When you sell services rather than products, pricing can be a challenge. Consulting, coaching, workshops, mastermind groups, professional speaking, and one-on-one services of all kinds — all these services require you to think strategically on several levels so you can be profitable in your business.
Don’t just charge what your competitors charge.
Don’t just charge the lowest price.
Don’t roll the dice and guess.
Instead, do the math.
1. Determine what you need and want to make
Part of the calculation in setting service fees is how much you need (and want) to make. If you first decide how much profit you want, you can then “reverse engineer” the math to determine what to charge in order to make that profit.
It’s necessary to do a personal and family budget first, to determine the minimum you need to bring into your home each month. Do you have a personal/household budget as a baseline?
In addition to that minimum, add the amount you’d like to make which would give you the lifestyle you want. It’s not enough to simply bring in the baseline amount – set a goal for the full amount you want to bring home each month when you have a successful business. (While income isn’t the only measure of success, NOT making enough money in your business will bring frustration and dissatisfaction.)
Take time to dream a little. If you could earn as much money as you ever wanted, what would you spend it on? Maybe you’d send the kids to college. Or go to Paris. Or tuck it away for retirement savings. Or give to your favorite charity.
When determining your business revenue and profit goals, consider your business expenses, both routine ones and wish list expenses. Maybe there’s a conference next year you want to attend in Bermuda? Or you need to replace your printer soon. Perhaps now is the time to hire an employee or subcontractor to help you grow your business?
2. Research your fee structure options
First, examine carefully your skill level. It is common practice in business to charge based on skill. The more skill and experience you have, the more you charge.
Also, consider the value of the results you get for your clients. If those results are something they strongly value or need, they’re often willing to pay more for those results.
You have several choices on how your services will be billed:
- per hour
- per session (regardless of how long a session lasts)
- per month
- per project
- per “program” (you define what the program includes and how long it lasts)
Next, find out what others are charging for similar services in your industry and location. You may have a difficult time getting clients if you set your fee at $150 per hour when other providers in your area are only charging $90 per hour, unless you have more experience, are more well-known, or have a unique offering that is different (and better!) than your competitors.
One interesting note is that you often can charge much more in big cities than anywhere else: in the suburbs you might be able to charge $75 an hour and in New York City charge $150-200 a hour. And even within a city, you might be able to charge more in exclusive neighborhoods compared to middle-class neighborhoods. Keep your eyes open to the subtle differences in pricing structures all around you.
Look at your target audience. Are you trying to reach high-income people or is your target somewhere else on the economic spectrum? Are you intending to sell to corporations, or to non-profits? Knowing your ideal target client can also impact your pricing model.
Ask others in your industry what they charge. It is not collaboration or price-fixing to simply inquire as to industry norms. Ask your attorney if you have concerns about enquiring within your industry about pricing.
Another consideration is how much you paid for your education. As an example, some coaches can spend $4,000 to $6,000 to get their certification. An MBA can cost 10 or 20 times that. These education expenses need to be figured into the mix when setting fees. You’ve got to recoup those expenses and make a profit, too! And the more education you have (and the more experience you have), the more valuable your services to your client.
Finally, decide if you will offer discounted fees and how you will apply them. Some people create their fees on a sliding scale, based on what the client can afford. Others offer either full fee or free sessions, with no discounting in-between the two extremes. Some take one or two free clients per month as a way to give back to the community. Some offer discounts with a deadline attached. The choice is yours.
3. Determine your payment policies
Decide if the client must pay in advance, over time, or after the work is complete.
Also decide if you will offer a discount for early payment of invoices, say a 5 percent discount if paid by a certain date. This encourages those clients you invoice to pay their bills early, thereby giving you earlier access to your cash.
Finally, if you will be invoicing clients, determine how much time they have to send you the payment. Typical time periods are 15 days or 30 days after the invoice date. You must be willing to be assertive in collecting past-due accounts and be firm with people who don’t pay on time. For example, if your policy is that payment must be received in your office by the first day of the month, consider warning, then firing, clients who habitually are late in sending in their payment.
Note that if your customer is a corporation or organization, they might have a standard 60-days-to-pay cycle, so find out what their practice is before agreeing to a contract.
EXERCISE – How many sessions do I need?
To reverse engineer your revenue, you need to determine how many one-on-one sessions (or how many clients/contracts) you need in order to make the revenue you want.
Let’s use the “one-on-one” sessions as an example; you can substitute “sessions” for “contracts” if that’s the way you’re doing your billing.
For this exercise, you’ll need a piece of paper and a calculator.
1. Calculate the income you need to bring into your home (after taxes and business expenses) so that you’ll have a comfortable life. Don’t short-change yourself here; be honest with what you really need and want. This number is the net profit you need to make from your business.
