December 2007



 

Dear Will

Last time in Forecast I focused on credit control - how to get your money in on time! Click here if you would like to read the October issue. This month I want to take a look at another very important issue: what is your product, and how can you come up with a fair price for it?

Please forward this issue to anyone you think will enjoy reading it and find it useful. If you’ve been forwarded this issue of Forecast and would like to receive your own free monthly copy, you can subscribe by clicking here.

With best wishes,

Graham

 

  

What is My Product?

This may seem a very silly question – after all you went into business because you had an idea for a product, and you know exactly what it is, what it’s worth and what to charge for it. Or do you?

In my experience, people usually find it much easier to assess the cost of their product, and therefore what to charge for it, if it’s something concrete – a thing you can hold and touch. In the retail market, it’s easy. Your product is tangible, and it costs something to make. You can see it and hold it.

But for many of you, your ‘product’ is a service. It’s not concrete and tangible. You are selling your time, your expertise, your research, or information, and it often seems harder to put a price to it. One way of making it easier for yourself is to think of your service as a product.

 

How do I Cost the Service I Provide?

Try breaking down your service into components; consider what the output is of each component. For example, a bookkeeping service might process sales and purchase invoicing, carry out credit control, or do bank reconciliation, payroll etc. Outputs might include invoices, reconciled bank statements and reports (P&L, balance sheet).

You can calculate the cost of the different outputs as a starting point for coming up with a price for each. Calculate your true variable costs for each component: software, postage, stationery, maybe time bought in from someone else, and so on. Remember to include your time – see the sidebar for a suggestion of how to cost this. To this, add a proportion of your overheads (rent, lighting, heat etc), if they are not already included in your time calculation.

 

So is This the Price I Should Charge?

Not so fast! Too many people take only the cost of providing the service as the price they charge for it. But that leaves you with a business that’s making little or no profit! You need to add on an amount to produce a price that meets three criteria:

  1. Your potential clients regard it as fair, and good value for the service they are getting

  2. It provides you with the income you require to have the working life you want

  3. It provides something over for you to further invest in your business

To create a price for your work, take your costs as a starting point. You cannot simply add whatever percentage you fancy, as the market may not stand for it! Research the market to find out what similar service providers in your market are charging. Ask potential clients what they would consider a fair price for the service, remembering that many people are happy to ‘outsource’ work that someone can do faster and more cheaply than they can themselves.

Work out, too, what you want to earn (see Sidebar). You don’t want to price yourself out of your market – neither on the other hand do you want to work endless hours, and still not make a comfortable living. Remember too what your potential clients are doing – once you know what your hourly rate is, be sure to outsource work that someone else can do quicker and more cheaply than you can! That way you can get the best value for the hours you work, and really have the lifestyle you always envisaged.

 

How Do I Put a Fair Valuation on My Time?

Let’s say you decide you want to earn, after costs and before tax, £30,000 per year.

Firstly estimate and add in your expenses (you’d be surprised how many people forget to do this bit!). Take your office expenses (rent, phone, PC, stationery, software etc), other costs (marketing, bookkeeping, admin, memberships etc) and your pension payments. Let’s say these come to another £12,000.

That’s £42,000 you need to make in a year to achieve your target earnings.

There are 226 working days in a year, if you allow yourself 25 working days’ holiday. Don’t make the mistake of assuming you can work all of these. You’ll need time for marketing, networking, writing proposals and so on, so take maybe two-fifths – two days a week – of your time for these activities.

The remaining three-fifths – 136 days – are your potential time ‘on the clock’. Now you can make an informed estimate of the hourly or daily rate you should be charging.

Should I Give Discounts to Get Started?

Many people starting out in business are tempted to offer ‘freebies’ or heavily to discount their services to ‘get into the market’. Don’t do it! Your clients and potential clients will not value your offering if it is free or nearly so, and even if they like what you do and want you to do more work for them, you will never be able to raise your fees to the market rate later. If you really want to discount your service for any reason, always preserve your full fee rate by stating it clearly, and making it clear that the discount is for a short period only, or for a specific reason.

Practising What I Preach

I’m thinking of launching a service which I call ‘Intelligent Bookkeeping’. It will be a service aimed at businesses which are currently not using bookkeeping effectively or at all. Initially we would start work to sort out the books and establish a system. Then you would get a half-day consultation with me to explain the system and train you to keep it under control.

Intelligent Bookkeeping would then be available monthly, with useful reports and advice. I’m thinking of setting a fixed hourly rate of £25; we would work out together how many hours you need each month and stick to that amount.

I’m asking for feedback from you. Would you find the Intelligent Bookkeeping service useful in your business? Is £25 the right hourly rate? Do you have any comments or alternative suggestions? Click here to Email me, or call me on 01993 771100 and let me know your thoughts.