replacing expensive equipment three years from now or helping you prepare for the unforeseen events that can otherwise set a small business back.
Zervant has developed a new tool that will help you price your work based on the data we have gathered from thousands of invoices and companies. Let’s work together to make sure you get off on the right foot and succeed every step of the way.