Are Your Prices High Enough?

“It isn’t necessary to be rich and famous to be happy. It’s only necessary to be rich.”—Alan Alda

You love to get new clients for your business. You work hard developing your skills and marketing yourself and the payoff comes when someone says, yes, yes, they want to hire you! Hooray!

Then they ask how much you’re going to charge them. Do you wince at the thought of that? Do you think lowering your price will get you more clients? Better clients? Actually, the reverse is true. I’m reminded of the owner of a resort in Santa Barbara that couldn’t fill up their rooms and kept lowering their price but nothing worked. Finally, they hired a business consultant who said, “You need to charge $200 per night.” The owner said, “That can’t be right – I can’t sell it at $49. How can I sell it at $200?” The consultant said, “Do it and see what happens.” So the owner started charging $200 and filled the place up and it has been filled up every since. The Small Business Administration once said that the number one reason small businesses go under is because they don’t charge enough money for their services.

Here are some guidelines to ensure that you take everything into consideration when pricing your services:

1.      Calculate your “profit price.” Create a monthly operating budget for your business that factors in all your costs including overhead, sub-contractors, taxes, salaries, marketing expenses and every variable you can think of. Remember to count the irregular expenses that occur annually or quarterly such as insurance expenses, annual tax preparation fees or Christmas gifts. Don’t forget repairs and maintenance and an allowance for refunds or bad debts. Total all these expenses and then add an additional 5% for contingencies (because you will have forgotten something!)  and an additional  percentage for your profit. Now add in your income goal which would be equal to the salary you would be paid if you were employed by someone else plus fringe benefits including a retirement plan. Divide this total by the number of hours you want to (or are willing to) work each month and that will tell you the hourly rate you must charge for your service.

Now your question might be whether or not this hourly rate is competitive for your type of business. The rule of thumb is to be priced in the “high middle” range of your competition.  If your income goal calculation puts your hourly fee too high, then you must trim expenses, work more hours, reduce your income expectation, choose another line of work with a higher profit potential. Or get very creative!

2.      Time doesn’t always equal money. When calculating your “profit price”, don’t forget that you will work a number of hours “on” your business but not “in” your business.  That means that not all of your time is billable to a customer—there is your administrative time writing letters, doing budgeting, billing or accounting and marketing time making phone calls, going on appointments, attending networking meetings, etc. Entrepreneurs are often overly optimistic about the number of hours each week they can work on client business and perform all these other tasks and therefore overestimate their income potential.  Or they find themselves working too many hours each week and then burning out. Make sure to take this into account when figuring your “profit price”. Raise your price rather than increase the number of hours you’re willing to work or find someone to delegate to.

1. Marry your “profit price.”  That is, be faithful to your income goal and avoid the temptation to lower your fees to your absolute bottom line in order to get business. Yes, you work hard marketing in order to find someone who wants to hire you and you are anxious to make the deal. But everyone knows cheapest price doesn’t equal best quality. You will find that the clients who are shopping for the lowest fees are the most difficult and demanding to work for and you will spend more time than you will be paid for on their work. Stand firm on your “profit price” and you may have fewer clients initially but they will be higher quality clients—Dolphins who praise you and pay you! The higher your fee, the more respect you get. Sometimes you eliminate yourself from consideration because your rate is priced too low. The prospective client might then assume that you are either new at this, not good enough, or in financial trouble. A friend of mine started a home-based business doing computer consulting. When she called a friend to solicit business and told him she was going to charge $50 per hour, he told her that he could not recommend her unless she charged at least $100 per hour. She understood then that he could only refer his customers to a top-notch professional and that such a professional would charge this kind of fee.

The time and care which you invest in pricing your services will pay off handsomely as you start to meet and then exceed your income goals. You are the only you out there, and you deserve to be rich, successful, and happy!