How do you decide how to price your services (Your hourly / daily rates)?
I am currently trying to understand how self-employed, freelancers, consultants etc. price their services in the right way, specifically anyone that charges for their time (by the hour or day).
I’d be grateful if you could let me know how you worked out the pricing for your services, including any specific examples, if possible.
So far, I believe that the following should be factored into pricing calculations:
1. Covering your personal / business costs
The amount you need to charge to make the work worth your while, in terms of charging enough to meet your personal costs, business costs and to make a profit
2. Understanding the market rate
Establishing what the expected costs are in your market / niche. Some initial thoughts: Competitors websites, wages paid for similar salaried positions, rates paid for similar contractor / consultant positions. I’d reall appreciate any advice you have on how to do this effectively.
3. Competitor analysis
Finding out what your competitors charge, either through understanding their hourly / daily rates or doing some ‘mystery shopping’ for a particular scenario or service. Again, some specifics of examples here would be great.
Am I missing anything out when setting rates, outside these three areas? Any feedback / comments very gratefully received.
Above all - value yourself! Believe in who you are and what you have to offer - it's very easy to reduce prices, but currently very difficult to increase them, so enter the market with a price that reflects you. If this means you go in at the top end of competitors pricing, then do so, so long as you have a good marketing and presentation vehicle that will prove to your customers why they should chose you and what added value you can give.
You probably will not like my answer as I tend to contradict what is taught in books. I believe each client is different based upon where they are in there growth. We have similar businesses and if you truly want a broad base of Clients you are going to have to climb out of the box. Some of my competitors follow a strict cost structure with no room for the Client to feel comfortable. We go so far as to not charge any up front costs with Clients and work off a percentage of what we save them while increasing sales and profits. Then we have some clients that pay us $1,000 and up per week per location. I have picked up some large clients that package our services into selling their products, We started off with mostly marketing support and have had to open off shoots of what we do based on what our Clients need. It sounds complicated but what suits your Clients needs should be what you are trying to accomplish. Hopefully you will offer something that your competition does not so you will be the obvious choice. Most clients talk to me about percentages and I ask them one question. CAN YOU PUT A PERCENTAGE IN YOUR BANK ACCOUNT? Then the question comes what would they rather have? A thousand clients spending $30 or ten thousand spending $20. Be careful not to price yourself out of today's market. I hope this helps and feel free to contact me for some advice.
Cost are not important. It is all about value that you create for the customer. There is no direct relation between cost and value.
The core rule of business is very simple: Make more than what you spend!
Each business is different. Regardless of the industry, going market rate, and all of that stuff... to stay in business, one has to make more than spending. It sounds like common sense, but I've seen so many businesses (large and small) sink because they do not follow this simple rule.
We never price our services based on what my competitors do. We price it based on the quality of service & product that we provide. Competing on price has repeatedly been proven to be a bad strategy. But competitor analysis can provide valuable information about marketing, positioning, and the marketplace ... but not pricing.
There is another factor I have encountered in the past - I'm sure some still employ it - usually by businesses that don't put the price of their products or services on their website (something I hate with a passion):
They factor in the type of cars they see in the client's car park when visiting their offices as part of their 'relationship building' approach to customer relations.
The more expensive the cars - the more they feel they can charge.
Pricing should be in the endb ased on two factors: 1) How easy is it for the purchasure to understand the price 2) How does it fit into a sales presentation if needed. Hourly or total price or daily should fit into an advantagous place for the purchaser to understand the price and its benefit.
Another approach I use is to ask my clients for feedback after I provide trainings. When they have responded very well, I ask : "How much more would you pay for this and still consider it a great value?" I have subsequently raised the prices of workshops by 20-80% based on their responses. They have continued to attend (at the higher rate) without hesitation.
I base my pricing on the size of the company. Most of the people I deal with are small business owners who are new to the development process. By allowing potential customers to choose from a menu (a-la carte), I can suggest what that particular customer needs and what they don't. I'm not going to sell someone on the idea of having a website, if they don't need one... As with the new client I'm working with now. His market has no need for a website and more and more, I'm selling people on social media marketing, which in most cases is free!
Never have an hourly rate. Instead consider a value you provide rate.
Great article on value pricing there!
Paul, as Brian says. Find the minimum price that will cover your costs and provide a small profit and find the highest market price. Somewhere in that margin lies what your potential clients will pay. But do take into consideration your client, you might want to adopt a policy of low cost or even free advice for less well off businesses and a higher price for the very well off clients. Regular customers may be retained through a discount package. The best thing is to get to know your customer and make your fee comfortable for them.
I think your factors are good ones, but I didn't factor in competitor pricing when determining my hourly rate. I do, however, consider the intangible "fairness," that is, the reasonable bottom-line business contribution my services provide. Also, you might want to consider the length of the commitment; if someone is retaining services for an extended period of time, it would be reasonable to factor this in to cost calculations, as most consulting engagements require more resources at the start.
Paul - Aside from what you've already considered, focus on the VALUE (i.e. ROI) you bring to each client... And, start from the value/ROI that you add when you make proposals to prospects. Clients won't get hung up on your fees if they know your involvement with them is indispensable.
You also need to understand your customer or potential customer and their needs. Setting a base rate is fine but rates are negotiable depending on the job - the length of engagement, task difficulty, etc
Paul, you've been given many great ideas. I would add one thing: sometimes you want to think about pricing on a per-project basis.
For example, I have a long-standing relationship with a Fortune 500 client. I was engaged by one director and continue to do work for that individual/department. Sometimes, however, another director will get in touch. The price we agree upon is grounded in the level of confidence in each other that we have achieved. Specifically, that I will finish the task and that the fee is fair to both parties.
Of course if the assignment changes dramatically, then it is time for a conversation - which has happened twice over the course of 7 years.
I price my service at the rate I believe is appropriate at the time based upon my knowledge of the market for my skills.
The only other rule i apply is the 'Working away from home rule', in which I arbitrarily add £75 a day to my day rate to cover the cost of accommodation and eating out. That sometimes prices me out of the market for long distance roles, but my logic is that if I'm going through the hassle of working away from home i expect to feel it's worth it, otherwise I'm not going to be doing my best for the client and as I've told some agents I would obviously be tempted by similar money closer to home.
This is the most difficult question. What helped me a lot is the e-book Don't just roll the dice by Neil Davidson. Link: http://downloads.businessofsoftware.org/dontjustrollthedice.pdf
You can read the book "Rework" by 37signals also.
Paul, I am sharing a link with you which has helped me calculate my consulting fees properly: