For many of us, starting and running a business means freedom: freedom to work when, where, and how we want. It can mean we’re better able to freely share our talents and passions with the world. But how do you structure your business (and your pricing) so that you don’t end up feeling constrained, responsible to do work you don’t enjoy, or even pressured to take a financial hit on a project?
The way you price your service has a lot of implications. Getting pricing right can mean the difference between turning a profit or not. It can mean the difference between being at your child’s soccer game or missing it. It can mean getting a good night’s sleep or pulling an all-nighter.
Regardless of whether you charge per hour, per project, or using a less traditional method (like a subscription model), you’ll gain clarity about your work by building a pricing model. The following tips will help you build this model so that the structure of your business works for you.
Estimate the time you need
Start by brainstorming the 5-10 most common services you offer. If you’re just getting started, this may be harder, but you probably have a sense of where you’ll focus. If you’ve been running your business for a while, dig into past sales and clients to pinpoint trends.
Using an excel spreadsheet or a Google Spreadsheet, identify the components that go into each job, service, or project, and estimate the time that each one takes. If, for example, I were offering coaching on college admissions, I might build out the following estimate for a basic service package:
I’d then do the same analysis for other packages, like SAT Prep, ACT Prep, an Essay Package, and an Interview Prep Package. If you plan to meet clients in person, determine if you want to build in travel time (and if you want to charge for it.) Get a template here that will help you identify COGS (Cost Of Goods Sold).
Figure out your COGS
Many product companies start with their COGS. What are the components that go into your service? If you’re baking wedding cakes, this refers to ingredients, of course, but make sure you also factor in things like the electricity or energy you use for your oven and the gas you need to get to and from the store. Most people underestimate COGS when they’re getting started with a business.
COGS can be harder to pinpoint if you’re in a service business, but these costs still exist. Think about the price of your phone line or your web-conferencing tool, assuming you speak with your clients. If you print materials for your clients, include those printing costs, and don’t forget the money you spend on gas or public transportation to get to and from the printer or your local Staples.
Estimate the risk involved in a project
I don’t mean “risk” in the traditional sense of walking down a dark alley at night alone. Rather, I mean the risk that the project will take longer or cost more than you expect. Knowing the risk in a certain project is especially important if you’re just getting your business off the ground. For example, what if you’re writing copy for someone’s marketing materials, and the client changes their business mid-way through; will you potentially spend 50% more time because you have to rewrite the first half?
Estimating the risk that something veers off course can save you time and frustration in the long run. Just because there’s risk doesn’t mean you shouldn’t take a client or project. It simply means you should charge more or build in contingencies, (i.e. if the blog topic changes, there will be a surcharge.) Make sure you’re documenting these guard rails in a contract with your client. Having an agreement in writing will make sure that neither you nor your client feels blindsided.
Document your work in a central place
As you’re figuring this out, make sure you document your estimates and analysis in a central place. This serves three purposes: it allows you to refine your pricing over time, it means you’re not reinventing the wheel every time you need to draft a new proposal or document, and it lets you outsource work as you grow your business.
Suppose my college admissions business is really taking off, and I want to hire someone to help me? Maybe I hire someone to help with the essay editing, so I can take on additional clients. It’s helpful to give this sub-contractor a sense of how long things take and the touchpoints I had with former clients. Ideally, you should be able to give someone access to the hard-earned knowledge you’ve accrued over time. I’m partial to Tettra software as a way of transferring knowledge, but you could also use Google Drive or another cloud-based system to share information.
Bring it all together
Once you have these building blocks, you can better determine what model to use with each job or client. If a project is fairly routine and low-risk, you can safely charge per project, (rather than by the hour,) since you’re unlikely to spend 50% more time than you think. If, on the other hand, you’re doing something for the first time or you have a client who seems indecisive, an hourly cost model makes more sense. Charging by the hour gives you more control when something goes off track.
Last, think about how transparent you want to be with clients about your business model. Most people will want basic information about how much time something takes or when it will be complete. Beyond that, it’s up to you how much or little you want to tip your hand. You may decide you like being super upfront about how much something costs, so that clients understand how you’ve set pricing. Or you may prefer to keep these details to yourself, so that clients don’t pressure you to work faster than you’d like.
At the end of the day, customer happiness will likely bring you referrals, as well as a greater sense of satisfaction in your work. Regardless of how transparent you are with your costs, time, and pricing, it’s worth making sure you communicate well. Having a handle on your own business model allows you to communicate more accurately and effectively.
P.S. want more guidance? Check out Tettra's business planning template.
Kristen Craft is Chief Revenue Officer at Tettra. Tettra builds a knowledge management that helps organizations share information more easily. With over 10 years of experience in tech and digital marketing, Kristen loves helping start-ups grow and succeed. Her past experience includes work for Ovia Health, Wistia, Transparent Language, and Kaplan (WPO), as well as launching her own start-up, Brown Box Storage. She holds a BA from Brown University and graduate degrees in education and business from Harvard and MIT Sloan. Kristen resides in Somerville, MA with her husband and two children and can be reached on twitter @thecrafty.