A step-by-step guide to charging your clients.
Many of you reading this article sell intangibles. Unlike a company that rents chairs, which are easy to touch, feel and compare, a big part of what you sell is ideas, relationships and service. And as a result you may have a client questioning why you charge what you do when someone else charges less.
The mistake that many people make when determining their fees is only looking at what the competition charges and pricing their services the same, at a premium or below market value. The problem with this strategy is that you may not be covering your costs, validating your experience or expertise, or ensuring that you generate the income you need to grow your business.
Here’s how to justify your pricing to potential clients, but also set up your business for success.
What is your vision for your business?
The first place to start is to understand what you want your business to look like. Do you want to be a premium service provider or do you want to be the lowest cost provider? It’s very difficult and not sustainable to charge a premium price if you don’t have unique value to offer.
What is your realistic annual income?
At the end of the year, what do you want your income to be? You need to be realistic with this number. If you’re a wedding planner with a year of experience under your belt, don’t expect to make what a seasoned and experienced professional nets.
Know your expenses
Estimate your annual overhead. This would include the cost of your utilities, office/rent, taxes, equipment, staff, travel, insurance, marketing and all of the other expenses needed to run your business.
Identify your profit margins
What do you want your profit margin to be? This is what you’ll earn over and above your salary. Profit margins are important: they can help you save up for the unexpected, the wanted and the rainy days. They also give you the ability to reinvest in your business—website updates, new staff, new technologies, new inventory—all things important in growing your business.
As a general rule, consultants will have a profit margin range from 10 to 33 percent.
Estimate your billable hours
A lot of new consultants make the mistake of thinking that they will bill for most of their time. Unfortunately, with downtime, administration tasks such as RFPs, billing, book keeping, travel, education and a slew of tasks every small business owner needs to do, the average time spent on unbillable work is about 35 percent. You also need to account for any vacations or holidays you want to take off throughout the year. So, based on a 35 percent unbillable rate, if you’re thinking of working a 40-hour work week, you will only be able to charge for 26 of those hours. If you add a two-week vacation, that works out to 1,300 billable hours per year (26 hours per week times 52 weeks).
Calculating your fees
Let’s say you want to make $80,000, your overhead is $20,000, you want a 10 percent profit margin and you plan on working 1,300 billable hours:
Your salary plus overhead $100,000
A 10 percent profit margin $100,000 + $10,000 = $110,000
Divided by your billable hours $110,000/1,300 = $84.60
Based on this example, your hourly billable rate would be $85.
Whether you’re charging an hourly fee, daily rate or project fee, your hourly rate is the foundation of your calculations.
Are you being realistic?
Do your research and find out what others in your market are billing. Go back to my first question: What’s your vision for your business and determine how your pricing fits in line with other market offerings. If you’re not in the ballpark, you need to seriously reconsider either what you want to make in a year, what your overhead costs will be and/or how many hours you need to work on billable projects.
Determining your fee for the first time may seem like a daunting task, but it gives you the ammunition you need to set yourself up for success in business.
Event Solutions magazine