How do I set a price point?
Last week I wrote about how to find your first client. But, once you’ve found them, how do you decide what your fee should be? Well, that’s the topic for this second in my series of 3 articles about the most common questions I get.
“How much should I charge?”/“What should my price point be?” is a very common question, especially from clients who sell services as opposed to products. There are different ways to approach this, and I will outline 4 of them today.
1. Time based method
With this approach, you estimate how much time it will take you to complete the work. You then multiply the number of hours by your hourly rate to determine your total fee. The math is simple, so this is a fairly straightforward way to determine your fee. There are, however, 2 main difficulties with this method.
1) It can be a challenge to estimate the total number of hours a project may take, especially when you are first starting your business. That’s because you don’t yet have any past projects under your belt, projects that would have given you a basis for knowing how long a job will really take. I’ve written previously about this topic, so I won’t go into too much detail about it today. But the key is finding out as much as you can about your client and the work they want done. That way, you have a much better chance of making an accurate estimate of how long it will take to complete the project. That means knowing which questions to ask and how to probe for more information.
2) It’s not always easy deciding what your hourly rate should be. Many of my newly self-employed clients struggle with this. Should they charge the amount they would like to make? Should they base it on what they were making per hour when they were still employed? Should they charge a lower hourly fee than they would like, because they are just getting started? Actually, none of those approaches are the best. Instead, you want to make sure you have a firm understanding of all your expenses, both billable and unbillable, and take those into account when you set your fee. When you know how much your costs are (say per hour, or per day) then you are in a position to know how much to add to that (your profit) to come up with your final fee (see method #2 below).
2. Mark up method
This method is typical for companies that sell products as opposed to services. However, many service companies also use this approach. The idea is that you add a percentage on top of the amount it costs you to buy or produce the product/service. So, if it costs you a total of $10 to produce a product, you might mark that up by 50%, to get a selling price of $15. For services, the markup is typically much higher. For example, if it costs you $20 per hour to deliver your services, then you might mark that up by 200%, or even 300%, and charge $40 or $60 per hour.
This method depends on knowing exactly how much it really costs you to produce your product or service. That’s not always easy: you have to make sure you take everything into account when determining your costs. That means supplies, meetings, labour, travel, insurance, gas—everything.
3. Competition based method
If you’ve been doing your homework, you should know how much your competitors charge for similar services to yours. You should find out the hourly rate they charge, what they all include in that hourly rate, and how many hours they would bill for a similar project. Then you can price your own work similarly (or lower, if you want to get an edge on your competition). You could also charge more, if you deliver more. The idea is that you find out what your services are worth by discovering what people are already paying for them. You determine that by finding out what your competitors charge. Sometimes it’s easy to find this information. For example, your competitors may list their fees on their website. Other times it may take some digging. (I used to know a salesman who would phone up his competitors, pretend to be a potential client, and find out that way!)
4. Value based method
The idea behind this approach is that you charge based on the end value your work will bring your client. Let’s say you spend 10 hours on a project, and charge $50/hr. If you use the time-based method (#1 above) then your final fee would be $500 (10 hrs x $50/hr). However, if your work helps your client double their annual income, then the actual value that your service brings to them is probably considerably more. Let’s say, with your work, their earnings will likely go from $100,000 per year to $200,000 per year. In that case, it’s not a stretch at all to place a value of $4,000 or perhaps even $10,000 on your services. Think about it: would your client spend $10,000 to make $100,000 more each year? They very probably might.
As long as you are not charging way more than comparable competition, value-based pricing can be a method to try. It’s a bit harder to close sales with this approach, because of the higher price tag, so you have to know how to justify your fees (that’s all about your sales pitch, which I have written about in previous articles).
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So those are 4 approaches you can consider when determining your own price point. I usually recommend approaches 3 or 4. That’s partly because they earn you a higher fee, but also because they are based on market value—how much the public is willing to pay. In fact, from a sales perspective, the value of an item or service is typically defined that way: what people are willing to pay. For example: would you try to sell your 5-year-old car for $1,000, or would you try to sell it for what people are willing to pay (probably over $10,000). I’m sure you would choose the latter!
Next week, we’ll talk about the third most common question I get asked: how do I get a lead I’ve been nurturing for a while to buy?
See you then,
Tim
Helping you engineer the business of you
Information in this article is for general information and is not intended as professional advice.