A Simple Way to Solve Your Pricing Problem

A common trap early-stage service-based entrepreneurs fall into is setting their prices too low. The confidence required to know your worth and charge accordingly doesn't arrive overnight.

Remember it's your responsibility to your customers to stay in business for the long run, which means you have a duty to be profitable.

If your customers don't understand this and constantly pressure you to drop your prices, find different customers (or swallow hard and take the reality check if you're out of line to the market.) But as Seth Godin says, it's a race to the top, not the bottom.

You don't need an MBA or a background in finance to level up. Most of the time, common sense thinking and a basic grasp of the data is all you need.

Here's a back-of-napkin calculation you can make to be more data-driven and less fear-based and reactionary in how you price what you do. The end result will be greater confidence when people ask "how much?"

Here's how to price for profitability:

Determine your labor costs - your employee's average hourly rate (compensation + benefits), or your own hourly rate if you're a solopreneur.

Determine your overhead costs - all sales, and general and administrative costs go here. If you spend money to stay in business, include it. It's often easiest to look at the past 12 months of all nonCOGS and labor costs, and divide by 2080 (the typical number of work hours in a year). The goal is get to a number that represents what it costs you, per hour, to be in business.

(For simplicity, we're assuming you have one client who is covering all your costs. If the client occupies a fraction part of your time, determine that and multiply your all-in-hourly cost by that percentage).

These numbers together represent the all-in-hourly cost for you to operate your business. The fee you charge per hour must exceed this by the profit margin typical in your industry. If you're uncertain, start at 50%. This becomes your stop-loss price.

Put another way, figure out how much it costs to take great care of your client, add a profit margin, and go from there.

Remember that the profit margin required to stay in business is different than the profit margin required to grow your business.

In order to add more and more value to your customers, you need to have enough surplus to invest in yourself, your team, and your systems and infrastructure, to be an even better version of yourself next year (where you'll raise your prices to reflect the additional value added.)

And your best clients will gladly pay it because they want to work with professionals who are in it for the long term. That's you.