Getting paid. It’s wonderful, right?
Then why is pricing work one of the trickiest parts of the job? Charge too little and you feel cheated. Charge too much and you may price yourself out of the market.
Well, the truth is… it doesn’t have to be all that tricky.
Whatever you sell – be it products or services – when it comes to pricing, you need to think strategically.
In this post we’ll take a look at some of the key things to consider before you set your prices to help you avoid the pitfalls of just ‘winging it’.
Step 1: Determine your annual salary
First off, you need to work out how much you want to get paid.
If you’ve done a similar role before as an employee or know how much others earn doing the same work, use that as a guide.
Whatever salary you choose to set for yourself, make sure it’s reasonable and reflective of your skills and experience. You’re clients will quickly realize if it’s not!
Step 2: Calculate your overheads
Now you need to calculate how much it costs to operate your business. Take stock of all your outgoings and work out how much they total on an annual basis.
This includes things like:
- Accounting and bank charges
- Office or workspace costs
- Company car/van costs and insurance, fuel, servicing
- Work wear (if it’s necessary to wear protective/safety gear or a uniform)
- Equipment and tools
- Third party software, services and subscriptions
- Website running costs
- Marketing and advertising
- Stationery (pens, paper, stamps, business cards)
- Business insurance costs
… And anything else you can think of!
If you’re just starting out, you may have to estimate some of these expenses or ask other contractors in the same field what they pay in overhead, then use that amount in your calculations.
Note: A lot of the costs associated with the day to day running of your business should be tax deductible. This means that you won’t have to pay tax on the money you earn to pay for these costs.
Step 3: Choose a profit margin
You’re fully entitled to earn a profit on top of your salary and overhead expenses.
Your salary is one of the necessary costs of running a business. Profit, however, is the reward you get for taking the risks of being in business for yourself and it provides you with money to expand and develop your business.
Profit is usually expressed as a percentage of total costs for each job. There is no standard profit percentage, but a 10% to 20% profit is common.
Step 4: Determine billable hours
How many days you will you be working over the course of a year?
Although there are 52 weeks in the year, bear in mind that – unless you’re superhuman – you will need to take time off! Also, not all of your ‘breaks’ will be planned. Contracts may end unexpectedly and there could be periods where you struggle to find new work.
Give yourself at least 20 days holiday – you may not take this all in the first few years of starting your business, but it’s good to err on the side of caution and not underestimate this as it will have an impact on your day/hourly rate.
Based on this example, 20 days holiday takes your working weeks to 48 per year which equates to 240 working days per financial year, or 1,920 billable hours.
Step 5: Calculate your day/hourly rate
Now let’s work out how much you can charge by the day and by the hour.
Use the following calculations to determine your rates:
- Add your chosen salary and overhead costs together. For example: $70,000 (salary) + $20,000 (overheads) = $90,000.
- Multiply this total by your profit margin. For example: 10% of $90,000 = $9,000; $90,000 + $9,000 = $99,000.
- Divide the total by your annual billable hours to arrive at your hourly rate: $99,000 ÷ 1,920 = $51.56. You may then want to round your hourly rate off to the nearest whole number (i.e. $52 in this case)
- Finally, multiply your hourly rate by 8 to reach your day rate. For example: 52 x 8 = $416
Now you have your rates! Awesome!
But wait – it doesn’t end there…
Step 6: Do some market research
Before you dive in, it’s always wise to do a little market research to see what others in the industry are charging for their services.
There are a few places to gather this information:
- Contact a professional organization or trade association for your field. They may be able to give you good information on what other Independent Contractors are charging in your area.
- Ask other Independent Contractors what they charge.
- Talk to potential clients – attend trade shows and business conventions, speak to your existing network.
Whilst you’re weighing yourself up to others in the industry, make sure you factor in things like experience, and the quality of service offered. You may find you are charging more than others but that you produce more value for the client. Many potential clients are willing to pay more for quality, so don’t be scared to charge more if you feel it is justified and you can offer this.
Step 7: Get a grasp of the entire job
So you’ve worked out your rates and you’re starting to bring in customers. The next step is making sure you price each job correctly.
For every piece of work you enter into, it’s super important to study up and get a good grasp on all the work involved. This will help you to provide your client with the most accurate estimate and you’ll be less likely to hit them with an unexpected hike in price because of unforeseen extras. Obviously this will happen from time to time, but it’s always best to get as much clarity as possible from the start.
Read more: 10 Invoicing Tips for Small Businesses
Step 8: Lather, rinse, repeat
The fact is, not everyone gets it right the first time around. Make sure you keep evaluating your approach and try not to settle on any long-term commitments until you’ve found the right mix of pricing and strategy.
As your business develops you may find that you’re in a position to offer greater value to clients. Adjust your price accordingly and if you begin to see price resistance you will start to get a sense of what costs are adequate for your services.
Image credit: © studiogstock