Trying to set the right price for your services can be a tricky business for many service providers. Should you use the prevailing market rates and try to match them, and should you be charging a premium for your experience and skill set? The best way to work out your prices is to calculate your overheads and billable hours, come up with an hourly rate, and then adjust, as need be, to reflect what the market can bear, and what you can expect as a reward for your efforts.
Work out what money you need to cover your overheads or fixed costs. As the name suggests, your fixed costs are there, whatever your level of business, and need to be paid. Such fixed costs might include rent, utility bills, server, internet and IT costs, stationery, and administration costs.
Depending on your type of business, you may be required to provide consumables as part of your service. A cleaning service might require a range of cleaning products, cloths, sponges and dusters, for example, an advertising agency may use quite a lot of ink and paper presenting concepts and storyboards to their potential customers, while a lawyer might incur court and registry fees on behalf of their clients. Whatever the nature of these costs, such consumables should either be built into your overheads or charged separately to clients. Don’t ignore them – to do so will impact on the profitability of your business.
- Expected Earnings
Estimate how much you would like, or need, to earn in a year – but be realistic! This could be based, at the basic level, on your personal expenses, and the bills you have to pay, or more likely the going rate, or “salary”, in your industry, for somebody with your experience, skills and ability. Compare this with other competitors and service providers in your field, remembering that their rates, in turn, do not reflect what they pocket at the end of the day, but include an amount to cover their own overheads and consumables.
- Billable Hours
Your billable hours are the amount of hours you are likely to charge out in a year, assuming a standard working day of 8 hours. Billable hours are not the same as available hours. You need to exclude weekends, public holidays, personal vacation time and possible sick leave. You also need to factor in time for administration, advertising, business development and finding new clients, especially in the early days when you are unlikely to have a steady stream of business. Most likely, you will only be able to charge for 4 or 5 hours a day, out of every working day, which means your hourly rate has to be able to cover all your downtime and non-availability, as well as the time you spend on direct client activities.
Therefore, with all the holidays, illnesses and non direct client activity factored into the equation, and assuming 40 weeks as the available time frame available per year, then your billable hours will be either 800 (40 weeks * 5 days a week * 4 hours a day) or 1,000 (40 weeks * 5 days a week * 5 hours a day) a year.
- Calculate your hourly rate
To calculate your hourly rate, add your overheads and expected earnings and divide by your billable hours (overheads+ earning earnings/billable hours). For example, if your overheads are €45,000 and expected earnings €55,000, and your billable hours are 1,000 a year, then your hourly rate is €100 an hour (€45,000 + €55,000/1,000).
- Calculate your rate of service
Depending on the industry and sector in which you work, you may simply charge your hourly rate, or an increment of it – 15 minutes, for example – for your service. However, there may be some instances where a client wants to know, in advance, what they can expect to pay for a particular service.
In such instances, work out a service rate for the job based on the hourly rate and the amount of time you expect a particular job to take. For example, a business trainer might charge 4 hours for a morning’s presentation, with travel time factored in as well. So, in the example above, assuming an hourly rate of €100, they would charge the client €400 for the service.
- Adjusting to market rates and premium pricing
If the hourly rate you have calculated is out of kilter with the prevailing market rates, then you may need to adjust your calculations. Find a way of reducing your overheads, lower your income expectations, or increase your billable hours. On the other hand, make sure that you are not under pricing yourself and are making a fair comparison to those market rates. You would expect to pay more for an accountant with 30 years of experience and knowledge than for somebody who has just qualified, for example, whilst a highly qualified web designer will command a premium over somebody who just offers tech support. Make sure prospective clients appreciate this and the understand the added value you offer.
Depending on your industry you may want to discount your rates for large volumes of wok or regular work from the same client. This will need to be determined on a case by case basis. You could also discount your rates in return for a non-monetary return, such as a client providing links to your websites on theirs, or giving client testimonials for you.
- Charging Multiple Rates
Again depending on your industry and sector, you could offer different rates for different markets or services. Copy editors and proof readers, for instance, may charge different hourly rates depending on the type, complexity and degree of specialist knowledge required of the text they are editing, whilst an accountant may charge a lower rate for compliance work such as preparing a VAT return or making supplier payments, and a higher rate for offering detailed tax or financial advice.
Setting the right price for your services is not easy and a number of factors need to be taken into account in your calculations – your overheads, consumables, expected earnings, billable hours and prevailing market and industry rates. Remember that you may need to adjust your rates if they are out of line with the market, but don’t under sell yourself, especially if you are offering professional, skilled services. Above all, bear in mind that your rates can be changed and, hopefully, increased, as you gain more clients, experience and standing.