Mary has been operating her life coaching business for two years. Three months ago, she was able to leave her full-time job to focus solely on her business. This major transition away from a full-time job is what business owners aspire to. However, Mary has also realized that she needs to have a better handle on her business finances, specifically on how much she charges her clients.
In the past, Mary has been charging hourly based on her full-time job rate. She now realizes that this pricing strategy is forcing her to work longer hours for what seems like less take-home pay. She knows she needs to rethink her pricing strategy.
For small businesses providing personal services, the owner’s pay is a large part of the business expenses, but not the entirety. There are many metrics and strategies that small business owners can utilize to determine pricing for services. Here are a few ideas to help you develop a strategy that works for your business.
Calculate Operating Expenses
You need to know your operating expenses, plus an amount for taxes, your desired profit, and the owner’s salary. This will give you the minimum you should be charging if you plan to make a profit, however it doesn’t necessarily mean that this is the price you should or can charge. It might make sense to charge less to attract more clients if your business is new.
Plan For 20 Hours/Week
If you bill hourly, you won’t be able to bill 40 hours a week unless you plan to work 50 to 60 hours. If hourly billing is your preference, plan to only bill 20 hours per week. There are always admin hours that you need to devote time to which are not billable to the client. Having a plan to bill just 20 hours will give you the flexibility to work more if you want more money while also offering enough buffer time to complete all your administrative tasks.
Monthly Subscription
Monthly recurring income is the gold standard in many businesses. It provides more income stability and allows for easier planning and projections. For small businesses without a sales team, a subscription model allows the owner to focus on retaining clients rather than constantly selling services.
Fixed-Rate Contracts
Many clients don’t like the uncertainty of hourly billing and in some industries it might be hard to substantiate your billable hours. The client has to take your word on how many hours you worked and it can create friction when you send an invoice. Working on a fixed rate helps set the financial expectations for each party.
Introductory Prices
If you are charging below your desired level and plan to increase prices later, make sure you communicate clearly that the price is a special offer and will go up in the future. We all loathe the cable companies doubling the price after the first year; don’t be like them if you want happy clients. Remember that communication is key when using introductory prices to attract new clients.
After considering various pricing strategies, Mary decided to offer a mix of fixed-rate contracts and subscriptions. Offering monthly subscriptions has been a rising trend in business and many customers are familiar with the idea. And fixed-rate contracts allow Mary to offer a fixed number of sessions so that her clients will see results. Every business should employ a pricing strategy that aligns with their overall business strategy, and remember that there will always be tweaks and changes as the business evolves.
This article originally appeared on Forbes