One of the most challenging aspects of starting a new business is knowing what to charge for your services. In economics terms, the ideal price is where demand meets supply. The problem, of course, is that at the beginning we tend to have a lot more supply than demand. This can lead to imprudent pricing decisions. Below are 3 considerations to take into account when determining the price for your services:
Projected Earnings: A good starting point is to determine how much you could earn if you were employed full time, and translate this to an hourly rate. It is important to note that, when self employed, a considerable amount of time is spent on administrative tasks (marketing, accounting, sales etc.). This should be reflected in the calculation which is as follows:
Projected Annual Salary: $50,000
Add: Estimated Expenses of running the business: $10,000
Gross Revenues Required : $60,000
# of Hours in a year: 40 hours per week*50 weeks (two weeks for vacation) = 2,000
# of Hours on administration: 20%*2,000 = 400
Hourly Rate = $60,000/(2000-400) = $37.50
This means that, if you were to work 40 hours a week, you would need to charge $37.50 an hour to earn an amount that is approximately equivalent to $50,000 a year. Note this amount does not taken income taxes into account.
Competition: In order to identify the competition, you should find businesses of your size that are offering similar services. Remember that larger outfits can usually charge less, however they also tend to be less differentiated. Determine what they are charging and use it as a point of reference. Ideally, the rate determined in point 1 will be in the same range.
Differentiation: Prior to launching your own business, you should have a good sense of why you are unique; what differentiates you from the other businesses in your space. Perhaps you offer a complimentary service to every client that signs up with you, or perhaps you personalize the services to meet your clients needs. Whatever this is, you need to be able to communicate this effectively to your potential clients.
Although overvaluing your services can be bad for business, undervaluing them can be equally damaging. Clients are often more willing to stick with a business that provides great service, is passionate and possesses superior knowledge than one that offers a lower price.