How to price your services
Regardless of business maturity, many solopreneurs struggle with pricing their services. Whether it’s copywriting, graphic design or else, considering all the factors that have an impact on the price (and value) of creative work is tricky – and underestimates are just around the corner.
For industry newcomers, pricing is even more difficult. You could easily spend hours browsing competitors’ websites on the hunt for the ultimate pricing formula… and still have no clue.
So, what could you do?
This step-by-step guide is just about that.
Pricing basics: understand your needs
How much should I charge for this?
This question is all over peer communities and professional fora. However, sustainable pricing stems from a different angle:
How much do I need to charge for this?
To find YOUR answer, you need to understand how much you need to earn over a year to cover your business and lifestyle-related expenses. Fear not: you’ll only need a pen, some paper, a calculator (or Excel spreadsheet) and some patience.
To get started, calculate your annual business-related expenses. Consider everything:
- Office/workshop rent;
- Utilities (internet, phone etcetera)
- IT tools (e.g. hardware, software, hosting services)
- Training courses and travel expenses
- Professional services (e.g. accountant, translations)
- Taxes, professional insurance, duties
- Marketing and PR-related costs
Next, calculate your annual lifestyle-related expenses:
- Loans, rent, taxes and duties
- Transportation (incl. owned car and related costs)
- Life insurance, home insurance, pension funds, healthcare
- Food & groceries, utilities & CO.
- Babysitter, day-care, school etcetera
- Holidays, entertainment, fitness, leisure time
The sum of the totals represents the minimum annual income you must earn to sustain your current lifestyle and business.
Pricing basics: profits
With the minimum annual income, earnings balance expenses (including recurring savings). However, that’s not enough to elevate your lifestyle or invest in your business. For that, you need profits.
How much would you like to earn with your business? It all depends on your projects and ambitions. Whatever the answer, make sure to quantify your desired profit share to concretise your financial expectations and work towards a specific goal.
Got it? The next step is a piece of cake. Just add the profit share to the minimum income (e.g. 20,000 € + 25% = 25,000 €) to find your target income for a given year.
Down to numbers: hourly rates
At this point, you have a clear overview of how much you need and want to make with your service-based business. Now it’s time to determine the pricing schemes that will get you there.
If you run a solo business and your services require your active involvement in the project, you already know that time is a standard parameter for pricing. But time also poses serious limitations to your capacity i.e. income.
Hence, the first step towards appropriate pricing: calculate your average hourly rate. To do so, divide your target income by your annual billable hours (total).
Then, calculate your minimum hourly rate. To do so, divide your minimum annual income by your annual billable hours (total). The minimum hourly rate is important because it tells you how much you need to charge to sustain your current lifestyle.
These values form the basis of your pricing structure. In the “From hourly rates to prices” section of this guide, you’ll learn more about key aspects you need to consider when pricing your services.
In the meantime, …
Focus: working hours VS billable hours
As you see, calculating your hourly rates is relatively easy.
And yet, that’s where many solopreneurs take a wrong turn. The most common slip-up? They confuse billable hours with working hours.
- Working hours include all the time spent working for your business;
- Billable hours connote as the time spent on providing services to your clients.
To clarify: working 40 hours/week for 48 weeks/year adds up to 1920 working hours a year. BUT: if 10 hours/week are dedicated to managing and promoting your business (e.g. marketing, sales, paperwork), you’ll “only” have 1440 billable hours a year.
That’s a whole lot of difference.
From hourly rates to prices
Your hourly rates aren’t wrong nor right. They just indicate the level of price that will make you achieve your desired income (minimum and target) when all of the billable hours are dedicated to “paid work”.
Adopting such figures as your price list with no further evaluation would be a mistake.
Why? Because those calculations don’t take into account:
- Your brand positioning strategy
- Your market and niche
- The nature and type of services
- The (perceived) added value for clients.
Ignoring such factors is a recipe for disaster.
As you know, there is no such thing as The Market.
Quite the contrary: markets are fluid, fragmented and varied.
Brand positioning decisions are only yours to make. However, remember that different market segments connote different levels of prices. And this means that customers expect to pay more (or less) for specific services.
Selling a premium service at discount prices might indeed attract more clients, short-term. But an excessive difference between your prices and average “market rates” can have a negative impact in the perception of your service.
Conversely, a brand targeting a budget-conscious clientele won’t gain momentum with higher price tags. In the long run, inappropriate pricing does more harm than good.
Also: your prices shall reflect the added value of your services (as perceived by your target audience). Because it varies greatly across different scenarios.
When your washing machine breaks, you call a plumber.
For regular maintenance of your washing machine, you call a plumber.
Same person, same task (e.g. fix a pipe). However, you’ll find it more reasonable to pay 80 € for an emergency call rather than for regular maintenance work. That’s because the value of maintenance work isn’t as evident as the benefit provided by prompt response to an emergency call.
The perceived value of a service plays an important role in buyer purchase decisions. Regardless of your chosen pricing scheme – e.g. hourly rate, project price, unit price -, your rates should always reflect a fitting value proposition.
Notes on discounts and price reductions
For independent service providers, requests for discounts and “preferential treatment” are as common as OS updates. This is often due to lack of value perception in the work and support we provide to clients.
But unaware clients aren’t the only cause.
In most cases, we are also part of the problem.
Globalisation and the subsequent saturation of markets often result in price-based competition. But that’s a losing game – and damages all industry players in the long run.
The term price comes from the Latin word pretium, which means value or reward. Hence, when solopreneurs give up on their prices are diminishing the inherent value of their work and know-how.
This doesn’t mean that price reductions are EVIL, though.
Simply, discounts and price reductions should be an exception rather than a rule. If all of your estimates result in price negotiations and subsequent discounts … well, that means something went wrong in your positioning or communication strategy.
In all cases, I recommend defining a policy on discounts and special offers. You are the only person that can assess the impact of a discount on the profitability of a project. And defending the profitability of your work is up to you.
As an example, you can decide on a maximum discount rate for each type of service. And determine how many projects you can offer at a discounted rate over 3, 6 or 12 months. If you find it hard to stop the money drain from discount requests, this trick can help you reframe your needs and avoid the “automatic discount” trap.
Alternatively, you can create some time-limited promotional campaigns. Just be aware that relying too heavily on this technique can affect your credibility. Your audience can indeed distinguish between a genuine special offer and regular discount-based promotion in disguise.
Finally, flat fees for micro-projects are a great way to protect your income. Solopreneurs often end caught up in a stream of requests for time-consuming “small favours and minor adjustments”. With a flat fee, you can cover (part of) the costs associated with the provision of micro-services – and make a point about the value of your work.
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