Pricing Business Services: How Much Should I Charge?

February 7, 2013 | By | Reply More

Knowing how much to charge for your service business is one of the toughest decisions for any would-be entrepreneur. While there is no single formula for calculating the price of your services, your pricing structure should follow the simple accounting principle of Income ­ Cost = Profits. This means that you must price your work in order that your revenues will cover all your costs.

To apply this principle, you must first identify what your costs are, and this usually includes the following:

pricing services

Time and Expertise

The costing of your services will depend on how much time and value you place on your work. The time factor is easy to determine; you have to know how complicated will the task be; how long will it take you to complete the project; and whether you will be allocating extra time (e.g. overtime) to complete it.

To compute your hourly rate, you must know how many hours of your work is billable. Assuming that you are able to work for 40 hours a week and 50 weeks a year, you will have 2,000 hours of workable time. Estimate how much of that is spent working on your accounts (40% or 60%?) , and that time should be used to determine your hourly rate.

The value you place on your services will depend on several factors:

  • your level of expertise as reflected in your training and experience: the more trained and certified you are, the higher the rate you can charge;
  • your public profile: if you are considered an expert ­ especially if you have authored books, is a regular speaker in industry symposia, or frequently invited by the media as a resource person, you can charge a higher rate
  • the factors that make your service stand above the competition: is the quality of your service superior to others?




It is important that you are able to quantify the benefits that you are able to provide. If you are going to save the client money because you deliver a faster service, that benefit should be included in the cost.

Be careful, though, in underpricing your services. Many home business owners, particularly the start-ups, are so afraid to charge the real price for their services. While a lower price can initially draw clients to you, remember that this strategy could backfire and customers may think that your price is lower because your service is of poor quality.

Overhead and Operating Costs

Make a list of all the expenses you pay to operate your business. This will include your administration costs, business development time and expenses, and overhead costs. Your overhead costs may include your electricity bills, phone, internet access, web site hosting (if you are working online), or rent (even if you are working from home). You must also include your insurance payments, tear and wear of your vehicle, equipment depreciation, marketing costs, and others. Include even the smallest expense.

The materials you use to produce your service ­ whether the paper and folder for the business plan that you write, or the office supplies you used to produce your bookkeeping ledgers ­ must be included in your cost structure. Add them all up monthly, then break it down weekly, daily and hourly.

Your business should not only cover your bills, but also your income and benefits. Even if you are not presently drawing a salary from your business, you must include in your pricing calculations the amount of your own services. Plus, benefits like bonuses, your own health and insurance, retirement and pension benefits.

If you are not at the very least able to cover all your costs, there may be some serious flaw in your pricing structure.

Your Competitor’s Prices

Whatever your pricing levels, there is one important thing that you should remember: your prices should be justified. You do not want to charge too high and price yourself out of the market even though you haven’t established any credentials or expertise. In planning your pricing structure, try to get the lowest and highest prices in your market and determine the features of their services. You can call them and pretend to be a customer, making sure that you ask what you will be getting for your money. Then determine how you compare to them in terms of kind and quality of service.

There is no cut-and-dried formula in pricing your services. You can set a price, then gauge customer’s reactions to that price. If your customers find it too high, you can do either two things: revise your marketing plan to reach customers who may be able to afford your services; or lower your prices. But never undersell yourself! You don’t want to be in the situation where you work twice as hard as your competitor with twice the number of clients, yet your competitor earns more from you because he or she charges more. The key to setting the right price for your service is your respect for yourself and your business.

 
Recommended Books on Pricing Your Services:

 

Nach Maravilla is the President and CEO of PowerHomeBiz.com LLC. He has over thirty years experience in sales and marketing of various products, which covered as he jokingly describes, “from toothpicks to airplanes” He also had extensive experience in International trading and he always excelled in special promotional ideas for retail outlets.

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Category: Financial Management

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