Don’t just charge what your competitors charge.
Don’t just charge the lowest price.
Don’t roll the dice and guess.
Instead, do the math.
1. Determine What You Need and Want To Make
Part of the calculation in setting service fees is how much you need (and want) to make. If you first decide how much profit you need to make, you can then “reverse engineer” the math to determine what to charge in order to make that profit. It’s necessary to do a personal and family budget first, to determine the minimum you need to bring into your home each month.
In addition to that minimum, add the amount you’d like to make which would give you the lifestyle you want. You need to have a goal of the full amount you want to bring home each month when you have a successful business. While income isn’t the only measure of success, NOT making enough money in your business will bring frustration and dissatisfaction.
Take time to dream a little. If you could earn as much money as you ever wanted, what would you spend it on? Maybe you’d send the kids to college. Or go to Paris. Or tuck it away for retirement savings. Or give to your favorite charity.
Take into consideration any business expenses, both routine ones and wish list expenses. Maybe there’s a conference next year you want to attend in Bermuda? Or you need to replace your printer soon. Perhaps now is the time to hire an employee or subcontractor to help you grow your business?
2. Research Your Fee Options
First, examine carefully your skill level. It is common practice in business to charge based on skill. The more skill and experience you have, the more you charge. Also consider the value of the results you get for your clients. If those results are something they strongly value or need, they’re often willing to pay more for those results.
You have several choices on how your services will be billed:
- per hour
- per session (regardless of how long a session lasts)
- per month
- per project
- per “program” (you define what the program includes and how long it lasts)
Next, find out what others are charging for similar services in your industry and location. You may have a difficult time getting clients if you set your fee at $100 per hour when other providers in your area are only charging $60 per hour, unless you have more experience, are more well-known, or have a unique offering that is different (and better!) than your competitors.
One interesting note is that you often can charge much more in big cities than anywhere else: in the suburbs you might be able to charge $75 an hour and in New York City charge $150 a hour. And even within a city, you might be able to charge more in exclusive neighborhoods than middle-class neighborhoods. Keep your eyes open to the subtle differences in pricing structures all around you.
Look at your target audience. Are you trying to reach high-income people or is your target somewhere else on the economic spectrum? Are you intending to sell to corporations, or to non-profits? Knowing your ideal target client can also impact your pricing model.
Ask others in your industry what they charge. It is not collaboration or price-fixing to simply inquire as to industry norms. Ask your attorney if you have concerns about enquiring within your industry about pricing.
Another consideration is how much your education cost you. As an example, some massage therapists can spend $4,000 to $6,000 to get their certification. These education expenses need to be figured into the mix when setting fees. You’ve got to recoup those expenses and make a profit, too! And the more education you have (and the more experience you have), the more valuable your services to your client.
Finally, decide if you will offer discounted fees and how you will apply them. Some people create their fees on a sliding scale, based on what the client can afford. Others offer either full fee or free sessions, with no discounting in-between the two extremes. Some take one or two free clients per month as a way to give back to the community, or offer discounts with a deadline attached. The choice is yours.
3. Determine Your Payment Policies
Decide if the client must pay in advance, over time, or after the work is complete.
Also decide if you will offer a discount for early payment of invoices, say a 5 percent discount if paid by a certain date. This encourages those clients you invoice to pay their bills early, thereby giving you earlier access to your cash.
Finally, if you will be invoicing clients, determine how much time they have to send you the payment. Typical time periods are 15 days or 30 days after the invoice date. You must be willing to be assertive in collecting past-due accounts and be firm with people who don’t pay on time. For example, if your policy is that payment must be received in your office by the first day of the month, consider warning, then firing, clients who habitually are late in sending in their payment.
EXERCISE – How Many Sessions Do I Need To Do?
For this exercise, you’ll need a piece of paper and a calculator.
1. Calculate the income you need to bring into your home (after taxes and business expenses) so that you’ll have a comfortable life. Don’t short-change yourself here; be honest with what you really need and want. This number is the net profit you need to make from your business.
2. Net profit isn’t the same thing as gross income. Gross income is all the revenue you bring into the business. Net Profit is what you get to keep after paying all your business expenses, taxes, etc. Add 30-40% to that number to your desired net profit number from Step 1 above, to figure out the gross income (total income) you’ll need. This covers taxes and expenses. (Adjust the percentage if you will have higher business expenses, like employees, office rent, etc.)
3. Determine the fee you’ll charge for one session (hour/program/month).
4. Divide your total gross income by the per-session fee to calculate the number of sessions you need to do in a year.
5. Now divide the yearly sessions by 12 to determine how many you need to do per month.
6. Assuming you’ll work an average of 20 days per month, divide the total monthly sessions by 20 to figure out how many you’ll need to do per day.
1. Desired Net Income: $135,000
2. Plus 30%: 135,000 x 1.30 = $175,500
3. Per Session Fee: $80
4. Number of Sessions per Year: 175,500 / 80 = 2,193.75 (let’s just call it 2,194 to round it off)
5. Monthly Sessions: 2,194 / 12 = 182.8 (round off to 183)
6. Average Daily Sessions: 183 / 20 = 9.15
In this example, you would have to do around 9 sessions per day in order to reach your annual profit goals. Now think about this carefully: If a “session” is 30 minutes, then doing 9 of these a day is possible. But if a “session” is 60 minutes, then that means you have to work 9 hours a day, 20 days a month to make the income you want! Do you have enough time and energy to do that many sessions?
Your Calculations: Do The Math
Per Session Fee:
Number of Sessions per Year:
Average Daily Sessions:
Look closely at that final number. Can you physically and emotionally do that many sessions in a day? What about the time you need for administrative and marketing work?
There more involved with setting your pricing and payment policy, but these tips should give you a solid foundation. Until then…be happy, be prosperous, be ambitious for the sweet life.
So, what did you think of this post? Did you find it helpful? Do you like these longer, meaty articles or do you prefer shorter ones? Let me know what you think!
About the author: Karyn Greenstreet
Karyn Greenstreet is an internationally-known self-employment expert and small business consultant, and has owned five businesses since 1981. She helps you transform your business with proven techniques and strategies to increase profit, work efficiently, and create a clear business and marketing model for the future of your business. She has taught over 270,000 people worldwide and you can visit her website atwww.PassionForBusiness.com”
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Great post Karyn! I have a question on your 2nd point: how do we find out what others are charging in our city? I work freelance from home.