And how do you decide what that amount actually is? With Our Profit First Expert Laurie
This article is ideal for serviced based businesses who are currently charging an hourly rate. I plan to reveal to you your true worth!
Say you currently charge $50/hour. Times this by the time you have available in your business, say 40 hours per week. Your ‘potential’ income is $100,000.
Now I say ‘potential’ income because this is only if you sell every single block of time you have available, best case scenario.
$100,000 is not too bad right? But, this is also the maximum limit to your income.
Here are the real numbers:
$20,000 Operating Expenses (being very frugal I’ve based this on just 20%)
$5,000 Up-levelling money (reinvesting into your business)
$20,000 Tax (you could maybe get that lower by seeing your tax agent or financial advisor with some tax reduction strategies.)
$ 4000 Profit (the reward your business pays you for all the time and effort you pour into your business. You can pay it as a quarterly bonus four times a year, pay off debt or build a buffer.)
Owners Pay = $51,000
Is that what you were hoping to make when you went into business for yourself?
Remember this needs to cover obligational expenses, long term expenses, fun money, financial freedom and quality of life savings goals.
OK so say we flip the equation and work out what you really want and need here…
Start with your take home pay:
- $10,000 Profit
- $85,000 Tax
- $60,000 Operating Expenses
- $355,000 in sales. Divided by time available (30 hours/week and 48 weeks/year)
Hourly rate = $250/hour
$250 per hour!!! Does that scare you off? Are you thinking, that’s just impossible? My target market would never pay that! What gall do I have charging that sort of money!? If I’m only charging $50/hour right now, how on earth can I justify $250 an hour!
If you believe you are worth more than your current maximum income level, (or will one day, hopefully soon) let’s see what your pricing might really look like…
A new way of thinking
OK So now, I want you to throw out the concept of charging by the hour and explore this concept with me…
One of the businesses I own is a web design business which has had a six-figure profit for over 5 years now. And we will let you in on a secret… we didn’t earn over 100,000/year in profit by charging an hourly rate.
We absolutely started off doing that.
When we first started playing with the idea of owning our own business, my husband and I were still both working full time jobs, we were 21 years old, just married, already bought a little house because we knew we would have to wait two years to use our business numbers for the bank and our charge out rate was $30/hour.
Our justification was; I’m not accessible during normal working hours so I can’t charge that much.
We saved a three month buffer, and told ourselves if we can’t get our dream business up and running in three months, we will pack it in and go get jobs for the rest of our lives. Our price went up to $50/hour.
We put everything into that three months, door knocking, dropping off business cards, telling everyone we knew (facebook didn’t exist in its current form back then).
Our very first client was my leg waxing lady who wanted pricing menus and a logo.
To cut a long story short, we survived our first year of business… just.
Gradual price rises
Over the next few years, our hourly price went up each financial year between 5-10% to ensure we were keeping up with inflation.
Then we had a light bulb moment about time vs money. As our experience built and we had the skills to get jobs completed quicker than in the past, it wasn’t so important now, how much of our time, was being charged.
The moment we realised when we created a logo for a new business, they were using that logo, to establish their brand, and use it on EVERYTHING, for years to come! They could be using that one small piece of artwork in 1000 different places! They were getting so much value out of that one hour logo we put together, and therefore it was worth more than just one hour of time to that client.
If you are charging an hourly rate, aren’t you really just selling hours?
So you need to set your prices based on Value. The impact or outcome your service has on your client or your clients business, not time.
Look at your pricing from a clients point of view. They don’t hire us to design a website for the sake of designing a website. They hire us to design a website that is going to help them GROW their business.
When you look at it from their perspective, it is clear we are not selling time. I’m selling them a solution, to help that client achieve an objective.
So how do we set our prices then?
One of the first questions we ask a new client is ‘tell me why you need a new website”. They might say,
“We believe a new website will generate us $100,000 annually for our business”, or “If just one new client finds us through our website, that would mean $20k worth of income for us.” (They might not straight away but we keep asking to get the right information from them.)