2. Net profit isn’t the same thing as gross income. Gross income is all the revenue you bring into the business. Net Profit is what you get to keep after paying all your business expenses, taxes, etc. Add 30-40% to that number to your desired net profit number from Step 1 above, to figure out the gross income (total income) you’ll need. This covers taxes and expenses. (Adjust the percentage if you will have higher business expenses, like employees, office rent, etc.)
3. Determine the fee you’ll charge for one session (hour/program/month).
4. Divide your total gross income by the per-session fee to calculate the number of sessions you need to do in a year.
5. Now divide the yearly sessions by 12 to determine how many you need to do per month.
6. Assuming you’ll work an average of 20 days per month, divide the total monthly sessions by 20 to figure out how many you’ll need to do per day.
1. Desired Net Income (take-home income): $135,000
2. Plus 30% to pay for taxes, expenses: 135,000 x 1.30 = $175,500
3. Per Session Fee: $80
4. Number of Sessions per Year: 175,500 / 80 = 2,193.75 (let’s just call it 2,194 to round it off)
5. Monthly Sessions: 2,194 / 12 = 182.8 (round off to 183)
6. Average Daily Sessions: 183 / 20 = 9.15
In this example, you would have to do around 9 sessions per day in order to reach your annual profit goals. Now think about this carefully: If a “session” is 30 minutes, then doing 9 of these a day is possible. But if a “session” is 60 minutes, then that means you have to work 9 hours a day, 20 days a month to make the income you want! Do you have enough time and energy to do that many sessions?
But if you raised your per-session fee from $80 to $100, then you’d need to do 7 sessions/day to earn the same amount of money — much more do-able! You can see from this example where underpricing yourself has some true negative outcomes.
Your calculations: Do the math
Net Income: _____
Plus 30%: _____
Per Session Fee: _____
Number of Sessions per Year: _____
Monthly Sessions: _____
Average Daily Sessions: _____
Look closely at that final number. Can you physically and emotionally do that many sessions in a day? What about the time you need for administrative and marketing work?
There is more involved with setting your pricing, payment policy, and revenue goals, but these tips should give you a solid foundation. Until then…be happy, be prosperous, be ambitious for the sweet life.
Very helpful article Karyn, Thank you for the details about pricing of services.
I’m glad you found it helpful, Arturo. I’m always concerned that these in-depth articles might be too much for some folks, yet on a topic like this, it’s better to cover it competely than part-way.
Karyn, This is much needed information and a great process to use. So many people (coaches) love their work and just want to be able to make that their career. But…the process you propose will yield information essential to determining how to build a life around something we love doing. One thing I would add is all of the time that must be spent marketing oneself in order to get the number of clients to sustain one monetarily.
Thanks for this. Great and important information.
Rita, I often tell people (new business owners as well as established business owners):
Do your work with/for customers. Any and all time left over from that should be devoted to marketing….and a little bit for sleep. 🙂
Good advice though I do think you multiplier of 30% for taxes and overhead is too slim.
15.5% of everything you earn below a next income of $106,000 goes for “self-employment tax” e.t. FICA or Social Security and Medicare contributions.
One must also consider a minimum of 15% – 25% for Federal income tax quarterly payments and anywhere from 2-5% for state income taxes.
A more realistic multiplier would be 50% — and that’s just to cover taxes. You still need to consider day-to-day expenses for, I presume liniment and massage table, marketing, travel to and from clients, allocating part of your home to your business and so forth. And, that is in addition to healthcare insurance costing a minimum of 10,000 annually as well as contributions to a pension plan and 2-4 weeks vacation.
Before diving in check the following:
Wages paid to massage therapists in the area. Though for income tax purposes net income is profit, it would be more realistic to consider your net profit as being what is left over after you pay yourself a realistic wage. This should be at least 10% for the risk involved in running your own business.
Be guided by competitive fees. There is no reason why an new business should undercut the fees of more established businesses unless — strategically — you want to position yourself in the market as the low-cost alternative. Storefront dentists and eyeglass chains including Costco are examples of business that sell on price. A solo practitioner would be hard-pressed to efficiently offer price concessions and still be profitable.
So before entering the business, decide what you can offer that is different (other than price) in terms of customer benefits, even if it is only your superior skills, enthusiasm and youth.
For the type of business you describe credit card payments or cash are a must.
Just some thoughts….
Good points, Dick. I’m often surprised when speaking with customers that they can’t list their expense categories off the top of their heads. Insurance, retirement accounts, etc. need to be factored in, as well as supplies, equipment, travel, sub-contractors…the list goes on and on. And if you accept credit cards (which I highly recommend for most service businesses), you have to factor in the merchant fees.
Still, when all is tallied up, it’s possible to have a six-figure business as a solo entrepreneur. If I can do it, others can do it, too. But you’ve got to “do the math,” right? 🙂
Karyn, I’m sharing this with my photography students!
This translates so well into how they need to price their services. I see it working well for family portrait and wedding photographers. Your background in the photo business is showing here!
