Posted: Tue 15th Nov 2022
It's difficult to work out how much your time is worth, particularly if you're starting a new business. People often undervalue their expertise and calculating how much you need to earn is complicated.
Charge too little for your time or fail to factor in business expenses and downtime and you won't be able to build a sustainable business.
This article covers the basics you need to know, including how to calculate your day rate based on wage expectations, deal with discounts and build your self-worth.
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Build your sense of self-worth
It's common for people to underprice their time, particularly when they're starting a new business. The desire to win clients and the pressure to generate income encourages people to offer low prices.
"What usually comes out is people say they aren't good enough or there are self-worth issues," said Wellbeing Business School managing director Helen Pinnock. "It's very important to get to the heart of why that is, whether it's how they were brought up valuing themselves or an experience in a previous job role."
You're an expert at what you do and it's important to remember that when you're pricing products. Have confidence in the value you can provide for clients.
With that in mind, let's look at a number of ways to calculate how much service-based businesses should charge.
Using a salary to estimate prices
Salaries provide a useful benchmark. Business owners may be supplying a service they did in their previous job. For example, working as a head of marketing and then launching a marketing consultancy.
If you haven't worked in a relevant role before, compare your experience with publicly listed job roles.
Add 10% to the salary to account for pensions and other benefits. Divide that by the number of working days in a year (normally 262 for full-time employees, minus your holiday allowance) to get a base day rate.
You'll need time to work on the business and the amount you charge needs to cover this downtime.
"You'll probably spend at least 25% to 35% of your time on tasks that you can't bill to clients, such as bookkeeping and billing, drumming up business and upgrading your skills," said Studio 77 CEO Ruby Lee.
That needs to be added to your base rate to make sure you can achieve the salary you need.
Remember that clients expect to pay a higher day rate for external suppliers. They provide expertise and flexibility that isn't available internally and are rewarded accordingly.
Profit margins and overheads
When you know the cost of delivering a day's work, you can calculate how much to charge for services. Clients might book a certain amount of time or pay for a project. If it's the latter, you'll need to estimate how long it will take - build in a buffer in case things overrun.
Service-based businesses don't tend to have high overheads, but you need to factor these costs into your prices. You might be paying for an office, have software subscriptions and pay an accountant, for example.
It's difficult to account for these costs on a project-by-project basis. Instead, add a margin to your day rate estimate.
The margin varies by sector and business, but try forecasting your outgoing and expected sales over a six or 12-month period. You should be able to pay yourself and generate a surplus.
It's important to benchmark and sense-check your pricing against the industry average.
Google companies in your sector
Some service-based businesses list prices on their website. This provides a guide, but it should be taken with a pinch of salt; it's common for businesses to negotiate prices depending on exactly what the customer wants.
"First of all, it's about market research and seeing what other people in your area are doing," said Helen. "That's quickly sitting down at your computer and spending half an hour looking at what people are charging."
Speak to other people in your industry
Talk to freelancers in your space and find out what they charge. If you feel that competitors are unlikely to share information, you can look for related services.
Experiment and correct
When your business is up and running, you'll have more information to help you improve your pricing:
Are you left with enough profit each month and quarter?
Compare how long you spent on a project to your estimate (it can be helpful to keep a timesheet).
Calculate the profitability of each project, including any additional costs like freelance support and travel.
Get feedback from the sales process. Clients might mention where you sit in the market or try to negotiate prices. Although, remember it's often not clear whether the price or their perception of the value is the issue.
How to deal with discounts
Helen's not big on discounts but recommends rewarding loyalty. It's about reframing how you give money off.
It's better to offer a discount to people that commit to longer engagements. For example, the reflexology and yoga coach Helen works with could offer a discount to someone that books six or more sessions.
Encouraging clients to commit to a long-term relationship makes sure they get value out of the engagement and reduces your customer acquisition cost.
If you do offer a discount, make sure you are still making a profit - there's no point in doing work that's costing you money!
Know your worth!
These tactics can help inform your day rate and how much you should charge for services when you're starting out. Spending two or three hours doing the calculations and research should provide a point to start from.
"If you've never priced yourself before and you don't know where to put yourself in your market, the worst thing you can do is underprice yourself," stressed Ruby. "You make your own glass ceiling, which you struggle to break through after that."
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