Whether you’re brand new to the professional services game or have been at it a while, I am willing to bet you constantly wrestle with this question:
How much should I charge?
And don’t forget this question’s rambunctious cousins: What is my hourly rate? How much should I mark up? Should I propose this project at a flat rate or on hourly basis?
This question is tricky when you sell “time” or intellectual property and not hard goods with manufacturing costs associated with them. When I first started out consulting, I was lucky enough to have hired people like me before and knew the ballpark going rate. Plus, I knew that I had to price in such a way as to emphasize that I was a consultant, not a contractor. Nuanced distinction but very important in my field: Consultants make recommendations and advise on strategy. Contractors complete tasks they are told to do.
It’s important to remember that pricing is a branding decision (Tweet this!)
Who is the ideal client you want to attract and how do you want to be perceived? Price too high and you may be out of reach of your target clientele. Price too low and people may think your work has no value.
We’ve all made pricing mistakes. I took a bath on a nightmare project early on in my business when I neglected to add in hours on for my time, assuming that my mark-up on my subcontractors would cover me. It did not. While I made all my subcontractors a hefty sum on that almost year-long engagement, it’s too embarrassing to admit to you what I netted out from all that work and heartache. After we finally walked away, I licked my wounds and learned a valuable lesson to always, always factor in my hours as a separate line item to subcontractor markups.
This was such a popular question from my audience that I sought out the advice of the woman who changed the way I look at pricing: Audrey Godwin.
Audrey Godwin is the CEO and Founder of The Godwin Group. She coaches women business owners and transforms them into financially savvy CEO’s. Audrey is passionate about helping women entrepreneurs fund a good salary, provide for their families and create a strong retirement plan.
Here are four powerful tips on how to price your products or services:
- First, Determine Your Costs: Regardless of your service or product, you must know what it costs you to make, deliver or generate your revenue. These can be hard costs, such as raw materials, or overhead costs, such as rent. But what if you don’t have a product? Then your cost is labor. What’s the cost of your labor? If your company is not set up as a corporation from which you draw a salary, you may have no idea how to determine the cost of your time,” says Audrey. One way she advises you to back into the number is to determine the salary you want each year. “There are 2080 working hours in a year, so let’s say your goal is $100,000 in take-home salary,” says Audrey. “This equates to roughly $50 in labor cost.” Your goal should be to charge clients at least this much for their hours (with a markup to cover taxes, overhead, and other business costs), but also to assess if a given activity is worth $50 of your time.
- Articulate Your Brand, Target Market and Value: As mentioned, pricing is a brand decision. Are you a commodity or a luxury? You need to price accordingly so it’s clear. Who is the audience? What is your differentiator, to allow for a premium price? Do you simply offer DIY information or do you work with people to actually get things done? For what is your target market willing to pay a premium? This is where fleshing out your brand strategy is vital to more than just your marketing efforts.
- Determine Your Markup and Final Price: How do you choose your markup percentage? Look at the industry and see what the percentage is for that industry. Talk to others who have been at this a while and find out what they charge. Check out competitors and see if they bill hourly or flat-rate by project. And consider the company culture you are building: are you building a full-time staff or going it alone? Audrey says, “If you are taking salary as part of your expenses, then 10% to the bottom line is not a bad thing. But as a solopreneur, remember you are paying market rates to your subcontractors rather than paying 1/3 of that cost in wages and benefits if they were employees.” How much money do you personally want to make? If you’re using subcontractors, they will eat into the gross profit so will you really net a good profit on the deal–which is what I didn’t factor in for that nightmare client referenced above. Assess whether it would it be better for your pricing model and net profit to get an employee or temporary help.
- Be Careful about Discounting to Attract New Clients: Make sure you’re discounting to the right People that will only buy with a discount are not necessarily ideal clients. Better to use discounts on the backend, Audrey says. “Incent them for paying faster versus just to get new clients. When you discount to get them in the door, you end up doing work you hate for people you can’t stand.”
Want more good stuff from Audrey? Sign up for her FREE 50 minute Financially Savvy CEO Strategy Session. She’ll work wonders with you, promise.