How to Set Prices for Services

How to Set Prices for Services

Pricing can be difficult as it can frighten off ideal clients. But even so, as a business owner, you have to make sure that you are charging enough so that you make a profit. 

You must have an understanding that every service that you are offering needs to be profitable and never misses out on any crucial parts of the calculation. Furthermore, you have to analyze each of your services offered and include the things needed in your pricing, such as any stripe or transaction fees, hourly/weekly/monthly rate, and other significant areas in your business. You can make use of the formulas in different software like Microsoft excel or Google Sheets. 

Annette will talk about how you can set prices as a business owner to have profit and a great stream of clients.

Highlights of this episode:

  • Importance of profit
  • How to set your pricing
  • How do you know if you’re profitable?
  • Activities that you can do to make sure you are pricing correctly
  • What should be included in your pricing

Resources:

Listen To The Episode

Listen to the episode on the player above, click here to download the episode and take it with you or listen anywhere you normally listen to podcasts.

Subscribe To The Financial and Lifestyle Freedom for UK Business Owners Podcast

book a call button

00:00  How do you set your prices that will allow you to earn a profit and attract ideal clients?

Pricing can be complicated. How do you set your prices that will allow you to earn a profit and also attract ideal clients? I'll show you how it's done in this episode. I am Annette Ferguson, I am a Chartered Accountant and Certified Profit First Professional and I run Annette & Co., a U.K. based accounting firm. There are two key things to consider when pricing your services - profit and value. So let's consider each of these in turn. First of all the profit. Of course, each of the services that you offer in your business needs to be profitable. However, many people when they are looking at the profitability of each service, miss out some incredibly crucial parts of the calculation. So first of all, you want to look at each of your service offerings individually and work this out for each in its own kind of silo for your business. Now, I want you to write down the price you are planning on charging for that service, or thinking of charging, or you have a service already, the price you are charging. The easiest way to do this is in something like Excel or Google Sheets, so you can make use of the formulas and calculations. However, you can just do this on pen and paper as well. And if you're a VAT registered, I want you to do this exercise, excluding VAT do not include the VAT in the calculations for the income or for the expenses. So exclude VAT completely from these calculations.

01:34  What are the costs to service one client?

And next list the costs to service one client. Make sure you include any stripe or PayPal transaction fees in relation to that one client. Typically, that is a percentage of revenue that the payment processors will charge you. Make sure you include any direct time that you are using to service that client. Put in what your hourly rate or your hourly equivalent rate is based on how many hours you work in a week and what your monthly and weekly take home might be, and work out what your equivalent hourly rate is, and therefore what your time is worth that you're spending on that client as well, add that into the costs. If you have any team members servicing these clients, then make sure you add in what their time is, make sure that you add in any time that your VA, for example, might spend on onboarding them, or ongoing checking calls, or servicing that client. And also any software costs that are applicable, perhaps you pay a license fee for each new client you bring on board to give them access to a piece of software or anything like that. Make sure you add in those types of costs as well. All the direct costs are associated with servicing that client. Now you might be asking, do I do this per month or per year? Well, that depends on how you offer your service. So you might want to look at doing it for a month. If you service clients on a monthly basis, it might be that you get clients to sign up for three months worth of services. And then that's how your contract works, in which case look at it over that time period. Whatever makes sense for your business. You could also look at it if you have clients who are just unrolling monthly, what is the average length of time that they are with you and you might want to look at it in that way as well.

03:29  How do you know if this is the right price for your service?

So this is the point where most people stop, they go, "okay, well, here is my revenue here my expenses", although many do tend to leave out their own time in this calculation. But many people just stop here and they say, "okay, therefore that number is positive. I am therefore profitable on my services." But this is not the point to stop the calculation, we need to keep going. Because there are some key areas that we need to add in here to truly ensure whether this is the right price for the service we're offering. Because you see each client needs to be able to not only contribute to the overheads of the business, but also to things like your corporation tax. That means you need to include in the calculation, a contribution to overheads. Now this number can be quite tricky to work out. But here is a way that you can get a ballpark figure of what to put in here. Look at the total overheads for your business over whichever time frame you have chosen to do this calculation. And then look at the typical number of clients that you serve at any one time over that time period and divide the total overheads by the number of clients. That will give you an approximate number for the amount of money that each client needs to contribute to the overheads of the business, and you can then slot that into this calculation. Now we need to work out the tax. How much tax do we want to allocate to each client? well we need to get our total income that we've already written down on all these expenses that we've got written down so far. And we need to take the revenue minus the expenses, and we'll be left with a balance, then we need to take 20% and multiply it by that balance to give us the approximate tax number, we can take that off the balance, and we basically get our net profit that each client is going to contribute to our business.

05:26  If that number is negative, then it’s time to stop looking at it.

Now, if that number is negative, we have a problem, the client is not profitable, or the service itself is not profitable. So the first thing to do there is, we know that we need to increase our prices for the delivery of that service, or reduce our costs in order to make it profitable. But if that number is positive, then it's not actually time to stop looking at it, because we need to consider the second element that we spoke about, and that is value. Now if you're getting value from this video, if it is resonating with you, I would love if you make sure you hit that like button. So value, the price that we've come up with in that first section, it might not work for your business. Because if their value isn't there in that pricing, you might get some clients coming in, but the problem will be that they're not going to say very good things about your business and they're certainly not going to refer other people to you, if they don't believe the price they paid was great value for the service that they received. So we need to make sure that we have value layered in so that, when people come to us, they understand and they get great value. And they refer other people, they say good things, they give us testimonials and all those good things which help fuel and drive our business forward. So how do you establish if you are giving great value? Well, here is an exercise that might just help establish that. Now ultimately, it is the market that decides whether you are good value or not.

07:03  If you feel like you are delivering great value for the price that you are offering, do this exercise.

But this little exercise can help from your perspective to work out if you feel like you are delivering great value for the price that you are offering. So for the service that you've just worked on, and the price point you've just worked on, I want you to list out all the things that you include, at that price point. Every single thing that you and your team do to service that client, even the things that you don't tell them about, but you do anyway. I want you to list out every single thing that you do every single value that you deliver, and how it's done. I want you to list that all out. And then I want you to assume that there is a law that has come into place that says you must double your prices, it is absolutely required that you have to double your prices. And I want you to think okay, what additional value would you add in if you had to double your prices? If you were forced to double your prices, what else would you layer in there for your client? And let's say that another law came and it said you did double it again. So now you have a double doubled price or quadrupled price, essentially, what value would you deliver? Again, if you had to deliver at that price point, what would it be? And then I want you to consider is there any way in my business that I can deliver the doubled doubled value for the doubled price? So is there any way that I can deliver the value for the quadrupled price, essentially, but give the client at the doubled price?

book a call button

About the Author

Owner of Annette & Co. - Chartered Accountants & Certified Profit First Professionals. Helping online service-based entrepreneurs find clarity in their numbers, increase wealth and have more money in their pockets.

Build Your Implementable Profit Plan

Change your profitability and stop feeling like you are working so hard just to make sure you can make payroll each month, with the Profit Plan method.

>