One of the most common questions people ask about starting a new service based business is “how much should I charge?” In many cases, it can be a difficult question to answer.
If you charge too much, you won’t get any clients, especially if clients can go to other service providers providing similar services for a lot less.
On the other hand, charge too little and you won’t make enough. Even if you get clients, you’ll have to work so hard to make money that you’ll probably burn out.
So how do you figure out the right balance? How do you charge as much as you possibly can, without pricing yourself out of the market? Let’s take a look.
Step 1: Decide if You’re a Commodity or Value Service
There are two ways to sell services: Commodity sales or value sales.
A commodity service is one where you’re competing within an established market. For example, if you’re doing voiceovers on Voices.com, you’re competing in a commodity market. Since you’re competing with other voiceover people who’re charging $X per minute, you can’t charge a lot more than the same amount. What you’re selling is a commodity, even though it’s a service.
On the other hand, you have value sales. Value sales aren’t sold based on where the market is at. Instead, it’s sold based on what the service is worth to the client. For example, when a Fortune 500 company decides to re-name their company after a merger, they’ll often go and hire an outside naming firm to help come up with a name.
That firm isn’t going to be hired based on what other firms charge. There’s no bidding market. The client isn’t going to go out and look for the cheapest naming firm possible. No, they look for the best. And what the firm charges is based on what the value is worth to the client. That’s why just coming up with a name could be worth several million dollars.
Even the same type of service provider can often reside in both commodity and value markets. For example, graphic designers. In the commodity markets, you have designers on sites like eLance and oDesk that pretty much have to outbid one another to get jobs. On the other hand, you have high end designers that charge $20,000+ per job because they build value in their brands.
So, before anything else, you need to ask yourself: Do you want to offer your services in an existing service market? Or do you want to try and sell yourself outside of that market and build value in your own service?
The former is much easier. You can make sales in hours or days, because you’re plugging into existing markets. The latter is much harder, but you can price yourself a lot higher once you’re successful.
Step 2: Check Market Rates
Now it’s time to figure out what other people are charging. This will help inform what you charge, no matter how you decide to sell your services.
Use sites like eLance and oDesk to figure out what other online service providers are charging. Use Craigslist to see if you can find out what other people are charging for similar services. Look on internet forums in your industry and look at discussions of what others charge.
See if you can determine what the median is. Figure out what most people expect to pay. Then also figure out what the maximum amount charged seems to be. In other words, try to figure out the standard in the market, as well as the upper end of what people are willing to pay.
Step 3: Evaluable Supply and Demand
This is especially important if you have a specialty. For example, if you’re a finance writer who specializes in the energy industry, your services could be worth a lot to the right person. You’re a lot more valuable than just a freelance writer, because you have the background and experience to do a very specialized kind of work.
Look around and see if there are other people like you on the market. Are there people providing the kind of services you provide, with your specialty? If so, how much are they charging?
Then look at the demand for your services. How many potential clients are there looking for services like what you offer?
The less supply and the more demand, the more you can charge.
Step 4: Determine Your Hourly Goal
This decision isn’t based on the market. It’s based on you.
How much do you want to make? For example, let’s say you’re replacing a current job at $50,000 a year with your service based practice. You’re prepared to work 40 hours a week, which comes out to 2080 hours a year.
If you divide the $50,000 by 2080 hours, you get $24 an hour. This is the amount of money you need to make in your business in order to replace your current income.
Figure out how much you need to make. This could inform how you market your services and how you price your services. If you find that your potential earnings are a lot lower than how much you want to earn, it could even help you decide whether or not to work in the industry at all.
Step 5: Translate Your Hourly to Billable Hours
The amount you need to earn on a per hour basis is not the same as what you charge your client. Remember: Running a business is a lot more than just client work. You need to manage a website. You need to market. You need to respond to emails. You need to respond to phone calls.
Figure out what percentage of time you’re spending on actual client work and what percentage of time you spent on unpaid business related tasks. Then figure out how much you need to earn from your paid work to compensate for your unpaid work.
If you don’t know how much time you’ll be spending on client work yet, assume it’s half. If you need to earn $25 an hour in total, then you need to bill your clients at least $50 an hour to make your earnings targets.
Step 6: Factor in Costs
Are there costs to your business? For example, if your goal is to be a professional public speaker, you have to factor the costs of flying to your destination as well as accommodation in your prices. If you’re a piano tuning specialist, you need to factor the cost of renting (or owning) vans to move pianos into your costs.
Don’t just look at how much you need to earn. Look also at how much you need to spend. Those costs need to be factored into your rates.
Step 7: Choosing a Pricing Model
Knowing your target hourly rate doesn’t mean you have to charge by the hour. Often time’s your target hourly earning rate is just for your own information. The best way to charge for your services is to use the pricing model that’s most expected in your industry.
Nobody hires a copywriter per hour. Instead, they pay per piece for the copy, plus perhaps a percentage of earnings.
On the other hand, nobody pays a personal assistant on a per-job basis. Personal assistants are almost always per hour.
Content writers on the other hand are often paid either on a per-job or per-word basis. Voiceover artists are paid on a per-minute or per-job basis.
There are a lot of different ways to charge for your services. Try to figure out what the norms are in your industry. Use your target hourly rate to inform how much you charge, but express your rates in a pricing model that makes sense.
Step 8: Start Low, Then Raise Your Rates
When you’re just starting out, you should price your services relatively low. Look for the median of the market and either price yourself right at the median, or 10% to 20% below the median.
This will help you get your first paying clients. This will help you fatten up your portfolio as well as get you your first batch of positive feedback from real clients.
This will help boost your credibility for future clients. As your practice starts to fill up, start raising your rates. Anytime you hit 80% capacity, raise your rates.
To sum it up, start by determining whether you want to price yourself in a commodity market or to build value in your own brand. Next, research your market to see what others are charging and to find out how much supply and demand there is for your specialty. Figure out how much you need to earn, what your costs are and what pricing model makes sense. Finally, start low and gradually raise your rates as you build more credibility and gain more experience.