I talk quite a lot about pricing. It’s one of those things that most business owners struggle with at some point. Price too high and you won’t win any business. Price too low and you won’t cover your costs. Both have the same outcome – you can’t pay yourself. And if you can’t pay yourself, then what’s the point of putting all that hard work into running a business?
Stop just guessing!
The first mistake many people make is using guesswork to set the price. They pluck a figure out of the air and say, ‘that sounds about right’.
But what is that figure actually based on? Competitors? Costs? The price their mate suggested when they asked for advice?
Don’t just guess.
Do some research. Do some planning. Do some calculations.
Start with the end in mind
Nobody goes into business wanting to work for free, or even worse, at a loss. So, when setting your pricing, the first thing you should write down is how much you want to earn.
There’s no guarantee you’ll earn it, and you need to be realistic, but this gives you a starting point to work from.
For easy calculations, let’s say that in year one, you want to earn £24,000 before tax. That’s £2000 per month.
Calculate your costs
The next thing you need to know is your expenditure. Add up all your monthly outgoings. If you’re just starting out, you’ll probably need to estimate some of the costs, for example, you might set yourself a limit of £500 per month for marketing. For the purpose of our example, we’ll say our costs are also £2000 per month.
Do a bit of maths
If we want to pay ourselves £2000 per month, and our costs are £2000 per month, then we need to bill at least £4000 per month. That’s our target, and now we need to break it down.
By the hour
Let’s say we want to work 40 hours a week, 48 weeks of the year. That works out at 160 hours per month. So, we just take our target of £4000 per month and divide it by 160 hours, meaning we need to bill £25 per hour, right?
While you might work 40 hours a week, not all of them will be billable. There will be time spent doing marketing activities, going to meetings and attending networking events. Time spent on calls, sending and replying to emails, completing admin tasks and doing all the other things that come with running a business.
If there’s just you in your business, you’ll be lucky to spend more than 50% of your time doing actual billable work once you factor in all the other stuff. This means the billable rate for our example should be at least £50 per hour. Make sure your hourly rate covers your non-billable time too.
Note that I also fundamentally disagree with billing by the hour.
At it's heart, billing by the hour punishes you for doing well.
Imagine you take on a novice plumber. It takes them 3 hours to fix a leaky tap. If they charge £25 per hour, then that's £75 you pay them.
Now imagine you take on an expert plumber. It takes them 5 minutes to fix your leaky tap. Even if they charge £100 per hour, you might end up paying them £50 for that first half hour.
In other words, spending years becoming an expert and learning how to be good at your job means you get punished when it comes to billing.
Now do you see why I think hourly billing is crazy?
By the project
Project pricing can work in a similar way to hourly pricing. Just work out your hourly rate as above, then work out how long it takes to complete a project on average to get your project price.
Alternatively, decide how many projects you can complete each month and divide your target by that amount. Let’s say you want to build four websites per month. Your target is £4000, so that works out at £1000 per site.
But, if you're charging by the project, there's an even better way to think of your prices. That's value pricing - and it takes some real confidence on your part - but if you can get it right, it can transform your business.
The basic idea of value pricing is no-one actually wants whatever it is that you do. They don't want a website, they don't want someone to write an employee handbook.
What they actually want is more different. Instead of a website, they want more sales. Instead of an employee handbook, they want to not taken to a tribunal.
What is it worth to someone to get more sales? Well, if their new website brings in £100,000 of extra sales, that's a real boost.
What is it worth to someone to not get taken to a tribunal? Well if it avoids a compensation claim of £50,000 then that's a real benefit.
And of course, all we've looked at here are the direct benefits. Underneath those are indirect benefits - more sales mean you can show off to your neighbours with a brand new car. No tribunals mean you can actually sleep at night. What are those things worth?
So to get started with value pricing, you need to figure out what your work is worth to your client. What value are they getting out of it? Both in monetary terms, the direct benefit, and in emotional terms, the indirect benefit.
These benefits are going to be different for everyone - so the process of value pricing is complex.
But if you get it right and you get your client to agree that this piece of work could be worth £50,000 or £100,000 - plus immeasurable emotional security, you can then use that figure as an anchor for your price.
I'm not going to build you a website - but for £10,000 I will give you a pathway to £100,000 in sales and a car that your neighbour will be jealous of.
I'm not going to write you an employee handbook - but for £5000 I will give you a cast-iron mechanism for avoiding employee tribunals, so you can sleep at night.
So you can see how value pricing can be really hard to do - and takes utter confidence and belief in your abilities. But when you get it right, it can transform your entire business.
Focus on what you can control
It's all very well having these fantastic numbers for your prices. But you actually need customers, not prices.
The best way to do that is to focus on the things you can control. How many leads do you have coming in? How many of them become customers? And how long does it take for them to become a customer?
You might have heard me mention the two magic numbers. Knowing these figures allows you to forecast for the months ahead and ensure your pricing structure works.
If you'd like to take control of your time, escape the constant firefighting and build a business that works for you, the easy way to get started is to build a 12 Week Plan. My free planner shows you exactly what you need to do.
Photo by Mohammad Saifullah on Unsplash