Are Your Rates Right? Step-by-step Guide To Setting Your Prices
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One of the most difficult things to establish when you’re setting
up any kind of service business is how much to charge
for your time. Get this right and you should have
plenty of customers and a business that pays you well.
Get this wrong and your new business may never get
off the ground.
If your prices are too high, your customers will go
elsewhere - but, if your prices are too low you could
end up working all hours for months on end simply
to break even. Or worse still, to lose money!
One of the most frequent mistakes made by new businesses
of all types is to think that people are only motivated
by price in the buying decision. Consequently, a common
initial approach is to find out what others in the
same line of work are charging and undercut them…
don’t fall into this trap.
Give the matter a bit more thought, after all, this
is to be your livelihood and it’s essential that you’re
paid a proper and decent amount for your time and
expertise with the proviso that both you and your
customers feel you are giving value for money.
The following method may not be the simplest in the
world, but it is probably one of the most dependable.
Use these guidelines to establish what your true market
value is for the service you are offering.
What would an employer pay for your time?
Firstly, research what you would earn
if you were working for a local employer in a similar
field. If you’re a freelance bookkeeper check out
large companies with their own accounts departments.
If you’re a car mechanic, check out local vehicle
repair companies and if you’re a private tutor, check
out schools and colleges or adult education centers
and training companies.
Spend some time looking at job vacancies online and
in the local newspapers and get a good idea for the
average annual salary for your line of work in your
Important Note! As most full-time employees
get 4 weeks’ paid holiday per year, in effect they
are only working for 48 weeks out of 52 – and you’ll
need a break too. This is taken into consideration
in the calculations below.
I work as a freelance Personal Computer Tutor for
adults and in my local area the current annual earnings
for full-time college tutors and those working for
private IT training companies is around $51,000. I’ll
use this figure as an example by calculating how much
I should be charging for my services.
How much is this per working week?
$51,000 divided by 48 weeks is $1062.50
Business running costs
Unlike an employee, you will have
to cover your business running costs. You will have
to establish a figure for your own business expenses
according to the service you are offering. Fortunately
in my business these are comparatively low as I don’t
need premises or expensive equipment. My biggest expense
is my car. Your business may be different so make
sure you take everything into account here, right
down to envelopes and paperclips.
(At this stage do not include purchases for specific
jobs such as replacement parts for a vehicle as these
would be charged to the individual customer on top
of the charge for your time).
General business expenses may include:
Gasoline / vehicle running costs (not including any
proportion for your private use)
Advertising and promotional activities
Office supplies and stationery
Computer (hardware, peripherals, software, consumables)
Training costs if you need to keep your skills up
Telephone, cell phone and internet charges
Insurances including business insurance and personal
Professional membership subscriptions and trade magazines
Miscellaneous (parking costs, postage etc)
Tools of your trade
Premises costs, etc
Although it may be difficult to be precise when your
business is just starting, try to measure as accurately
as possible how much your overheads will come to each
year, then divide this figure by the 48 weeks you
will be working.
My own business expenses come to about $15,300 per
year, so continuing with our example:
$15,300 divided by 48 weeks is $318.75 per week business
Add this to my weekly earnings target:
$1062.50 plus $318.75 is $1,381.25 weekly income target
How to use this figure to calculate your hourly
Assume at this stage that you have
40 hours available to work each week - this is in
line with most full-time employees. Consider how many
hours out of these 40 you will need to spend on non-earning
activities such as traveling between appointments,
carrying out administration or promotional activities.
Let’s assume, for the sake of our example, this is
10 hours per week (25% of working hours). Subtract
this number from your total working hours to reach
a figure of 30 chargeable hours.
Now, divide your weekly earnings target by the number
of hours you can actually charge your customers for
Continuing with the example above my rate would be:
$1381.25 divided by 30 chargeable hours = $46.04 per
hour (round down to $46.00 per hour)
To summarize then:
1. Local average salary divided by 48 weeks.
2. Expected general business overheads per year divided
by 48 weeks.
3. Add the above two figures together to reach a weekly
4. Work out how many hours you will be directly charging
customers for after subtracting non-earning hours
(such as administration and traveling).
5. Divide your weekly earnings target by this number
of chargeable hours.
6. The resulting figure is your hourly rate.
Important Note! Using this method, it
doesn’t matter if you’re working on your business
full-time, part-time or for a bit of extra income
– your hourly rate should remain the same. It’s based
on a method which enables you to cover all your costs,
(including 4 weeks'paid time off) and still earn the
“going rate” for someone in your line of work.
With the figures from your initial research, use the
same method to establish a guideline as to how much
your time and expertise is worth in your own local
area and currency. Of course there is always room
for some flexibility and ultimately you will have
to determine what your local market will bear, but
this is an invaluable method for ensuring you are
not undercharging for your service or significantly
Of course, for those of us that do work on a freelance
basis, we realise there are many more benefits to
being our own boss than mere financial reward!
And always remember, the most valuable thing we
all have is TIME - so please, do not undersell yourself!
About the Author:
Juliet Lynn is a successful Personal Computer Tutor
to Adults and has written an in-depth manual, "Your
Computer Tutor Biz Handbook". It guides you step-by-step
in setting up your own part/full-time Computer Tutoring
Service. Juliet gives on-going support to buyers.
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