Do you find yourself wondering how calculate the price for your service?

Many people who start their own business are experts on the services that they provide, however they aren’t so sure how to price them.

If their prices are too much, they are ripping off their customers and this does not work in the long run. But, if they price too little, which most service providers do, they are ripping off their family, their suppliers, their bankers, their employees, and themselves.

Most owners try to determine the right prices by making a few phone calls to competitors to find out what they are charging. Then they pick a price that is slightly lower than the lowest competitor’s price.

Ed King, Director of Small Business Services at Wayne State University (Detroit) says there’s a better way.

What the competitors are charging is the last step in computing a price for a service… not the first step.

The formula:

The secret to pricing is using a formula to calculate the minimum price that a service provider should charge. The formula is: annual salary plus overhead plus 10% for profit, divided by the provider’s annual number of hours billed.

Salary is not how much owners think they are worth, or how much they would like to make, but rather what they are really worth. This is the amount of money that an owner would actually pay someone with the same education, experience, and skills who would work the same number of hours as the owner. A good place to start is the Sunday newspaper, trade journals, www.salary.com, www.monster.com or www.career.com.

Overhead is the amount of money that an owner spends per year on rent, interest, utilities, training, automobile expenses, office supplies, marketing and depreciation on equipment.

Billable hours are the number of hours that an owner is actually working on jobs or projects. No customer is going to pay the owner for time spent on training, marketing, and administration. Billable hours are usually a lot less than the 2,080 hours someone has the potential to bill. Management consultants, for example, are lucky if they can bill 1,300 hours a year.

An example:

So, now it is time to get out the calculator. Let’s say a reasonable annual salary for an owner is $50,000 (including benefits) and the owner’s overhead is $15,000 for the year. We add the $50,000 plus $15,000 plus 10% of the total costs, or $6,500. We have a total of $71,500 for costs. We then divide that by, let’s say, 1,500 billable hours per year. The owner should charge $47.67 per hour for his or her time at a MINIMUM. If a job is expected to take 10 hours, the owner should give a minimum estimate of $476.70.

The final step is to compare that rate with what others are charging. If the competition is charging $60.00 an hour, I would recommend pricing a service at $55.00 an hour. If the competition is charging only $40.00 an hour then, I would recommend getting out of this business.

Author Bio: Ed King, MBA, CPA, is giving away free memberships to his website, $100 Dollar Business Tips, that has been open only to his business students. These tips are published several times a week, giving the readers practical, specific advice that will make them at least $100. Most tips are under 50 words. To get your own username and password, visit www.100DollarBizTips.com, while charter memberships last.

Category: Business
Keywords: price a service, how to price a service, what to charge for your service