When You’re Getting Started

The price you charge is one of the most important decisions you will make as a businessperson. Traditionally there have been three ways of determining price: value, competition and costs. When a buyer and seller simply agree on a price, the "agreed" value sets the price. A chef’s recipe may fall into this category. The few minutes she takes to write it down or the hours she spends using the recipe to prepare the dish has no bearing on the price she charges. When marketplace competition such as that seen at the gas pump sets the price, your costs are only important in determining how much profit you make. In all cases, however, one of the most important things to know is what it will cost you to do business. Even though these figures may be hard to come up with when you are getting started, they are critical to your success.

Determine Your Costs

Begin the task of setting your price by determining what your overhead expenses will be. Take into account what expenses you will be incurring because you have a home-based business. While you may not actually pay rent or utilities, it will be helpful to determine just what percentage of these expenses could be attributed to your business. Determine the amount of space your offices uses. If it is a separate room, calculate the number of livable rooms in your house. If you have a five-room house and one room is devoted to your office, then your expenses would be one-fifth of your mortgage and utilities.

Monthly telephone expenses, stationery and business cards, general office supplies, postage, insurance premiums, online services that are part of your business function are all part of the cost of doing business. If you sell a product, then materials, packaging and shipping costs would be added to your list of expenses.

Determine Your Revenue Goal

Next, determine how much money you want or need to make for yourself. Do you want or need to clear $10,000…$50,000…$100,000…to meet your personal expenses, taxes, and other needs? Add this figure to the amount of anticipated expenses for a total amount you need to bring in from your business.

The next part of any formula is the number of billable hours you will have available. Remember that you will need to set aside time for marketing, administrative duties such as bill, and continuing education. Don’t forget to set aside some sick days and vacation time for yourself. Traditionally, business owners can bill between 50 and 70 percent of their time to clients. Figure the number of hours or days per year that will be billable time; then divide this number into the amount of money you determined you need to bring in and you have an approximate rate figure. Approximate because now you need to determine if it is reasonable for your profession and geographic area.

Knowing Your Competition’s Rates

There are many ways to determine the going rate for your field in your geographic location. One way is to ask your competitors what they charge. It is not uncommon to find a group of people in common fields who meet regularly to compare notes and support each other in their business efforts, particularly sole proprietor business owners. They openly share techniques and rates once a trust level has been established.

Another source of information is your potential client base. Ask people what they have paid for services of this type in the past. Ask specific questions about the scope of the work to make sure you are comparing apples to apples. Check at your local library for a list of associations in such references as the Director of Associations. Your local office of economic development may also have figures for you. The Internet can also be a resource of this information.

Hourly Rate or Per Project?

Determining whether it is best to charge an hourly rate or a per project rate is an individual decision you will have to make. Some tings to think about are:

Can you determine the amount of time that the project will take based on previous experience?

Has the client had experience with outsourcing this type of work in the past and, if so, are they more comfortable with hourly or per project rates?

If you chose to charge hourly rates, can you justify your rate without being defensive?

Evaluating Your Approximate Price

When first setting a price for a new product or service, you may discover that your approximate price is lower than others charge for similar work. Raise your price! It is a good practice to position yourself in the middle of the range your discover with your research. Sustained corporate growth and happier customers come from competition on grounds other than low price.

Your customer will want to know that you value them as a client, that they are being charged fairly, and that you will still be in business the next time they need the kind of high caliber service you provide. You can’t make that guarantee if you constantly price work below the marketplace. And you should never believe that you can "buy in" on a job. Someday soon, someone will undercut you and all your "investment" in this client will disappear.

You may also be challenged on your pricing because you are home-based. The perception may be that you should do it cheaper because you don’t have the overhead of a separate office away from home. You may be tempted to charge a little less because of this but remember—it is you and your expertise being hired, not your location! Price yourself as an expert in your field, as a professional who will do the best job and, therefore, is worth every penny. Remember, because of their experience, the person who is cheaper by the job is rarely cheaper by the hour.

When To Raise Your Prices

It is probably wise to reevaluate your prices at least once a year. Remember that you are another year more experienced. You may want to keep your old rate for current clients for a while and charge your new rate for new clients.

You will want to raise your rates when:

• You add a new product or service.
• You gain more knowledge and experience.
• You have more clients than you can handle.
• Think Before Giving An Estimate

Inevitably, at some point during preliminary discussions about a project, your client will ask you about your rates or about the project costs. You should resist the urge at this point to quote a price. Many business owners have gotten stung giving a price too quickly without details on the scope of the project. For instance, a desktop publisher might be asked to quote a rate for an eight-page newsletter. If the response is given without finding out how the text will be delivered (disk versus handwritten materials), format desired (black and white or color), and numerous other specifics that affect the amount of time it will take to produce the newsletter, the desktop publisher could lose money on the project or lose a potential client when they have to retract what they gave as a general answer.

Customer Comfort Levels

Help your client understand what is involved. If possible, give them a menu of service options so they feel more in control of the costs. For instance, if you are being asked about a project that is hard to determine the exact amount of time needed, offer to do an initial phase that would include a written report. Break the project into smaller tasks but only estimate the time needed to perform this first phase. Your initial report can then define these subsequent phases and you will be able at that time to include a far better estimate for the remainder of the project.

Misunderstandings

Spell out as clearly and in as much detail as possible what you will do, when you will do it, and what the price will be. Include what your client’s responsibilities for the project are as well, i.e. when the information needed will be given to you, by what method, and so forth. Taking these steps at the beginning will clear up potential misunderstandings and assure prompt payment of your invoice when the project is completed.