ARE YOU FEELING LIKE A BUSY FOOL?
Ok, don’t take offence at that .. but if you are feeling that you are working non-stop and are constantly tired and have nothing to show for it all, then a busy fool is what my Grandad would have called you! But also, you aren’t alone in feeling that way. Pricing is something I come back to again and again (and again) and if you feel like this then the chances are your pricing needs looking at and an overhaul (it could be something more fundamental within your business, but pricing is a good start). Whether you sell your time or products there are a few basic areas that you need to be thinking about.
Every business has time that isn’t chargeable – you can’t sell the time as services to the client or you can’t use it to be selling products. This is the time you spend on your admin, your marketing, your business planning .. and maybe (if I’m really lucky!), your books! No-one pays you for this time, but it is an essential part of running your business. If you spend 50% of your time on work that isn’t directly generating an income, then you need to factor this into your pricing. And, yes, I know marketing is there to generate income but it’s not a direct sale for these purposes (the aim as always is to keep this simple!).
These are the costs that stay the same no matter what, so rent, phone bill, broadband etc. You need to cover these costs before you make any money for you, so again you need to factor these into your pricing.
BOTTOM UP PRICING
Think about what you need to make, this can be on a monthly or annual basis. But let’s work this through as monthly (and we are ignoring tax and VAT for now to keep it simple).
What do you need to earn at the end of each month? Note it says need, not want .. need will give you the minimum, you can then adjust it upwards! Let’s use £2,000 for this example.
Now add in your fixed costs – let’s say these are £500 a month – so you need to earn £2,500 a month to get to that £2,000 in your pocket. Now we have a target we can work out how to do it.
First step is to work out your hourly rate: If you work 30 hours a week but 15 are spent on non-chargeable time then you really have 15 hours of chargeable time a week. There are 4 weeks in a month (again, keeping it simple) so that is 60 hours of work in a month. So, to get £2,500 you need to earn £41.67 per hour. This needs to be done regardless of whether you sell products or time.
If you sell time you now have your minimum charge out rate.
If you make your own products and you know that you can make 3 in an hour then you now know you need to factor in £13.88 (£41.67 / 3) of time into the cost calculation and then just need to make sure you have in all the other costs of getting your product to market (materials, delivery etc). This then gives you the minimum price you ought to be selling at.
Of course, this then assumes you can sell what you make at this price and that you can sell the right number of units as well.
If you buy in products wholesale and sell them on then you are probably stuck with their pricing, so it becomes about volume and selling enough of the right products at the right price to cover your cost base. But knowing what you need to hit each month can help you make the decisions about what to stock and what to sell.
If the numbers don’t work then look at why, it could be your fixed cost base is too high in which case review what you and spending critically and decide if you actually need to spend it. It could be that you are spending too much time on admin and if you worked more hours (say 20 instead of 15) then that hourly rate becomes £31.25. Can you pay someone else to do the 5 hours of admin that you now aren’t doing at a lower rate so that the sums still add up?
In general, I am not an advocate for comparing to other businesses, but on this occasion, it can be helpful if it is done correctly. By this I mean it is worth a quick competitor check – so what is someone offering the same services or same products charging. Are you similarly priced or not? Obviously care needs to be taken as comparing apples and pears isn’t beneficial to anyone but it can give you a bit of a sense check as to if you are “about right” or not.