Professionals should think price, not wages

Jim Blasingame

Instead of a tangible product, like a computer or a kumquat, many small businesses sell professional services, like consulting and Web site development. The big issue for these entrepreneurs is how to establish a price for their work. Unfortunately, too often they do it poorly.
If you're a personal service provider don't make the professionally fatal mistake of comparing what you charge clients to how much you made as an employee.  Doing so, to paraphrase Mark Twain, is like comparing lightning to a lightning bug.
Here are three reasons to think pricing, not wages.
1.  You're a business now. Businesses have price lists, not wage lists and they collect revenue, not wages.
2.  As a professional services business, you're going to work more than 40 hours a week, but you likely won't be able to actually bill 40 hours. At least in the beginning, you'll have to do all the administrative and marketing tasks.       

Consequently, your business must collect enough revenue to cover the unbillable time you spend on those tasks, or the expense of paying someone else to do them for you.
3.  Until you have employees, you're a 100% extension of yourself.  Which means your only revenue leverage is the hours you can bill multiplied by your hourly rate.
Here's a good starting point for determining your hourly rate and it's actually the method used to price tangible products. Begin with your cost of goods, which for you is what you want to be paid as an employee of your own business. Then, based on a certain number of billable hours per week or month, calculate the hourly rate to charge clients in order to produce the gross profit needed to cover all operating expenses.
You should think of your hourly rate like renting a car at a rate of $60 a day. That works out to $1,800 a month for a car that you could finance for $350 a month. But you understand that you're paying a premium because you have a temporary transportation need, the rental company delivers the product and service just in time and you give it back whenever your need has been fulfilled, without further obligation. No muss, no fuss, almost exactly like when a client "rents" your professional services.
As a professional for rent, the services you provide and the resource that you are to clients means they don't have to adopt you like an employee. They can rent you and send you on your way until they need your "product" again.
Write this on a rock... Price your personal services like a business prices a tangible product, not like wages.

Jim Blasingame, creator and host of The Small Business Advocate Show
Copyright 2010. All Rights Reserved.

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