How do I determine the price for my products/services?

Many entrepreneurs frequently struggle with setting a fee schedule for their work. While it’s tempting to set a low price and cut profit in order to lure customers, this strategy will almost always backfire. Some customers may resist your attempts to increase prices later on, while others will be suspicious of what they are receiving for such a great price.

Trade journals and professional organizations often publish baseline rates and fees on a national, regional or local basis. Networking with other entrepreneurs can be instructive, although some may be justifiably reluctant to discuss their fees with potential competitors. You also want to learn the rationale behind various price structures to arrive at appropriate rates for your customers.

A good starting point is to set an hourly rate. As you gain experience, you’ll be able to set flat fees based on the amount of work, supplies and other resources that a job will require. Often rates can reflect what a company would pay someone with your skills to do the same kind of work in house.

Say a comparable full-time position for your service pays $30,000 a year. Dividing that figure by 2,000 (approximately 40 hours a week for 50 weeks) results in $15 per hour of straight pay. Next, add a percentage to cover the cost of fringe benefits that employers normally pay (such as Social Security and unemployment and health insurance). Generally, fringe benefits equal one-third of an employee’s pay. Then figure a percentage for your overhead costs: office space, equipment, supplies, vehicles and time devoted to business development and research. Fifteen percent is a common premium.

Next, consider your profit margin, such as 15 percent, for funding capital investments or future growth, and surcharges for time-sensitive assignments that may require extra effort or rescheduling on your part. Other variables that influence your prices may not become apparent until after you have been in business for some time.

Regardless of how you set a price schedule, make sure that you and your customer agree on the fee up front, especially if expenses and surcharges are involved. If the customer wants to negotiate, weigh the pros and cons of a lower fee. Is this a one-time project or the beginning of a steady stream of work? Does the client have a reputation for reliability? Will you still be able to cover your costs of doing business?

By the same token, you may develop a strong enough relationship with your regular customers to confidently offer a discount in return for a larger volume of work. Just be sure that this discount does not cut into your profit margin, and that the advantage of staying busy does not limit your ability to attract other, potentially more lucrative assignments.

Richard Strug
Greater Princeton Area SCORE (Chapter 631)
Serving Mercer and Middlesex Counties