Are you selling your products and services, have lots of clients, lots of work and YET every single time you get to the end of the month you’re like, “Where did all my money go?!” If this sounds familiar it might have to do with your pricing.
In this episode of The Andi Smiles Show, we’re talking all about how to price your products and services so you actually have enough. As in, how do you price your products and services so you’re not on a hamster wheel- working working working all the time, only to have a measly $5 in your bank account?
Let’s be honest- that feeling sucks.
Watch below to get the 411 or check out the recap under the video!
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3 Pricing Mistakes Small Business Owners Make
Using former employee wages to set their rate (3:17)
Here’s what this looks like: You used to be an employee with a salary or hourly rate, you transition to self-employment in your industry, you deconstruct your salary and figure out your hourly rate, and maybe you add a little bit because- hey!- you’re self-employed now!
This is not an intentional way to set your prices because you’re setting your prices based on what someone else told you you’re worth.
Not thinking about future price increases (5:17)
Choosing your prices without thinking about what you want your prices to be in the next 1-2 years will set you up for underearning. For example, you’re a brand new VA and you want to build up your portfolio so you charge $15/hour.
But, you know that in 2 years you want to charge $45/hour. When you break down how many prices increases you need to get to that $45/hour, you might find that it’s going to take 5 years to get there. And that’s a bummer.
SO- when setting your prices, think about what you want to earn 1-2 years in the future and how many price increases you’ll need to get there. Then consider where you need to start to get to that price within your timeline.
Not looking at your business holistically (7:24)
Looking at our business holistically means looking at our business beyond income and expenses. Often, we think of our business in terms of how much money is coming in, going out, and what’s left over. BUT there are SO many more moving parts in the financial landscape of your business.
For example, we have our taxes, debt to pay off, savings, and, of course, the elusive owner pay. Thinking over all of these factors is crucial when it comes to cash flow. Cash flow is the money that comes in and out of your business and cash flow is actually what keeps your bills paid in your business.
If you don’t have enough cash flow to pay your taxes, your credit card, and also cover your overhead expenses you’re going to have a really big problem.
Reactive Pricing vs Proactive Pricing
External Reactive Pricing (10:57)
External reactive pricing means you’re setting your pricing based on what everyone else is doing, what somebody else says you should charge, or what you used to get paid. In other words, you’re reacting to external messaging about your pricing and that’s how you’re setting your prices.
Now, there’s something to be said about looking at market pricing and pricing within your industry. But that’s not the only factor to consider and too often the way people set their pricing is based on what other people are doing or other what people say to them about their prices.
Internal Reactive Pricing (12:50)
Internal reactive pricing is actually really really hard on us because it comes from our inner critic. It’s reacting to the negative messages we tell ourselves about the value of our products and services.
For example, you charge $20/hour and everyone else in your industry starts at $30. You tell yourself that there’s no way you’re worth that. That’s the inner critic sabotaging you and that’s internal reactive pricing.
Proactive Pricing (14:44)
Pro-active pricing is the model we are striving for and is based on our actual, real numbers.
Your pricing should be intentional! Don’t set your price because someone told you that’s what they charge or because you believe that you’re only worth $15/hour. Instead, set your price based on careful consideration. Sit down, crunch the numbers, and figure out if that price is going to work for your business.
Pricing Formula Prep Work
Start with your costs (15:40)
Any time you’re pricing a product or services start with your costs. Costs are NOT your overhead expenses (don’t worry- that will come later). Costs are the direct costs you incur to produce, manufacture, or sell your product.
So we’re not talking about the $15 month you pay for Mailchimp (even though it does help you sell your product), but rather the manufacturing cost, or actual cost (like inventory) of whatever you’re selling.
Write down any costs related to that to whatever you’re selling.
Calculate overhead percentage (16:53)
Now it’s time to calculate your overhead percentage. Remember how I said when we talk about costs we’re not talking about MailChimp and all that stuff? NOW, we’re talking about it. It’s called your overhead and it’s what you spend to own and operate your business.
Our goal is to find out is the percentage of all of the money that comes in that goes to overhead so we can include our operating costs in our price.
First, decide on a certain time period you’ll use for this exercise. Personally, I like to do it year to date. I DO NOT recommend doing this exercise using last year’s numbers because many things may have changed in your business and your percentage will not be accurate.
Here’s how you figure out your overhead percentage: Take ONLY your expenses (so NOT your cost of goods sold- we did that in step 1) and divide that number by your gross sales and then multiply that by 100. So it is:
Expenses/Gross Sales= X
X * 100 = Overhead Percentage
Here’s an example: Let’s say your expenses year to date are $20,000. And then your gross sales are $60,000. Here’s what it would look like:
$20,000/$60,000 = 0.33
0.33 * 100 = 33%
And THAT’s your overhead percentage! (not that scary- right?!)
Set your baseline (20:15)
Can you already tell how much more intentional your pricing is going to be? But we’re not done quite yet! Now, you’re going to set your baseline- which is you declaring how much YOU want to get paid an hour.
And when I mean you get paid I mean money that YOU actually get to have- so not money that’s reinvested in the business because that’s already taken care of in the overhead percentage.
A really good way to figure this out is by reverse engineering it based on what you personally need to live off of and how many billable hours you can work a month. If you’re a product based business think about how long it takes you to make something and break that down into an hourly pay (again- considering how many of these items you can make in a month).
Build in Your Taxes (21:48)
The last step is to build your taxes into your pricing because, remember, as self-employed people we get taxed between 25-30% of our net profits. Often what happens is that people get to the end of the month and they’re like, “I hit my sales goals. I hit my spending goals. But I don’t have money left for taxes! WTF!!!”
Well, it’s because you never built taxes into your pricing. So it’s really important that you do that so your taxes aren’t siphoning off the money that YOU are supposed to make.
How do we do this? Simple! Take your baseline you figured out earlier and multiply that by your tax savings percentage. That’s what you’re going to add ON TOP of your rate. For example, if you charge $20/hour and you save 30% for taxes it would look like:
$20 * 0.30 (this is 30%) = $6
The Pricing Formula (23:58)
Now, we’re at a point where we have all the numbers we need to calculate our prices! The last step is simply putting them into a formula. SO- before you get to this point, be sure you’ve gone through the prep work and have all the numbers handy.
Also, the formula might look a little scary to you. DON’T WORRY. You got this. And if you’re still feeling a little scared, I have a free pricing worksheet that will do all the calculations for you! The formula has 3 parts:
Step 1: Baseline + Tax Savings + Costs = Starting Price
For example, if your baseline is $20, your tax savings is $6, and your costs are $0 it would look like this:
$20 + $6 + $0 = $26
Step 2: Starting Price * Overhead Percentage = Overhead Cost
SO- we are simply multiplying the number we calculated in Step 1 by your overhead percentage, which ensures your rate covers your overhead cost. For example:
$26 * 30% = $7.80
Our overhead cost per hour is $7.80!
Step 3: Starting Price + Overhead Cost = Final Price
The final step is to simply add together the numbers from Step 1 and Step 2. Going back to our example:
$26 + $7.80 = $33.80
And now you can round that number up (never down!) probably to something closer to $35/hour.
And- voila- you have a SUSTAINABLE rate for your business!
Still intimidated by all the math? Download my free pricing worksheet and watch the demo which starts at 27:00!
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