Considerations when setting prices for your services.
I would like to share my opinion, and thoughts on the best method for a new business owner to use when they are first planning to implement their Business idea.
I am often asked, what is the best formula to work out what price you should be placing on your services?
Whilst, I understand many Business owners will use different formula’s to set their prices, again like many things, not one method will suit every person.
Steps to consider taking before setting your prices
- Speak with your industry Body- do they have a recommended hourly fee, e.g. Association of Accounting Technicians set a recommended fee for bookkeepers.
- Research your competitors and see what they are currently charging, remember to ensure they are offering similar services to the ones you are offering.
- Prepare an Operational budget, and understand your associated costs.- this way can help you understand what your income needs to be each week/month to survive
- Consider how much you wish to earn in the financial year- knowing your expenses, and life style will help you answer this question.
- Consider how many hours per week, will be billable hours to a client- a normal business may be open for 40 hrs per week, however depending on your business, you may find after you do admin, Account keeping, sales, Marketing, research, travel etc., you may only have 20 hrs per week or less in the beginning which are billable hours.
- Consider any holidays you wish to have e.g. 4 weeks per year, or is your Business seasonal.
You will note, in the 2 scenario’s below, by knowing your billable hours a week, it can change the hourly rate significant, e.g. below we have a difference of 15 hrs per week, and it changes the required hourly rate by $31 per hour.
It may be fortunate, the Marketing industry, allows for this figure to be up to 4-5 times higher than the one I have set below, however the below one is a total minimum, until you are an established business in the industry.
Scenario 1
Fred Smith wishes to start a Marketing Advice business, and is considering what prices he needs to charge per hour.
Mr Smith wishes to earn $70,000 per year, which will assist him in covering his expenses and give him the lifestyle in which he wants to live.
Mr Smith has decided he wants to take 4 weeks off per year, therefore meaning he is only going to be working for 48 /52 weeks of the year in the business.
Mr Smith has estimated he will be able to obtain 20 hours per week of Billable work for his Business, as an average.
Wanting to earn $70,000 per, we divide this figure by 48, and we estimate Mr Smith needs to earn around $1458 per week to cover costs, we then divide this by 20, and the minimal hourly rate Mr Smith can charge is $72.90 per hour.
Scenario 2
Fred Smith wishes to start a Marketing Advice business, and is considering what prices he needs to charge per hour.
Mr Smith wishes to earn $70,000 per year, which will assist him in covering his expenses and give him the lifestyle in which he wants to live.
Mr Smith has decided he wants to take 4 weeks off per year, therefore meaning he is only going to be working for 48 /52 weeks of the year in the business.
Mr Smith has estimated he will be able to obtain 35 hours per week of Billable work for his Business, as an average.
Wanting to earn $70,000 per, we divide this figure by 48, and we estimate Mr Smith needs to earn around $1458 per week to cover costs, we then divide this by 35, and the minimal hourly rate Mr Smith can charge is $41.66 per hour.
Scenario 3
Fred Smith wishes to start a Marketing Advice business, and is considering what prices he needs to charge per hour.
Mr Smith wishes to earn $70,000 per year, which will assist him in covering his expenses and give him the lifestyle in which he wants to live.
Mr Smith has decided he wants to take 4 weeks off per year, therefore meaning he is only going to be working for 48 /52 weeks of the year in the business.
Mr Smith has estimated he will be able to obtain 5 hours per week of Billable work for his Business, as an average, which is probably more realistic for a new Business.
Wanting to earn $70,000 per, we divide this figure by 48, and we estimate Mr Smith needs to earn around $1458 per week to cover costs, we then divide this by 5, and the minimal hourly rate Mr Smith can charge is $291.60 per hour.
PRODUCTS.
When setting your prices for a product, the formula is slightly different.
Often a product is only worth as much as someone will pay for it.
However, it is still important to know all your costs, which may include,
- Materials
- Wages- super, WorkCover etc.
- Machinery
- Utilities – water, gas, Electricity
- Rent/ Mortgage
- Insurance
The list is just a rough suggestion and can change depending on the industry and product you are making.
However, breaking down your costs per hour, or for the time it takes to produce one item, can help you set the selling price.
Often to begin with, we will consider a 15% profit range on your product can be beneficial, whilst you are just starting out, and ensuring your name is good.
Once you have stamped your name out there in the industry, then your profit margin can increase, and again depending on the item, however looking at a range of 25-40% profit, can be a good price.
Ensuring you are producing a quality product for the cheapest possible price is the key factor here, and can help with profit margins; however, reduced costs are good, as long as there is not reduced quality, as without quality products you may not have a business.
Summary.
Whether a Service or a product the important aspect of a business is knowing your costs of something, and understanding your expenses and what it costs you to provide your service and or products.
If ever in doubt, speak with your Accountant to discuss the financial aspect of your business, or your coach or mentor may also be able to assist you.