Marlene, this can even translate into selling products or classes, and pricing them. Now, if you’re selling services “by project,” there’s more to estimating than just these numbers, but it’s a good place to start.
Thanks for posting this article, Karen. Really great information. I’m always timid when it comes to charging. Am I over-charging, under-charging? Most of the times I am sure I under-charge. Using a formula will help I’m sure.
Eleanor Farmer, CCMC
BeReady Resumes, LLC
I’m glad you found it helpful, Eleanor. 🙂
Hey Karyn, I really love the way you break down all the aspects of charging, fees, and really important…collecting! Thanks for ALWAYS providing such valuable info to those of us who can really use it!
Of course, PJ, I could have gone into much more detail, especially around estimating expenses, etc. I wish solo entpreneurs paid more attention to the details of the financial side of their business model. Sure, sales/revenue is a great number to track, but there’s so much more! 🙂
I have done consulting work for a large research company as well as doing it on my own account and this article is spot on in terms of content and method. It is obviously written by a practiced professional (as opposed to a theoretical one). The length is right for me.
Thanks for the feedback, Harry. Everytime I launch a new program, a new product, a new class…I still use a method similar to this to determine pricing in the overall scheme of my business model. (I have an extreme fondness for spreadsheets…just call me a nerd. :))
This is an excellent article for me. I am just starting out motivational speaking and coaching. This is my passion to motivate people through positive empowerment but I also want to “profit from my passion.” Thank you so much and I will be favoriting this blog and surely referring back to it. Thanks.
Best of luck and success to you, Kate, as you start your business!
Thank you, Karyn, for this very detailed and incredibly helpful info! While I’m confident in my skills as a Communications Coach, the business end of my coaching services still sometimes put me at a loss. A friend forwarded me your article — and I can’t thank her enough!
I’m glad this information was helpful to you. I like to share practical how-to business information; it IS something that can be learned, but it’s better if the concepts can be simplified and clear. But as a communications coach, you know that. 🙂
Excellent article, Karyn, with real-world advice!
You know I always try to keep it as practical as possible. 🙂
Your insight is a great help Karyn. It made think about the amount of money that I have to make every month. Maybe you can make a business certification program to train more people to spread your business knowledge.
I used to put off doing this exercise, as I did not have a clear formula. Your article came as an eye opener.
Great article. Thanks Karyn. Very useful. I did like this longer format article, as it touched both my logical and emotional part of the brain and helped me understand and give me the courage to take the next step of identifying how many sessions I can offer per day and whether I will be ready emotionally.
Thanks for the feedback, Lalitha, I’m glad you found it helpful for your and your business. These are such key questions, and once you have the answers to them, you can move on with your business growth. 🙂
As an SEO Copywriter, I usually charge 50% deposit and 50 % upon completion. However, I would like to charge completely upfront for orders that are $ 300 or more. My writing mentor advised that I shouldn’t do this because it will scare people away. I am going to take the tips from #3 and see how I can utilize it in my biz. Thanks for posting.
thanks for your informations!
So I’ve more things to think about. 😉
Yes, you do, Michaela! 🙂
The information is very useful and the length is perfect to get the point across. I will take these ideas into consideration to improve my practice.
great artikel! I am also concerned about work-life-balance. Wouldn’t it be better to devide through 11 month instead of 12 month, so people get time off to play?
Kind regards from Berlin!
Yes, Argante, you’re absolutely right! We should consider how many weeks/months a year we want to work, and do the math accordingly. Also, if you only want to work 30 hours a week, or only want to work 4 days a week, to give you the lifestyle you want, then that should be put into the mix. 🙂
How does the formula change if I sell product in addition to billing for my time?
The formula above is only for selling services. For products, you’d have to factor in your wholesale cost, any shipping cost and/or sales tax.
Tony Latimer, MCC
Karyn, love it. Except I am not sure I would have point 1 as point 1.
I agree if the maths doesn’t work t deliver what you need you will have to either rework the calks or “find another option”; but I don’t think it should be upfront.
My take would be to start with “what am I worth to the client”. And for all of us that is low at first (usually lower in our minds than it should be), then grows as our confidence and seeing client results grows.
Just feels better to me. We need to constantly improve in what we do. So maybe accept that and then ensure becoming more valuable to clients is in the equation to ensure you improve.
Sure, Tony, you can start with “What am I worth to my clients?” But that doesn’t ensure you’ll bring home the income you want. I’d rather start with your income goals first, then figure out if the price you want to charge your clients will get you to your goals. Over time, your income goals may increase, as will your service fees as you gain more experience.
Excellent, as always, Karyn. And I would agree with Dick that we need to figure in more than 30%. However, getting people to “do the math” is a huge wake-up call for so many. I always share your articles with others – and loved your closing statement: be happy, be prosperous, be ambitious for the sweet life.