Are Your Rates Right? Step-by-step Guide To Setting Your Prices

One of the most difficult things to establish when you’re setting up any kind of service business is how much to charge for your time. Get this right and you should have plenty of customers and a business that pays you well. Get this wrong and your new business may never get off the ground.

If your prices are too high, your customers will go elsewhere - but, if your prices are too low you could end up working all hours for months on end simply to break even. Or worse still, to lose money!

One of the most frequent mistakes made by new businesses of all types is to think that people are only motivated by price in the buying decision. Consequently, a common initial approach is to find out what others in the same line of work are charging and undercut them… don’t fall into this trap.

Give the matter a bit more thought, after all, this is to be your livelihood and it’s essential that you’re paid a proper and decent amount for your time and expertise with the proviso that both you and your customers feel you are giving value for money.

The following method may not be the simplest in the world, but it is probably one of the most dependable. Use these guidelines to establish what your true market value is for the service you are offering.

What would an employer pay for your time?
Firstly, research what you would earn if you were working for a local employer in a similar field. If you’re a freelance bookkeeper check out large companies with their own accounts departments. If you’re a car mechanic, check out local vehicle repair companies and if you’re a private tutor, check out schools and colleges or adult education centers and training companies.

Spend some time looking at job vacancies online and in the local newspapers and get a good idea for the average annual salary for your line of work in your area.

Important Note! As most full-time employees get 4 weeks’ paid holiday per year, in effect they are only working for 48 weeks out of 52 â€" and you’ll need a break too. This is taken into consideration in the calculations below.

I work as a freelance Personal Computer Tutor for adults and in my local area the current annual earnings for full-time college tutors and those working for private IT training companies is around $51,000. I’ll use this figure as an example by calculating how much I should be charging for my services.

How much is this per working week?
$51,000 divided by 48 weeks is $1062.50 per week.

Business running costs
Unlike an employee, you will have to cover your business running costs. You will have to establish a figure for your own business expenses according to the service you are offering. Fortunately in my business these are comparatively low as I don’t need premises or expensive equipment. My biggest expense is my car. Your business may be different so make sure you take everything into account here, right down to envelopes and paperclips.

(At this stage do not include purchases for specific jobs such as replacement parts for a vehicle as these would be charged to the individual customer on top of the charge for your time).

General business expenses may include:

Gasoline / vehicle running costs (not including any proportion for your private use)
Advertising and promotional activities
Office supplies and stationery
Computer (hardware, peripherals, software, consumables)
Training costs if you need to keep your skills up to date
Telephone, cell phone and internet charges
Insurances including business insurance and personal health insurance
Professional membership subscriptions and trade magazines
Miscellaneous (parking costs, postage etc)
Tools of your trade
Premises costs, etc

Although it may be difficult to be precise when your business is just starting, try to measure as accurately as possible how much your overheads will come to each year, then divide this figure by the 48 weeks you will be working.

My own business expenses come to about $15,300 per year, so continuing with our example:

$15,300 divided by 48 weeks is £318.75 per week business running costs

Add this to my weekly earnings target:

$1062.50 plus $318.75 is $1,381.25 weekly income target

How to use this figure to calculate your hourly rate
Assume at this stage that you have 40 hours available to work each week - this is in line with most full-time employees. Consider how many hours out of these 40 you will need to spend on non-earning activities such as traveling between appointments, carrying out administration or promotional activities. Let’s assume, for the sake of our example, this is 10 hours per week (25% of working hours). Subtract this number from your total working hours to reach a figure of 30 chargeable hours.

Now, divide your weekly earnings target by the number of hours you can actually charge your customers for your time.

Continuing with the example above my rate would be:

$1381.25 divided by 30 chargeable hours = $46.04 per hour (round down to $46.00 per hour)

To summarize then:

1. Local average salary divided by 48 weeks.
2. Expected general business overheads per year divided by 48 weeks.
3. Add the above two figures together to reach a weekly income target.
4. Work out how many hours you will be directly charging customers for after subtracting non-earning hours (such as administration and traveling).
5. Divide your weekly earnings target by this number of chargeable hours.
6. The resulting figure is your hourly rate.

Important Note! Using this method, it doesn’t matter if you’re working on your business full-time, part-time or for a bit of extra income â€" your hourly rate should remain the same. It’s based on a method which enables you to cover all your costs, (including 4 weeks'paid time off) and still earn the â€oegoing rateâ€� for someone in your line of work.

With the figures from your initial research, use the same method to establish a guideline as to how much your time and expertise is worth in your own local area and currency. Of course there is always room for some flexibility and ultimately you will have to determine what your local market will bear, but this is an invaluable method for ensuring you are not undercharging for your service or significantly overcharging.

Of course, for those of us that do work on a freelance basis, we realise there are many more benefits to being our own boss than mere financial reward!

And always remember, the most valuable thing we all have is TIME - so please, do not undersell yourself!