When customers ask “How much does it cost?” do your palms sweat?
In talking with hundreds of young entrepreneurs I know that for many, pricing goods and services can feel random and stressful. For example, new freelancers and consultants tend to undercharge, while female business owners tend to drastically undercharge.
Fear of turning customers off with steep rates can undermine an entrepreneur’s desire to make a profit. This is a direct path to burnout.
In contrast, it is ideal to be that business that makes enough to actually put money back into the business. You are investing in marketing and proactively attracting new clients that you want to work with—clients that can afford your services and appreciate your work.
Pricing services is one of the most important things you will do for your business—after all if you don’t get paid you can’t keep the lights on. So, when you come up with a proposal you must consider not only your labor, but also the additional costs of running your business.
Your pricing should account for costs such as health insurance, office space, gas for your car and your technology. Also, if you are an entrepreneur living on one of the two coasts you can charge twenty percent higher than suburban, Midwestern and Southern counterparts. I live in the Bay Area—housing is a pretty penny.
No Need for Hourly Billing
Over the years it has been considered “status quo” for consultancies, PR agencies and service-based companies to employ hourly billing practices. However in the age of the knowledge worker, hourly billing no longer makes sense.
Alan Weiss, a pre-eminent authority on consulting, has written incredible books that navigate the waters of opening your own practice. Weiss is a pioneers of value based fees—charging a client on the value generated rather than hourly billing.
In his book Value Based Fees, Weiss asserts that “if you leave $50,000 ‘on the table’ each year because you’ve failed to charge that equitable compensation, in ten years you’re a half-million dollars poorer, and that is revenue you will never, ever recapture. If that number is $100,000, then you’re a million dollars poorer.”
Did you perk up? That is a million dollars you could use to grow your business, start another business, or put toward your retirement.
Weiss believes hourly billing doesn’t make sense when it comes to an agency or consultancy. He notes, “the client is best served when issues are resolved and improved quickly, but the service provider is best served when the time involved is lengthy.”
Hourly billing ends up costing the client possibly more. It’s also a headache for consultants to keep track of billable hours which often don’t factor in knowledge, creativity, and relationships.
So, if you are just starting a business, or need to revamp your current pricing strategy, here are six profitable tips on how to improve the pricing of your services:
1. Get paid “at least” fifty percent up-front.
No entrepreneur wants to chase down a client for money owed. Tracking down late payments is embarrassing for us and for them. Sometimes clients are just busy, and they forget. For whatever reason, rendering payment isn’t a priority and this is a challenge since you have to get paid.
While the more you get paid up front the better, meeting a client halfway can help build respective trust. You do this by getting paid half up front and half upon completion of the work. If you could use the cash, consider giving the client a discount if they pay the full amount up front.
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