Posted by Gene Fairbrother (NASE Lead Small Business Advisor) - The NASE business consultants have spoken with thousands of members about how to set their pricing, and we've put our heads together to come up with four of the top questions on how to value on all your blood, sweat and tears.
1. How do I overcome income inconsistency?
Just about every business experiences ups and downs in cash flow, but it is a simple fact of business life and you have to plan for the lean times. For example, some sole practitioners are not very good at marketing. They wait for a contract to run out or a project to complete and then look for new clients. Can you imagine Dell computer waiting to sell their last computer in the warehouse before they market for new customers?
You can’t wait until you need business before you start marketing. Several hours every week should be spent in identifying potential new clients, new work from past clients, and making contacts to build future business.
Many business owners also don’t like to deal with the “numbers”. So, when money is rolling in, they don’t plan for slower times. All they know is that the bank balance is flush!
You can’t judge finances by how much is coming in during good months. You have to look at how much is going to come in over the total year and budget accordingly. If a freelancer is making $10,000 a month for 9 months out of the year, they can’t live like they’re going to make $120,000 a year.
2. How do I charge what I'm worth?
A mistake many small-business owners make is to under value their products and services. A common scenario is that a business will charge less than the competition because they think this will entice customers to give them business - which it often doesn't! What every business owner needs to understand is that customers don’t do business with you on how much you charge, but on getting the best value for their dollar!
If a computer programmer charges $85 an hour and others are charging $65 an hour, a client might evaluate the programmer in comparison other programmers who charge less.
In order to charge a higher rate, a programmer has to show that they provide a better value. For example, the programmer does their homework and shows the client that while their rate may be higher than some other programmers, they produce an end product in less time, with fewer errors, and less corporate support. This means that even though the client might be paying a slightly higher base rate, the overall project costs will be lower.
This principle stands no matter what your profession. How much is a writer worth that simply produces good articles on politics? How much more is a writer worth when they have the connections to get an interview with George W. Bush?
3. When is a good time for me to increase prices?
Presuming you validate your worth, it is better to address when not to increase your rates.
- Don’t try to raise rates outside of contract terms.
- Don’t raise rates if a client is encountering cash flow and profit deterioration.
- Don’t raise rates when a client is in their annual budget preparation.
- Don’t raise rates if your performance has not been up to standard or there have been issues with some of your past work.
- Don’t surprise your client with higher rates. Take the time to discuss rates prior to the beginning of a new contract period.
4. What is my competition charging?
Every business needs to do a competitive evaluation at least once a year. The challenge is how to get information.
If you’re a website designer, go to other designers’ websites and it’s common to find a list what they charge for developing and/or hosting a website. If they don’t list their prices, a phone call under the premise that you want them to build a website should get the information you need.
The challenge comes when what the competition charges is not openly shared. For example, if you’re an auto mechanic it might be difficult to pick up the phone and call the other shops in town asking for their rates. So, you have to be a little more covert. Get a friend to go to shops in your area with a list of things that need to be done on their car and get a written estimate.
The final step to putting these questions to work is to ask yourself, "Am I earning what I'm worth?” If not, maybe you need to lay out a plan to help you capitalize on the opportunities in your business. Even if you think you’re being paid what you’re worth, after a competitive survey you might discover that you’re worth more than you think.