The difference between costing and pricing

The difference between costing and pricing

Once you’ve figured out your costs, you can start thinking about your pricing.

Let’s say a potential client comes to you wanting 4 blog posts per month.

At its most basic, you could charge hourly.  Each post will take around 8 hours.  Your basic costs are £12.50 per hour.  So you could tell the client it will cost about 8 x £12.50 = £100 per day.

That means you're making £400 per month - and your business will be in trouble.  You will need at least five clients at that rate in order to survive - and if one client cancels, you need to find a replacement immediately.  That also means that you will be working flat out - with no breaks.  A full 20 days per month.  And what if you get three new clients in the same month?  Suddenly, that 16 hour per post timescale is going to be a real problem, as you just don't have the time to complete the work.

So instead, you add some margin.  This is known as "cost-plus pricing".  You take your costs (£12.50) plus a bit extra.  Let's say you double it to £25 per hour.  This makes the business much more sustainable.  You only need to work 10 hours per month to break even, meaning you've got a bit of leeway to deal with those new clients.  And if one cancels, you've got around 2 weeks to find a replacement.

This hourly pricing has three consequences though.

Firstly, you have just set a limit on how much you can earn.  There are only 20 days per month, that's 160 hours - so a maximum of £4000 per month.  Maybe you're happy with that - but it is a hard limit, as you can't magic more time out of nowhere.

Secondly, your client never knows what to expect.  One month they could get a bill for 4 16 hour blog posts (£1600), the next month it could be 4 4 hour blog posts (£400).  For some companies, that level of variability could be a real problem when it comes to planning their cashflow.

Thirdly, as you get to know your client better, and you get faster at producing the blog posts that they want, you end up charging less and less.  You get punished for being good at your job.

As you can probably tell, I’m not a fan of this way of doing things.  Not least because your costs and your prices are intrinsically linked.  In the next instalment we’ll look at some ways of separating them, so you can get more revenue from less time - and still remain fair to your clients.

Rahoul Baruah

Rahoul Baruah

Rubyist since 1.8.6. I like hair, dogs and Kim/Charli/Poppy. Also CTO at Collabor8Online.
Leeds, England