Business Owners Toolbox Blog Discussions and articles to help the small business owner solve the challenges they face as they grow their business.

August 6, 2012

How to Price Your Services

Filed under: Finances — Tags: , , , , , — Mike Van Horn @ 9:35 pm

For consultants, contractors, and other professionals

How much money do you leave on the table? . . . how many jobs do you lose? . . . by the way you price your work?

This is a regular issue of discussion at our Business Group meetings. I’ve pulled together notes from several such discussions.

I would love your questions and feedback on this topic.

Hourly or fixed fee?

You should never work on a fixed fee for a poorly-defined project or one of unknown scope.

When to use an hourly rate (e.g., time and materials):

– At the beginning of a job, before you have a handle on it

– For parts of the job that inherently cannot be defined (e.g., for landscapers, “rocks and roots;” for remodelers, dry rot; for bookkeepers and programmers, repairing the goofy things your predecessor did).

An hourly rate with a cap on fees acts as a fixed price where you accept the downside risk but have no upside opportunity.

When to accept fixed fee basis, monthly fee or retainer:

– For a routine continuing task, where the scope is known and agreed upon

– For a definable new task

– If your fee is fat enough to cover contingencies.

Define the scope of the job. Answer these questions for each job: Exactly what will you do? What are the deliverables? What is not included? What do you charge for extras?

Specify the add-on services you can make available (at an extra price, of course).

Here are other terms of your client agreement that affect pricing and billing:

– Duration of agreement or contract.

– Payment terms. How much up-front deposit? When you will invoice and how soon they must pay. (Can you get payment upon completion of service? Do you accept payment by credit card?)

– Their responsibilities and timing. They must do what and by when?

– With whom you will interface and how?

– How the contract can be terminated by either party?

– When do you have the right to raise your rates?

Monthly Retainers?

Sometimes the term “retainer” scares clients. It looks to them like an ongoing contractual commitment. (Have you seen the computer commercial where the consultant says with a sheepish grin, “We are contractually entangled”?) Instead, ask for a standard monthly commitment. “For a business your size, for your needs, you probably need about ________hours per month.”

Specify your regular scope of work under the retainer. “For this many hours we can probably handle the following tasks: ______.”
These tasks probably fall into the following categories:

1. Right now problems to be solved, work to be done. This is what you’re being hired to do.

2. Ongoing follow-up and support to ensure implementation.

3. Proactive projects to be handled when other requirements are completed for the time being. (I.e., non-time-sensitive things you do when urgent tasks are handled so that they don’t think you are twiddling your thumbs and billing them.)

List and describe all these carefully, so that you will know when some request falls outside the agreed-upon scope.

Specify extra charges. For what things will the billing level be increased? Some examples:

– Tasks outside the specified scope; special projects

– Handling crises, emergencies

– Delays and extra work caused by the client not meeting their agreements with you (!!)

– Rush work that requires you (or your employees) to work evenings or weekends or shift around scheduled work with other clients

Your monthly billing must include time spent preparing reports, phone calls, attending periodic meetings and reviews, managing the project, and doing research.

Different billing rates?

You may be tempted to charge different rates for:

a) Working a greater number of hours. Suppose your hourly rate is $150 for a small number of hours. For a larger number of hours, you may legitimately give a discount because your cost of marketing and administration is reduced as a percentage of the billing on that job. But it’s also fine to keep it at $150.

b) Different tasks, e.g. tasks that require a different level of skills. For example, you may think you should charge a lower rate when you are doing lower-skilled tasks. But if so, you should also charge a much higher rate when you do your highest-skilled tasks. Often, thinking things through and coming up with excellent solutions to problems is the highest value you bring. Your rate should be $500 or $1,000 per hour at such times.

If you are tempted to charge a lower rate for lower-skilled parts of the work, then it’s time to consider hiring or assigning a lower-skilled person to do that part and pay them half to a third of what you bill them out for.

If the entire job seems worthy of only a lower rate, then it is probably not a good job for you.

Should you bill for thinking? What if you wake up at 3:00am with the million-dollar solution to your client’s problem? How much do you bill them? This could be the most valuable thing you do for them. (Make sure you turn the light on and write it down!) This shows the difficulty of billing by the hour. What would you say on your invoice, “Million dollar idea: 10 seconds”?

