How much should you charge?
Photo credit: Richard Donelan www.RichardDonelan.com
Yesterday I promised to write on the subject of pricing. Pricing is required in all areas of business but today I’ll be focusing on the pricing of services delivered by individual self-employed or ‘freelance’ workers. This is never an easy subject to discuss which is all the more reason to do just that. Mastering this answer will make life so much easier by removing a whole level of unnecessary conversation and stress.
Let’s start by considering how much you should be charging for the services you’re delivering. There are a number of ways that this question can be answered so it’s well worth taking the time out to focus on the solution that will work best in your particular circumstances.
An easy option might be to simply pick the industry rate and benchmark your services against that. The problem with this approach is that you may not always have access to such a benchmark. Moreover, you may well be providing a lot of extra value that’s not reflected in such an incumbent pricing model.
Another option is to figure out what you might earn if you worked for a small to medium sized company or even a large corporate. What would your yearly salary be? Would you be receiving any other benefits in such circumstances, e.g., Health Insurance, Company Car, Car parking, Travel and Subsistence, Paid Annual Leave, Maternity / Paternity leave, Christmas Parties, Mobile Phone, Gym Access. Maybe you’d also be entitled to an annual bonus?What about a pension?!
What would these numbers add up to before and after taxes? Makes you think eh?! Now go and add up all of these elements and examine the total before and after tax. Then divide this number by 12, to get a monthly income equivalent, and again by 4 to get a weekly (5 day) breakdown. Finally, divide by 7 or 8 to get a basic hourly rate. What is this number?
How do these numbers now compare to what you’re currently charging for your services? Say an average working year is 11 months. Are you realistically going to be able to identify and deliver work projects for all of this time? What happens if you get sick or the economy contracts? Have you included a rainy day fund?
You really need to be considering these various elements before you ever start to talk to a customer about what you charge. Don’t forget either that you will invariably run up a lot of expenses in the daily operation of the business or service you deliver. These expenses have to be factored in too!
Most importantly, as I alluded to yesterday when I wrote “There’s no room for emotion in business”, it’s so important that when you are making decisions or having discussions around pricing that you are in the right mindset for that activity. There’s huge potential to really mess up this mission critical activity if you’re feeling in any way off form or out of sorts.
Case study 1 — You operate with no pricing structure because you’ve never sat down to figure one out: You answer. It’s ABC Ltd., a subsidiary of a large corporate. They want to “meet you for a coffee”. You think “great this could be just the break you were looking for”, drop everything to go meet them and then panic when they ask how much you’re likely to charge them and when you’ll be able to deliver by. You can’t think of an answer so you just spit out whatever comes into your head. This number is likely heavily influenced by your current state of mind so you’ll next quickly start to obsess about whether you’ve just quoted too low or too high. Sound familiar?
Worse still, you’ve gone out to have this coffee at your own expense (which you might not ever recover), when the people you’re meeting are on their company’s time. Maybe they don’t even have any interest in ever hiring your service — they just want a break from the office on company time and they just enjoy buzzing off new people, all the time absorbing the insight and knowledge of others at no cost to themselves.
So how can you improve on or ideally completely re-think this type of scenario? Planning. Think about all the various elements that I’ve already set out above. Factoring these in, properly work out what you should be charging as a function of what it actually costs you to live and to do business, i.e., what it costs you to deliver the service that you are providing. Make sure that you also factor in the costs of preparing for a job, getting there and getting back again not to forget also allowing for a bit of a runway for leaner times too.
Case study 2 — You’ve previously already worked out a stellar pricing structure based on mathematically working out how much it costs you to live and do business: The phone rings. You answer. It’s ABC Ltd., a subsidiary of a large corporate. They want to “meet you for a coffee”. You switch into action mode — no emotion involved. Great to hear from you. Can you please email me over an outline of what it is that you’re hoping that I can help you with. My rates are X per time with a minimum of Y units of time. If that’s agreeable then I look forward to proceeding quoting for your requirement on that basis.
This time you’ve sent out a clear message that you’re a serious operator that isn’t prepared to waste time messing about. The person on the other end of the phone should respect this as a positive indicator that you are a professional who will not waste time when delivering any project.
Moreover, you’ve delivered an honest and transparent message about your pricing strategy. Rather than obsessing about whether or not you’re going to get the job you’ve already gone back to progressing whatever you were working on last or already you’re already onto assessing the next sales opportunity.
You’re no longer wasting time or energy obsessing about what may or may not happen. Instead, you’re now confident that when work does come in that you will be able to make a living from it. If the phone doesn’t ring enough then you may have other issues to address but any such unknowns are currently out of the scope of this discussion.
Ultimately you need to figure out a strategy that will work best for you. In life and in business, being able to value yourself is absolutely the most important thing that you’ll ever have to figure out. The sooner that you can work this out the easier things will become. If you’re starting out and you’re struggling to figure out your worth then it will be all the more important to figure out what you cost. In other words, what does it costs for you to exist!
When you figure out your value, and a way to best communicate this, you will find it a lot easier to successfully do business. Perhaps you’ve already mastered this skillset? Please do let me know in the comments below if you have any top tips that you’d like to share about how you deal with, or have dealt with, the tricky subject of pricing!