3 Things All Business Owners Should Know About Pricing
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The 3 Things All Business Owners Should Know About Pricing

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Freelancers, entrepreneurs, and business owners have all faced the question at some point:

“How much should I charge?”

There are two schools of thought about pricing out your work, but both of them agree that you should not be choosing your rate out of thin air.

Read more about each of the ways to calculate how much you should be charging, and share in the comments how you determine what to charge!

1. Calculate Salary Based on Need

The first school of thought says you should choose your hourly rate based on your needs.

First, choose your time period (probably either a month or a year). Calculate how many billable hours you plan to work in that time period, on average. You might want to plan for less than 40 billable hours a week, since you’ll also have other work you need to do that you can’t bill to any client (general accounting and other business-related paperwork, efforts to gain new business, etc).

Next, decide the salary you want to bring home in that same time period.

Then, you just have to do the math.

For example: Let’s say you want to bring home $4,200 per month, or $50,400 per year, working 120 billable hours per month (30 billable hours per week).

  • Don’t forget to add taxes, at about a 20% rate (so you’ll need to take in at least $5,250 of revenue per month to reach your desired salary). Use this form to calculate your actual estimated tax rate.
  • Calculate your monthly overhead, like insurance, rent and utilities, office supplies, marketing, etc. Add this number to the amount you need to bring in. (Let’s say these add up to $1,000 per month).
  • Take that new total, including taxes and fixed costs (in this case, it’s $6,250), and divide it by your billable hours (120).
  • To make ends meet, you’ll need to charge $52.08 per hour.

Don’t forget, though, that you should also have a profit margin (and a safety margin for unforeseen expenses or growth). Add a healthy 15% to 30% on top of your hourly rate to make sure your business is sustainable and has enough juice to grow.

2. Charge What the Market Can Bear

This second group says that you should disregard (for now) what your bills add up to: how much can you charge based on the market you’re competing in?

This strategy may require more trial and error at first, but it’s proof you’re thinking less like an employee and more like a business owner.

Start with a tool like Salary.com. It uses a vast database of job listings to find out what comparable salaried jobs are earning in your area. This will give you an idea of how much your services are valued, which gives you an indicator of the market.

Next, try to hire your competition. Don’t lie to them or deceive them, but try to find out how much they’re charging. Depending on your industry, this step could require visiting Elance or oDesk to look at postings, calling friends to find out how much they’ve paid for similar services recently, or Googling to find your competition and look up their rates.

Finally, you’ll have to quote people your rate and see what happens. If possible, give them the rate over the phone or in person so you can gauge their reactions. Are they balking at the high price? Or do they seem suspicious that it’s so low? If someone passes on a proposal, ask them nicely if they’ll tell you why; this can be the best way to fine-tune and make sure you’re charging the right amount.

People who subscribe to this idea say that if you charge less than the maximum amount the market can bear, then you’re selling yourself short. And that if you can’t make your business viable on this rate, then you need to do something differently.

 

3. Never Low-Ball

It can be tempting to under-estimate how much time something will take you, or how much that time is worth. It can be even more tempting to undercut your competition in the hopes you’ll gain customers. Don’t!

This is not sustainable, and it’s bad for your personal economy. Moreover, the only way people will value and respect your time is if you do the same. You deserve to earn for the expertise you’re offering.

Some entrepreneurs say unless you occasionally hear, “You’re too expensive,” then you’re not charging enough!

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