Should you bill for research? Some consultants say, “I’m the expert; they expect me to already know all this stuff, so how can I bill them for researching things for their job?” I question this belief. Are they hiring you because you already know everything, or for your ability to efficiently find out what they need to know? Ask your attorney: do they bill you for the time they spend researching case law in all those books that line their office walls? You betcha! Obviously you must know the basics of your profession, but beyond that, bill for research. You might tell your client up-front about how much time you expect to spend on research. A rule of thumb: the more you are expected to know without looking it up, the higher your rate should be.

Should you bill for travel time? To keep your business profitable, you have two choices: a) bill for travel time (yours and your employees’), or b) set rates high enough to incorporate unbilled travel time. Options:

– Don’t bill for travel time to nearby clients: only when travel miles are greater than, say, 30 minutes.

– Don’t bill for travel time if you spend more than _____ hours per day on site.

– Have clients come to you. Charge a lower rate if they come to you.

– Conduct some meetings via phone or do some work online.

What’s your hourly rate?

What is the proper pay rate for a lead consultant? One consultant found that competitors charge $180–$210 per hour. $160 seemed too low: she wouldn’t be taken seriously. Perhaps $185 is right. Recommendation to her from other consultants: “Make the first digit 1 rather than 2.”

Other ways of looking at pricing:

– Value-added pricing approach. What is this job worth to them? What does it cost them not to have it done? Set your price based on this.

– What do the big guys charge? If the client doesn’t hire you, how much will they have to pay someone else for work of equal quality? If your rate is too much below this, they probably won’t hire you, because you don’t seem credible.

Negotiate your rate?

Should you leave som­e negotiating room on the price? Some say “yes,” but I am against it. Don’t cut prices unless you also cut scope. However, you might say,

– “I can reduce the hourly rate by 10% if you commit to using us for at least ______ hours per month.”

– “The rate for hiring a Principal is $185, and our lead consultant bills at $165.”

– Reduce the scope: “For the price you want to pay, here’s what we can provide.”

– Or resell them on value. Why are you worth your rate?

Billing vs. pay rates

Profitable companies bill out their skilled employees for (at least) three times their pay rate. Thus if you pay an employee $50 per hour, bill them for $150. If you can only bill $120, then you should pay no more than $40.

For an independent subcontractor, this ratio should be at least 2 to 1.

Why should you get 2/3 of the money, you filthy capitalist pig? Here’s why:

– To contribute to your direct employees’ benefits, their pay for unbillable hours, their pay for work that goes over budget

– Overhead. Contribution to facilities cost, insurance, administration, marketing, etc.

– You must pay employees (and even subs) on time, regardless of when you collect the receivable. You are the banker.

– Marketing cost. You brought in the job. You must recoup the cost of time spent on all the jobs you didn’t get. For example, if you get one out of three of the jobs you bid on, then the one you get must cover the bidding cost of the two you didn’t get.

– Management cost. You may have to devote some unbillable time to managing their work.

– Entrepreneurial risk. You take the risk for business reverses and interruptions, the risk of not getting paid by the client, the liability for lawsuits, the obligation for leases, etc.

– Profit from operations. You are supposed to make money on every aspect of your business.

– Return on your investment. You put the company together and built it up. Your organizational skill, teambuilding, training, and creativity are essential and deserve an ongoing return.

All this is in addition to the amount you pay yourself for time spent on the job.

I assert that if you bill for less than twice what you pay your people, you actually lose money out of your pocket for each hour they work.

At the very least, this practice is a sign that your business model needs tuning: you are estimating poorly, underpricing, overpaying, or going after the wrong kinds of jobs or customers.

Exceptions. Pay a larger proportion of billings for valuable extraordinary contributions, e.g.:

– Rainmaker. Someone who brings in good clients or generates extra business with current ones

– Creator. Someone who develops new intellectual property that allows you to bring in increased billings.

Raising rates

It’s easiest to raise rates for new clients. But if there is a large disparity in rates between new and old clients, then you will begin to resent the lower-paying ones. It’s then time to raise your rates, or fire these customers. If your rate is below market, and your client leaves you because you raise rates, then they will end up paying even more, so why would they leave you? You know it’s time to raise your rates if your clients tell you you’re under-priced.

Should you take jobs on commission?

Have a sliding scale? Give a lower rate for non-profits or start-ups? Before you do any of these, make sure you have enough full-rate work to maintain a viable business that pays you well. Then, if you wish, set a certain percentage of your projects that you will do at a different rate. But beware! These projects are time eaters. If you are working for me on spec or for a very low rate, I have no compunctions about asking you to do just a little more.


And finally, here is my Rule #1 for pricing:

“Never subsidize anyone wealthier than you are!”

