Yesterday I had a chat with a client that was so hardcore, we both grabbed a bottle of wine. The topic of our call? Pricing. For many business owners, the reason their business just isn’t as profitable as they need it to be boils down to poor pricing. Deciding what to charge can be confusing, but pricing yourself for profit (not for what you think people will spend, or what other people charge!) will bring you one step closer to running a profitable, successful business you’re proud to call your own!
All too often, I see business owners bursting onto the scene charging so little, they are essentially paying to be in business. Unfortunately, many entrepreneurs follow their passions and decide to run a business so they can do what they love, and they never take the time to learn the important business basics. I don’t care how good your pictures are, or how witty your cookbook is, or how cute your rain-boots for cats are.
If you don’t know how to run a business, you are setting yourself up for failure, and pricing for profit is something you need to have down to a science if you want to be successful.
The majority of business owners that don’t invest into learning how to nail the business logistics will fail. They will quit because the bank account has gone negative. They will damage relationships because they neglect the people they care about while they flail around aimlessly trying to figure out how to save their business. Premature wrinkles will form because they’re losing sleep, and their yoga pants will feel snug because they’re stress eating while trying to drown their sorrows in a Netflix marathon.
It’s harsh, but it’s reality.
The good news? I’m not going to let it be yours.
First things first. Financially, what are your goals? Why is making money important to you? Where does the money you make need to go? If you’re in a serious relationship, I urge you to include your partner in this conversation. You might be surprised what they expect you to be making!
P.S- your goals should have nothing to do with how much money your competition is making, or how much your friends are making at their 9-5 jobs.
Knowing what your goals are is one of the most important factors when it comes to figuring out how to price yourself correctly.
How much money do you want to put in your bank account each year? Perhaps you want to be able to pay all of your bills each month. Take out a pen and paper and get real about your expenses. Write down every bill you pay monthly, and write the total. If something is billed every few months, divide it so you get a monthly total. Find the average for your utilities.
Don’t skip anything! A few memberships with small monthly fees add up!
Setup your chart like this:
So, if I only wanted to make enough to cover my monthly bills, I would need to deposit $3,351 into my bank account each month.
But I don’t want to just make enough money to pay my bills, and I’m guessing you don’t either.
Aside from the obvious things I need to buy each month (groceries, gas, etc.), I want to be able to have some fun. I want to go out to dinner, have drinks with friends, take my daughter to the zoo, and keep fresh flowers on my dining room table at all times. Let’s say on average, after all the necessary stuff, and the extras, I spend about $1,500 a month.
Well, I also like to splurge sometimes at Kate Spade. My guy loses expensive sunglasses a few times a year. So I want to put away $250 a month for a rainy day when we want to make a random, higher priced purchase, just because.
Now, I’m big on saving for the future and making sure those unexpected uh-oh’s in life do not derail my plans, so I want to make sure I’m putting at least $1,500 a month into a savings account.
I also want to pay for my daughter’s college, so there’s another $500 a month.
Since I’m self-employed, I need to save for retirement. So, say another $500 a month.
Thankfully, I don’t have any debt other than my car payment, but if you have any student loan debt, good loans or bad loans, credit card debt, or whatever else, be sure to add that into your monthly numbers.
In order to do all these things, I would need bring home $7,601 per month.
Once you figure out what you need to net in order to live in the way you want to live, take that monthly number and multiply it by 12 to get the yearly amount.
I actually multiply mine by 13, to give myself a little wiggle room.
So, I would need to put $98,813 into my accounts per year in order to meet my goals and have a one month padding.
Since you’re self-employed, sweet Uncle Sam will take around 32% of your income for taxes. So, multiply your yearly number by .32.
That’s the amount you’ll need to pay in taxes each year, so go ahead and tack that onto your yearly number. Now, my number is up to $130,433.16.
Remember, you’ll also have business expenses. Office supplies, travel expenses, continuing education, software, monthly subscriptions, client gifts, etc.
Write down every single business expense you can think of, and add that to your goal number. I spend about $1,800 a month, so that’s another $21,600 per year.
Last but not least, add any other expenses you want to pay for. I want to be able to take an awesome vacation once a year, and while on that trip I don’t want to have to worry about a budget. So, I’m going to add $7,000 to my yearly amount.
Voila! If my goal is to pay all my monthly expenses, plus save for my future, while still splurging once in a while, paying my taxes, and spending money on my business, I need to make$159,033.16 per year.
Now that you know how much you need to bring in yearly to reach all your financial goals, you need to decide how many clients you need, and how much you need to charge them, in order to make that happen.
Unfortunately, I can’t walk you through this part as easily, because it is going to be so different for every industry, but I can give you some tips for figuring out where your sweet spot is!
We’ll start by taking that gross yearly income, and cutting it back down to a monthly number. So, divide it by 12 and see what you get. This is what you need to be bringing in each month.
Now you need to decide how much you want to work to make those numbers happen. You can either charge more and take on less clients, or charge less and work with more clients.
The easiest way to figure this out, across the board, is to decide how much you want to work. The numbers should come second if your goal is to run a business, not have your business run you.
So, how many clients do you want to take on each month? Think about how many hours you spend with each client, either providing your service or producing your product. Don’t forget to add in time you spend on marketing, emails, and other back end business tasks.
Let’s say you need to make $10,000 per month.
If you work with 10 clients each month, you’d need to bring in $1,000 from each client. Maybe that seems like a lot for what you do, and you’d like to lower that a little. So, you decide you can work with more clients than that.
Say you can comfortably work with 5 clients per week. That’s 20 clients per month. Now, you’ll need $500 from each of them to hit your goals.
Maybe you can do even more than that because you only spend an hour or two tops with each client, and you’re comfortable working full time hours, so you decide you want to work with 8 clients a week (32 clients per month). Now, you need to charge each client $312.50.
Obviously, you’ll need to adjust the monthly amounts depending on your goals. Maybe all you really want is to pay for a vacation each year, because your husband makes more than enough to support your family and whatever you bring in is icing on the cake.
Maybe you’re a single mom that needs to bring in a large amount to ensure stability for yourself and your little ones.
Everyone has such a different situation, and entirely different goals, so no two formulas are going to result in the exact same answer. Pricing is personal! But, if you follow these steps, you’ll know exactly where you need to be!
So, I want to know, were you surprised by your numbers? Is the number you came up with close to what you’re charging now? Do you have any other pricing questions? I’d love to hear your thoughts, so shout them out in the comments!
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