So if we asked them to make an investment of $20,000. They would make it back with just one new customer arriving through the website. Wouldn’t you invest $20,000 to generate $100,000 each year if you had it? That’s a 500% investment increase!
Yes, we would still be spending time on that project, so we theoretically could work out our hourly rate of about $400/hour.
Would clients think that’s too high?
You are not a collection of hours. You are the accumulation of skills, talents, wisdom, experience and creativity! You are not a punch card. And your clients don’t see you that way either.
Yes, I’ve been caught by mindset in the past, especially when I first started my second business Budget Beyond.
I thought charging $100 an hour was ridiculous! I was big time suffering from impostor syndrome.
Thankfully since then all the wonderful client testimonials and mindset work I have done over this last year has helped me overcome it. And the key was, that I had to stop selling time and start selling an outcome.
Since there are only so many hours in a year, it puts a cap on how much revenue you can collect in a year. And it means the only way you can make more money is to work more hours. These are limits. They are false limitations that lead to bad behaviours like burning yourself out working around the clock in an effort to earn more.
Even if I was in the same industry as you and had a higher price tag per hour on my head, it still puts a revenue ceiling on my business.
Plus, it doesn’t serve my clients…
Selling hours actually creates a conflict of interest.
It puts you and the client on opposite sides of the table.
If you are selling hours, it’s in your best interest to take longer, to bill more hours. But your client is interested in getting solutions that work as promptly as possible.
What if you work quicker for one client than another, but deliver the same value? Should you penalise the client you worked for longer? If your slow, it’s not their fault. And if you are getting quicker (like we were at designing.) It means your speed is providing extra value, you should be getting rewarded for completing work faster, not charging less because it took less amount of time.
Our clients don’t care about our costs.
They care about the value we create for them. So that’s what we should be asking them to pay for. But just because my clients don’t care about my costs doesn’t mean I don’t.
Which is why I see it as my job to always look for ways to create value for my clients so I can charge fees that will more than cover my costs, making my businesses profitable.
When you are pricing yourself too low, you make yourself vulnerable to something taking longer than expected or having an unexpected low month and once again, being worried about your cost vs time. Low months happen to everyone.
Charging value-based prices instead of cost-plus prices, will give your business the margin of error you need.
So, I can hear your next question…
Valued based pricing will mean being more expensive for my clients, and clients want to keep their costs down. Why would they pay us $20,000 for a website when someone else would charge $2000 to build the same website?
Here’s the thing… It wouldn’t be the same website.
When meeting with a potential new client. How often is pricing one of the first things you talk about? They want to know your rate and how much things will cost them.
When you start off talking about price you are putting your needs ahead of theirs. For us, they actually don’t want a website, they want revenue.
There are 7 mutual benefits of exploring value with your clients:
- Creates Trust When I start off by asking my client questions, they see that I am interested in understanding their unique problems and crafting solutions based on what I learn. It inspires trust because they know I’m not trying to push cookie cutter packages that I force on everyone.
- Fosters Alignment We agree on two points, where they are now, and where they want to be.
- Helps your client better evaluate vendors It makes the deciding factor on value not price (and you get a leg up on the competition if they haven’t shown like you have, how you will deliver impact.
- Frames the solution as an investment not an expense It’s a point of difference, no one likes expenses, so clients will try and keep them as low as possible.
- Inspires action When I help a client paint the big picture, they become emotionally involved and are eager to make those results come true.
- Lets your client make an informed decision They know if they want to pay less they have to choose for less to be delivered, that puts them in the drivers seat to make that informed decision.
- Establishes a partnered trust As soon as their investment in you translates into real value for them, you become a trusted partner, someone they will continue to work with. They will also become champions for you, leading you to other opportunities.
Not just a dog walker, not just a designer, not just a bookkeeper, not just a coach…
It all starts with you… and how you see yourself… and your clients will change how they see you.
Being money confident isn’t an overnight process. You have to grow your way into it.📷
Mindset is just one step. There is a whole ecosystem to get your business and personal finances in balance – Laurie