August 15, 2011

How Do You Set Prices for Your Products and Services?

Filed under: Finances,Profit — Tags: — Mike Van Horn @ 3:54 pm

Question from Alicia Terry on Linked In. She also asked, “What is your biggest challenge in setting your price?”

Set prices using two different methods:

A. What the market will let you charge, e.g., competitors

B. What costs you must cover, plus a profit margin

If A > B, charge A

If B > A, then go back to the drawing board. Perhaps you can redesign your product or service so that you can sell it profitably at the price point the market will allow.

Or perhaps you need to promote it in a way that will justify the higher price in the eyes of your target customers.

Many entrepreneurs fail to include all relevant costs when setting prices. Items often neglected: Markup on direct labor, sales commissions, freight costs, damaged goods, warranty work, project management. And #1: the value of the time put in on the job by the owner!

Small business owners underprice. They’re notorious for this. “I’m new, so I’ll offer more for a lower price.” You can’t compete this way with larger, better-capitalized competitors. It’s the route to bankruptcy.

In many fields, if you price too low, people don’t take you seriously. “Is that all he’s charging? He can’t be much good!” Charge at least what your larger competitors are charging, and demonstrate to customers why you are worth it, since you are better.

For small service businesses, look for clients who know the value of their time. If you can save them time, they are willing to pay more for that. Turnkey, troublefree, flexible, responsive–these are the things I will pay extra for. And of course friendly, personal service.

April 26, 2010

How Much to Pay Your Sub

Filed under: For Coaches & Consultants,Growth Management — Tags: , , — Mike Van Horn @ 5:28 pm
As a consultant or other professional, if you hire a skilled person to help you on a client project, how much should you pay them? How should you bill your client for their time on the project?  Here are my two rules:
— If the person is an employee of yours, bill them out at three times what you pay them. That is, if you pay them $30 per hour, you should bill them at $90. Looking at it the other way, if you can bill your client $90 for a skilled associate you assign to the project, you can pay that person no more than $30/hr.

— If they are a subcontractor, bill them at twice what you pay them. Thus if you can bill the client $90 for their billable time, you can pay your sub no more than $45.

Why must you have this much mark up? You are taking the entrepreneurial risk, doing the marketing, taking project responsibility, overseeing their work. You have to pay them whether or not you get paid. If there’s a glitch, you are responsible. If there’s a do-over or wasted time for which you cannot bill the client, you must still pay your associate. You’ve got to cover your overhead, contribute to your own salary, AND make a profit.

Why the difference between employee and sub? With an employee, you must cover payroll taxes, workers comp, etc. You may be paying them for hours that are not billable to any project.

You may respond, “I can bill my client at $120 per hour, but my sub wants $100. So I only make $20.” If you do this, you’re losing money every hour they work for you. You notice this via your feeling of  burnout: “I’m working my tail off on this project and I’m not making any money!” You’re tempted to do more of the billable work yourself–on evenings and weekends–rather than handing it off to your sub.

Instead, say, “I have this project ready to go. I need some help, and I can pay $60 per hour. Interested?” I’m betting you can find someone really qualified who will step up and shout “Yes!” Don’t let your overpriced sub call the shots. If you really need someone whose market rate (not their personal inflated rate) is $100/hr, then you must bill your client at $200.

If you don’t do this, I guarantee your business will stay in the cycle of smallness. Owners who adopt this pay policy free up their time to bring in new business, grow their business, hire and train more associates, and take more time off. Which do you want to be?

Do you have a situation where you can’t figure out how to make this work? Get back to me; give me some details. I can talk you through it.

July 3, 2009

How much would you pay for the book I’m writing on direct mail marketing?

Filed under: For Coaches & Consultants — Tags: , , , , , — Mike Van Horn @ 1:34 pm

Adapted from my answer to a LinkedIn question.


Why are you writing the book? Do you expect to get rich from the proceeds? Or do you see the book as route to attract people to do other work with you? If the latter, then your aim is to get the book into the most hands, and you price it as low as you possibly can. Perhaps even give it away.

Perhaps you respond that if you don’t charge enough, people won’t value the information. This is the rationale for $69 books. I don’t know: I think those days are gone. Except perhaps in the corporate market (a la AMACOM books put out by American Management Assn.), where purchasers are spending the company’s money.

But if you’re aiming at the consultant or sole professional market, I recommend you go with cheap or free book plus an in-depth and more pricey program for those who get turned on by it.

Author: How to Grow Your Business without Driving Yourself Crazy

Powered by WordPress