As a service entrepreneur, you need to determine the correct fees to charge your clients. This calculation is trickier than it may appear. Although to be successful, you must look to ways to leverage time, minutes and hours often remain as the most significant component of your “inventory.” And unlike the local hardware store that can simply order more faucet washers when supplies run low, there is only so much time you can sell. Therefore, maximizing revenue from that time, achieved by matching rates to a desired number of clients, is key. Here are five ways to help determine the right amount to charge for your services.
Sometimes, prospective clients are your best focus group.
First, know your close rate. What percentage of leads or inquiries do you ultimately convert into sales? Then, depending upon how your business makes a sale (in-person, by phone, electronic communication), you may be able to understand the reasons why a prospect chose not to purchase from you. This is often as important as why someone did buy.
If you take all other purchase factors out of the equation, there is an inverse relationship between price and sales: The cheaper the price, the more prospects will purchase. Theoretically, if you’re a lawyer and give away your services, you should convert 100% of your leads. Conversely, if you’re a plumber and offer to fix a leaky faucet for $1 million, your close rate for this service will likely be 0%.
The more information you can gather from prospects, especially ones who chose not to purchase, the better you can set effective prices. As a bonus, you will also gain other useful information about how your brand is presented to potential customers.
Here is one maxim worth remembering: if you never had anyone walk away because they believed you charged too much, you are likely charging too little.
Do the math.
With the help of your accountant, you should be able to find the average ratio between gross revenue and net profit for your type and size of business. Sometimes, these numbers are contained within audit guides that various taxing authorities use to determine whether a business appears to be operating within the norm for their industry. For example, if your particular kind of consulting business normally nets 50% of gross and you brought in $100,000 for the year, your net should be roughly $50,000.
Then, if you are in a business where you bill by the hour, you can take this analysis one step further. Figure out how many billable hours per year you can offer clients. Be sure that you allow sufficient time to handle other facets of your business, such as administrative, marketing and skill enhancement. Suppose you work an average of 50 hours a week on your business, but only 20 of them are billable and 30 involve other tasks. Thus, you may have about 1000 billable hours per year available.
The same audit guides may tell you the average gross revenue for your type of business. If a one-person consulting firm in your industry typically grosses $175,000 per year and you can spend 1000 hours billing clients, then the hourly rate to achieve that goal would be $175 per hour.
Beware of puffing and apples to oranges.
The most obvious way we determine how to charge is what the marketplace can bear. Through your own formal and informal research, you likely already have some inkling of what your competitors are snagging for similar services. Dig a little deeper.
If you’re at a conference of life coaches and one is telling you that he charges $500 per session for his clients, don’t necessarily assume that’s what he’s actually receiving. Many individuals portray themselves as hyper-successful. The $500 per session coach may be discounting his fees by 80%. Or, he may have no clients, braggadocio notwithstanding.
Be sure that your comparisons are exact. If you are a life coach specializing in clients wanting to lose weight, you shouldn’t compare yourself with an executive coach who limits her practice to Fortune 500 C-suite managers.
Understand if you are a commodity or a boutique.
Housecleaning services could be a commodity. Entry to that profession may have few barriers and there may be lots of competition. But someone who owns and skillfully operates machinery that cleans and restores the grout in hard-surfaced tile floors, although he is a housecleaner, has a more specialized niche requiring training and tools, and therefore will likely charge more. Rates increase commensurately with levels of specialization.
Undertake some self-examination.
How’s your self-esteem? Some entrepreneurs, especially ones in the creative realms such as art, music and writIng, tend to undervalue their work. How often do you see the phenomenal musician playing in a bar for tips? Or you know the artist painting magnificent watercolors and giving them away to her friends? Sometimes, finding the right price to charge for your efforts first requires a boost to your self-esteem.
Pricing is a slippery slope. Charge too little and you’re working like a dog with nothing to show for it. Charge too much and you will find yourself with no work and no clients. No matter how you set your fees, in today’s fast-paced economy, commit yourself to a periodic review of your fee structure. Even if you believe you charge the right amount, you need to be sure that you stay current in your marketplace.