Effectively Pricing Your Consulting Services
Are you making what you are worth? Is your consulting service valued appropriately for the market? Is your annual income at the desired level?
Entrepreneurs and small business owners often struggle with the question of pricing. They may over or under-price themselves for many reasons. They often forget that pricing considerations are complex based on years of experience, type of service, demand for the service, market expectations and many other factors.
Being self-employed offers lots of benefits, but it also means you are paying 100% of social security taxes, insurance, and other benefits typically shared with an employer. This makes pricing from the outset a critical consideration.
Lots of people are squeamish about pricing. They may fear that pricing too high will knock them out of the running with competition.
Others may believe that pricing too low makes them appear amateurish. And pricing too far off the mark is an indicator that you really don’t understand what your target audience values.
So, what do you do when it comes to pricing? Here are a few considerations to get you started:
1. First, decide how much you want to make in a year.
Whether you’re selling a product or a service, this is a critical first step. Not only will it help you determine a price, it will tell you whether or not this type of business will support the income level you desire. Let’s assume your target is an annual minimum income of $100,000 pretax for a financial consulting business.
2. Second, determine billable hours available to work.
Not all hours produce income for small business owners. There is paperwork, inventory management, planning, online content development, marketing, and lots of non-billable hours that go into a business.
If you have 2,000 hours available to work per year (50 weeks times 40 hours), assume 500 hours are non-billable for administrative tasks. That leaves you with 1,500 hours to provide services.
3. Calculate how much you need to charge per hour to reach your income target.
In our scenario, 1,500 hours divided by 100,000 is $67 per hour.
4. Determine the market value of the consulting service.
What are people paying for similar services today? Will they pay $67 per hour, more, or less? What advantage do you offer that impacts your pricing?
Someone with two years of accounting experience cannot command as much per hour as a CPA with 20 years of more complex experience. Clients hire you for your expertise and ability to accomplish a specific requirement.
Your experience and testimonials speak volumes and support your pricing. If the market will bear $125 per hour for the service you offer, you have options. Charge the higher amount and work less than 1,500 hours annually—or, work 1,500 hours annually and make almost $188,000 income annually!
5. Set your price.
Once you determine what you need to make considering unbillable hours, business expenses, and what the market will bear, it’s time to set your price. Consider everything you bring to the table as a consultant in your field of work.
In our scenario above, pricing at $67 per hour would be well below the market value.
Not only do you leave money on the table, you are not fairly compensated for what you offer compared to others in a similar business. You are not taking advantage of your skills, experience, education, accomplishments and other factors that influence price.
Taking everything into consideration, you can set a price for services that is fair and equitable to you and your potential clients. Once your price is set, don’t apologize. Others will often question or attempt to negotiate prices, but you must stand firm on pricing.
Many small business owners feel intimidated when it comes to talking money, but always remember that you are worth what you charge for services.
Note: Pricing for products rather than services requires evaluation of cost of goods, shipping, competition, and a variety of other factors.