So you're starting a business! Maybe you've been working here and there as a contractor or doing a side hustle for some time, or maybe this is your first big plunge into the world of self employment. Either way, it's an exciting time and an important milestone to set the rate of your time and services.
In the beginning, you may have found yourself striking deals for friends and people in your network, working with whomever you could for whatever price. It's easy to be in that mentality - that you're just feeling lucky to have clients that want to keep working with you. But at some point, you'll realize you're not valuing yourself at a high enough price point to make a living and feel in control of your business and what you can offer.
Here's how to calculate your costs so you can set a fair price for your work:
Start with some research:
A good jumping off point is researching businesses like yourself in your area who work with similar client demographics. If you're a personal trainer in New York City working with new moms, what hourly range are other trainers pricing at? If you're a wedding photographer in Ohio, what do other photographers in your region charge for summer weddings? Getting acquainted with what's deemed normal or in the typical range is important. While you do want to stand out from the crowd, you don't want to sell yourself short, nor do you want to be selling at an unattainable price.
Calculating your Cost of Sales (COS):
What are all the costs that incur each time you provide a service? Here are some examples: you're a wedding videographer and you always hire a second person to help you, or you're a designer who purchases images and a custom domain name to build a client's website, or you're an advertiser editor that needs to license music.
The COS is an expense that can be tied to a specific service (but not necessarily all services).
Whatever you deem to be your COS means that you need to make that much money just to break even.
What's your overhead?
Then, you have overhead, these are ongoing costs and expenses. So for a designer who needs a Photoshop, Illustrator and Sketch software license. Or, the costs of an office, renting a studio space, your point of sales or scheduling software, email newsletter software, advertising tools.
Once you know your overhead expenses, you'll want to factor in a percentage of this cost into each service that you perform, so that overtime your overheard costs are being covered too.
Typically, you'll want to take your Expenses / Gross Sales = X, and multiple X*100 = Overhead Percentage. If you are a designer who spends $10,000 a year on software and a shared office space, and you make $70,000 as a design consultant, that's 0.14*100= 14%.
That means that 14% of your rate from each transaction goes to covering the cost of your business.
So... what's your price?
To figure out a good ballpark price for your services - start with knowing your rate. In business terms, a rate is how much do you want to advertise getting paid to your customers and clients? What you're getting paid will be the calculation between rate, cost and overhead.
If you're the designer with 14% overhead costs getting paid at a rate of $150 an hour, then the designer actually makes $129. And if the designer always buys $15 of stock images, the baseline price of service would then become $165.
Here's the calculation to keep in mind:
Overhead + COS + Rate = Fixed Price
If overhead is 14%, and the COS + Rate is $165, then the designer needs to add $23 to result in: $188. At this price, our designer will still only go home with $150 - losing $38 each time.
Know that you can iterate:
The price you come up with today may not be the price you have next year or even next month. It's okay to iterate your time and value as things change. Perhaps your overhead increases, you COS differs, or you find that you can't make a decent living with what you previously calculated.
The longer you've been working in your field, the higher your rate can go - it's expected that with expertise comes higher costs. If you narrow your skill to a specialty or niche area, you can also charge more for something so skillful. Any additional certifications or credentials that you do for yourself can add to your worth. And of course, keep doing research on likeminded businesses in your area, if they're pushing their prices you certainly can too. This doesn't mean you need to leave old customers in the dust, you can always keep last year's clients at one price, and charge new clients your 2021 rate. That's the beauty of running a business - it's yours, and no one can tell you how to run it!