The story starts with a “how much should I charge for my services?”. Shortly followed by a confusing mixture of “Are you charging enough?” and “Why does it cost so much to do (insert your service)?”
We’re talking about pricing, the Achilles’ heel of many small business owners. It’s a sensitive spot, most likely the result of hours or days of frustration, confusion and a dash of despair. A constant battle between not wishing to undercharge and devalue your time, nor overcharge to end up spending the majority of your time creating quotes for crickets.
If you have tried to stare the beast in the eyes, your research may have provided you with two options (i) send fake enquiries to competitors (ii) or “know your worth and add GST” instagram posts from the ‘business’ influencers. While the latter is less questionable, the reality is that every small business owner faces a pricing struggle.
Without further ado, let’s break down the vague advice and dive into some actionable strategies to revolutionise your pricing game and achieve your business goals.
5 signs you may be undercharging.
“Am I charging enough?” It’s a difficult question to answer, especially when you are in a niche industry, a freelancer or have no ballpark figure to form the basis of your decision. Now, without having an inside scoop into your business, we can’t say with certainty. However, here are some common symptoms of chronic undercharging.
No questions asked.
Do your clients ever ask questions, request a price breakdown, or try their luck for a discount? If that is a no and your potential clients do not bat an eye when you send through a quote, chances are they are pleased as punch that they have just discovered a bargain. They may also be eager to get the deposit paid and the project started to avoid the chance of you having a change of heart.
You need help but can’t afford it.
Are you run off your feet yet your business is not in the financial position to get help onboard? To exchange your express ticket to burnout and get an employee or subcontractor on board, you will most likely need to raise your prices.
Your prices are set in stone.
When was the last time you reviewed your pricing? If it was over two years ago, ding ding, you are highly susceptible to undercharging. Your fees are not evergreen; they should change with the market, your experience, your equipment upgrades and other areas of business advancement. Not only do most industries see a slight increase year after year, but another year in business is also another year of experience. So block out an annual fee review on your calendar.
You’re packed to the rafters.
Is your business booming? Being overbooked is could mean you are undercharging. If you have no room for new clients, make room for a price increase.
When clients are paying next to nothing, they may treat you like next to nothing too. Why it’s by no means right or fair, if you don’t value your time, your clients most likely won’t either. If last-minute cancellations, answering calls and emails outside of office hours, working on out of scope tasks, and late payments are the norm for you, do yourself a favour and don’t let clients take you for granted by under charging what you are worth.
So how much should I be charging for my services?
Alright, you get it, you’re undercharging – but where do you go from here?
The pricing formula.
First things first, know your destination before you start your journey. Instead of getting straight to the nitty-gritty of individual service pricing, we will begin with your business goals and work our way backwards from there. Shape your pricing structure around the profit margin you want to see, and we can use this basic formula to get started.
Price = Costs + Profit Margin.
Step 1. Add up all your business costs, from advertising and software to subscriptions and training, be sure to include every single expense.
Step 2. Determine your profit margin. How much profit do you want to make?
Step 3. Add them together, and you have your price.
Friendly competitor analysis.
Competitor research is not just essential to marketing but your pricing as well. Don’t simply look at the dollar value your competitors charge but dig deeper and look at why they charge what they charge. If they offer Branding, a cheaper price point could mean fewer revisions and deliverables. A higher starting point could be due to the overheads of running a larger team and a long-established history with an endless number of case studies – you get the gist. With a clear idea of the figures floating around your industry, you can determine where you sit in the mix. Some food for thought: Do you have social proof in the form of case studies and testimonials? How much experience do you have? Where does your skill level sit?
While this is a crucial step, keep in mind that your competitors are your allies. They know your field inside and out with all the challenges and rewards running a small business brings, so a friendly and supportive relationship could make a world of difference. We’ve joined heaps of accounting groups for this very reason!
Consider the switch to value-based pricing.
Sarah and Linda have the same experience, degree, and service offerings. Sarah has a natural knack for quickly wrapping her head around a brand voice and can whip up a full-funnel ad copy before her lunch break. On the other hand, Linda likes to ponder on it, allowing plenty of breathing room for creativity. Linda often requires a lot of drafts and edits before she is happy with her work. Let us say Sarah finishes her copywriting three times as fast as Linda. If they both apply the same hourly rate to their work then Linda will be paid three times more than Sarah, and Sarah is penalised for being faster.
People are paying you for a solution to their problem, not how quickly you provide a solution. That is why at Orbit, we prefer value or project-based pricing over hourly rates. If you charge per hour, you are not only capping your income based on how many hours you work, but you could be penalising yourself for being efficient and experienced.
Determine your internal hourly rate + costs.
If you make the switch to value-based pricing, bear in mind that on an internal basis, it is still of value to understand your hourly rate to ensure you are not underselling yourself. This is where strategic accounting comes into play, as we can help you determine how much you should charge based on your business goals. Many factors are at play when determining your hourly rate, as not all your hours are billable. For example, your internal marketing and administrative tasks are not on client time. Therefore, your hourly rate needs to accommodate for the time you clock outside of client work.
Our Orbit team recently completed this work for a client who wanted to earn more but work less. Our strategic accountants calculated where the client’s internal hourly rate should be and thus empowered her to prioritise work aligned to her goals. As a result, the client is now undertaking higher-value work, providing her with more time and money.
Bundle with caution.
With the help of an accountant, you have a new pricing structure with your costs in mind and an internal hourly rate to meet. All that is left is updating your clientele. So what do the people want?
Options. Also known as upselling, this is the part when you can bundle up your services and drive up your profit margin, provided you are doing it right. Bundling your services usually means providing a discount, so keep this in mind when pricing your individual services to ensure you stay on track with your profit goals. Project management software like Xero can help you stay on top of your costs and client disbursements to ensure you are not straying from your profit margin goals.
Your goals come first.
Warning: people-pleasers, this step will be extra challenging.
Have you ever walked into a café and told the cashier that you do not understand why a latte is so expensive and if they want your business, they should give you a discount? Hopefully, that is a firm no.
If you have worked through these steps, you have done your research, and you know your value. Take pride in it and stick with it. The clients who respect it and already understand the value of your work are the ones you want to keep. If it is not in their budget, you do not need to bend over backwards because they want a service they cannot afford. If you are happy to arrange a smaller package or a payment plan, go for it but not at the detriment of your business. Sometimes you will have to get comfortable with the word no and respectfully exercise it.
Making more possible.
Determining your pricing is no easy feat, hence the length of this article!
At Orbit, pricing is our bread and butter. We want to make more possible for you by empowering you with good numbers and smart, specific advice. If you need help navigating this new terrain, consider us your tour guide with a personalised map in the shape of a business strategy. If you want to get the price right, book a chat or get in touch today.