How much should you charge? This ultimate question for business owners!
Making up a figure, or looking at what someone else charges is not going to cut it! What if they don’t pay the same rent as you, or they’re happy to earn a lot less. What if you’re providing a premium service and they are not?
There is an art to working out how much to charge!
Let me give you an example to show what I mean. Let’s take a look at baking. To some people, it looks like a few things are chucked in a bowl and then you turn the beaters on. Voila, a beautiful light and fluffly cake comes out of the oven. Little did you know that only the precise amount of flour went in, and specific amount milk and you can’t forget the baking powder or otherwise it could have been a flop and the whole cake ruined. Heavy lump of dough anyone?
Pricing is the same. Precision is required, but it doesn’t mean it needs to be difficult. You need to have the correct recipe, otherwise you might miss some important expenses that need to be included.
Result – your profit might flop.
There is no absolute method to pricing just as there is many ways to bake a cake, but some components need to be considered – and then there will always be items specific to your industry, type of service or business.
++ Start with the end goal in mind
Start with how much you want to earn at the end of the day, week or month. Why? Because time is your most valuable commodity. Calculate how many hours you can physically work to earn that amount of money. By this I mean, client appointments or the components that you charge by, not support tasks like replying to customer emails, taking phone calls, writing up notes or planning for the month ahead.
For example, if you coach clients how long is the appointment and how many appointments can you fit in a week? This is your base hours. Say you want to earn $1000 per week and you can fit in 10 clients per week. Just divide the $1000/10 so you need to charge $100 per appointment, right? Ummm, no.
We need to include a few more things.
++ Add in your running costs
- Office rent
- Website expenses
- Telephone/s and internet
- Products used in the appointment (even stationery)
How can you pay for these if you’ve only earned enough to pay yourself a weekly wage? Let’s add all those things up. I suggest having three lists – one for monthly, quarterly and annual bills. Keep it all together on one piece of paper or spreadsheet, wherever you store all your receipts for the tax accountant (you are storing all your receipts in the one place for your tax accountant, right? Good).
Ok, we’ve worked out that it costs approximately $1000 per month to keep your business running. Divide the monthly figure by 4, so that’s $250 per week. We now need to add that to the $1000 you’d like to pay yourself a week. So, we’re up $1250 income required from those 10 clients.
++ Then add tax (and GST if you have to pay it)
Hang on, we’re almost there! Now you need to include tax – let’s say your tax rate is 30% (everyone’s will differ). Let’s add tax on top of that $1250 x 30% tax (or 1250 x 1.3) and we end up at $1625. This your minimum sales income for the week.
++ Divide by the number of clients you can service in a week
Now you can divide that by the 10 clients and you need to charge $162.50 per client. See how we got there?
Offering a few different services? Then work out how many of each service you complete a week. Use an estimate. When you apply the rates you charge for each service and times out the number of services per week, it needs to add up to your weekly sales income figure above.
I’ve even completed this task down to the hour with one client. It’s a great exercise. Work through this with me!
Recap of all those words above: end $ goal + running costs = sales required then add tax that you’ll have to give to the tax man (times your sales income by your tax rate). Tick.
- END GOAL = $1000/ week
- BUSINESS RUNNING COSTS = $1000/ week
- INCOME TAX / GOODS AND SERVICES TAX (GST) = $2000 (end goal plus running costs) x 30% tax rate (2000 x 1.3) = $2600
How am I going to work out how to earn that? She says.
How many hours in a week can you charge clients, love? I say.
We grabbed her opening hours and took off her lunch breaks (what is that? most business owners say to me, I know you’re totally busy and there’s no time to eat!). So that’s 40 hrs/week.
We now work out the average rate she needs to earn an hour to make a livin’.
That’s $2600/40 hrs = $65.
She told me knowing this figure is a game changer, her most popular services take only 30 mins, so she knows for sure they need to be priced at $32.50 or more, because she can fit 2 in an hour and that covers the average rate she needs to charge. When we broke it down to the hour, she knew this was now achievable. Kind of like the saying goes, eat an elephant one bite at a time. Although I don’t like the idea of eating elephant… I bet the skin would be tough 😉.
Need help working out some of these figures? Feel free to contact me.