Learning to price your services effectively is an unexpected challenge that few people anticipate when setting up a business.
Getting it right is critical to success, especially in the early days when making money is tantamount to survival. You need customers so it seems logical to offer reduced prices in order to land the business.
But, this doesn’t lead to growth and success. In fact, more often than not it does the opposite by:
- Cutting your profit (when the costs to deliver stay the same);
- Decreasing the perceived value of your services to others who, when referred, expect a similar price;
- Risking you losing money if the project costs more to deliver than expected (i.e. your ‘guesstimate’ backfires).
You probably know all this but often end up in difficult negotiations where it seems there’s no choice but to work at a discount.
This is precisely why pricing is tricky and can be very stressful.
So, that’s what we’re going to overcome today. Here’s a simple yet reliable approach to start pricing your services so you make a healthy profit every time.
Always work on a fixed price basis
Customers prefer a single price that deals with all of their requirements. This is because it gives them peace of mind that everything is being taken care of and makes for easy budgeting too.
And, it doesn’t just benefit them. As a service provider, you:
- Know the time is ‘booked’ meaning you can focus entirely on delivery ;
- Have an opportunity to finish early without forgoing any revenue.
Of course, this approach only works if the project price accounts for all costs.
If it doesn’t then your profit is at risk or worse – you might end working for a loss. To prevent this from happening its best to break down the price into time and materials.
The term ‘materials’ refers to any resources that are beyond your normal toolset and/ or way of working.
So, this might be a certain software package that’s required or a specific piece of equipment or tool. It could also be a service from another business or related expertise from a freelancer.
Usually, materials are added to your service price at cost with an associated charge applied for managing their use and implementation.
For example, if a customer needs me to use a specific plugin on their WordPress website build, I’ll charge them for studying how to configure, use and test it as well as the time it takes to incorporate it in the design on the front end. However, I wouldn’t add anything to the cost of the plugin itself.
‘Time’ refers to the number of hours required to perform all the tasks and deliver the project to the customer.
Set your hourly rate
To calculate a project price based on time you need to set out how much your hourly charge rate is.
If you don’t know what this might be, just stick your finger in the wind by getting a gauge from others in your niche. Simply, search Google for ‘hourly rates’ in your field of expertise to get a rough idea of what people charge.
Don’t take the word of one blog or reference site though. Dig around a bit to get a few different points of view and work out an average range (e.g. $25-55).
Then, decide on the hourly price you’ll charge for your services accordingly.
Remember, undercharging is far more common than overcharging. This is because having less confidence often gets confused with having less worth.
So, believe in yourself! Opt for a mid-range price and see how it goes.
Estimate the time-to-deliver
The way to do this is by breaking a project down into stages, and then estimating how many hours each one will take.
There’s a natural tendency to try to be really specific but, actually, going the other way makes more sense. Round your timings up to the nearest hour and add more if you’re genuinely unsure about how long a specific task might take.
Also, check Google again for insights from other people on timings, so that you’re not under-selling yourself. Some idea of how long it takes others can only add more credence to your estimations and opportunities to capitalize on your abilities.
Lastly, add up the hours for each stage to get a total for the whole job.
Calculate the price for your service including markup
Once all the variables are worked out it’s possible to calculate the overall project price.
This is made up of your hourly rate, the total number of hours the job will take to complete, and markup.
Markup covers unexpected expenses such as:
- ‘Scope creep’ – the customer expands the brief during delivery;
- Additional materials, and/ or an increase in their cost;
- Human error – your estimated time-to-deliver was somewhat ambitious.
But, it also enables you to be exceptional as well, even when a project is taking longer than expected (which happens a lot). This means you can delight them by:
- Answering their queries thoroughly and giving regular updates;
- Doing as many revisions as it takes to get everything just right;
- Throwing in a few ‘extras’ that cost little to you but mean a lot to them.
A decent markup (between 20-45%) means you can provide the very best service possible because, in effect, you’re being paid to do so.
Hence, the way to price your services with confidence is:
Overall project price = (hourly rate x number of hours) + 20-45% markup
Be black and white with the customer
Now, it’s time to share the price with them.
The most important thing here is that you detail all of the deliverables – i.e. exactly what you’re going to do – in writing.
Usually, this is a list of tasks (i.e. bullet points) for each stage of the project which were identified when you were estimating the time-to-deliver.
Be as detailed as possible to avoid any confusion on what they’ll receive, and state what the additional costs will be if the scope of the project expands during delivery.
Also, always explain what will happen if the client cancels the work at some point after payment is received, but before it’s completed (a percentage refund for e.g.).
The success of a fixed price project depends heavily on a clear, itemised quote that explains the terms of service and acts as a point of reference for both parties. It lays out exactly what you will do for that specific price, so it needs to be crystal clear.
The last thing anyone needs is an angry customer because they’ve misunderstood what they’re getting for their money.
Time yourself to perfection
More often than not, business owners and new service providers overlook their personal time-cost when running their company. They seem to see their time as a free resource that doesn’t need to be accounted for.
But, we’ve just illustrated that ‘time cost’ is the lifeblood of a service business – it’s the primary revenue and profit generator.
Therefore, tracking how long it actually takes you to do a piece of work is crucial to your ongoing profitability. Not only does it underpin the success of your business, it also enables more accurate estimations in the future.
The cheapest method of time tracking is noting the number of hours you work on the project on any given day, excluding any breaks. Providing you’re organised, there’s no reason you shouldn’t manage a high degree of accuracy.
Either way, you’ll get better and better at estimating timescales and maximising revenue potential with insights about how long past projects ended up taking.
Begin understanding what you’re worth
In this post, we’ve learnt to cost our services by calculating a fixed project price based on time and materials, and including any additional expenses.
It’s a solid method because it’s consistent and always profitable. For this reason, it’s a great starting point for anyone who feels a bit out-at-sea with their pricing for whatever reason.
But, it’s not perfect because as it stands we haven’t considered your perceived worth – that is, how your business is positioned to prospective customers.
Want to maximise your revenue potential?
Then check out the sister post which is about having the right mindset to get paid the best possible price for your services.