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As more and more people find themselves twisting in the financial wind, they often to turn to consulting or providing other services for hire.

One of the most pressing and important issues you face as an independent service provider is how to price your services.

While the following will not tell you what to charge for your services, it will give you a number of things to consider. But, before we go into the nuts and bolts of calculating, let's review some basic marketing principles.

First you have to think about how you want to position yourself in your market place.

• Do you want to be the low cost leader?
• Do you want to be the high-end expert?
• Are you introducing unique new services?
• Are jumping into a mature market full of established competitors?

Obviously, how you want to position yourself affects your message? It is very difficult to try to position yourself as the leading expert when you are trying to compete on price. Sadly, your chances of being perceived as the leading expert when you price your services too low are very slim. You may be thought of very good for the price, but you will never be perceived as the top dog.

Here are a couple of examples to drive home the power of perceived value.

Imagine your friend's son or daughter is soon to be married and you are shopping for a $50-$75 wedding gift. You know the bride loves crystal. So as you are shopping you find a beautiful crystal bowl. So beautiful in fact, you are afraid you won't be able to afford it. You almost walk away, but decide to flip the bowl over and see the price.

Tentatively as your allow your eyes to focus on the price tag, you see two things.
#1 it is a brand you do not recognize. And,
#2 the bowl is only $17.49

Instantly, fear sets in. You can't possibly show up at the wedding with an $18 dollar gift, no matter how beautiful it is. So you put the bowl down and go in search of a more appropriate gift.

That my friends, is perceived value. The value you placed on the bowl is greatly diminished just because the price was low.

Here is another example. When EssentiaLink first started out, the message got confused. As we wowed our potential clients with the huge array of products we provide, the conversation always turned to price. Something in our presentation lead our prospective customers to think all of our products would be lower priced than the other guys.

It was not until we approached companies above the purchasing level and started speaking with C-Level managers that our message made sense. We were not selling low cost products, we were offering a simple procurement solution that typically lowered the TOTAL cost of procurement for non-strategic consumable supplies by 25% or more.

In both of these examples, the issue of price obfuscates true value.

Think about this with respect to the service you are offering. Are your prices high enough to establish value? Think of it this way, if your price is too low, it diminishes the perception of value, no matter how much you contribute.

Don't think so?

Have you or someone you have known ever had to change jobs to finally earn a salary commensurate with their abilities and contribution?

A very common problem in companies is that when they hire someone at say $40k per year they always think of them as a $40k per year employee. Even if the employee takes advantage of all the company educational benefits and completes 2 degrees, they still see him/her as a $40k per year employee. Consequently, they only move them up the pay scale based on small annual % increases. So this highly educated and trained individual has no other choice but to seek financially rewarding employment elsewhere.

And the company that hires our hypothetical employee for $70K will always perceive him/her as being a $70k employee and so the cycle starts again.

Are you inclined to price your services low so you can get a foot in the door?

Think about it, will your services ever be valued for the benefit they provide?

Also, imagine a group of CEO's are having social lunch. What do you think will capture their imagination more, the fact that one of them hired a functionary for a nominal fee or the fact that another just committed a bundle of money to an expert to come in and shake things up? If you are the high priced expert that gets results in that crowd, you are going to open far more doors than the perceived functionary.

So here are some things you must consider when pricing your services.

• What is your true cost of providing your services?
  Obviously you have the cost of travel, printing, office supplies, phone, Internet and so on but there are a lot of hidden costs that get over looked. For Example:
  • The cost of business licenses
  • 7.65% FICA and self employment tax
  • Your health insurance
  • Additional Car insurance to cover liability of using vehicle for business
  • Banking and Phone services are higher for businesses and many banks will not allow you to cash checks as DBA
  • The cost of incorporation and/or maintaining O & E insurance to limit exposure to liability.
• You need to charge for marketing time.
  As an employee everything is taken care of, but when self employed you need to plan to spend at least 25% of your time on marketing efforts. Even if you have the perfect gig, it is going to end and if you do not maintain marketing efforts, you may have extended periods of $0 income.
• You deserve to have benefits too.
  As an employee you probably had a number of benefits that comprised your compensation package. For Example:
  
  • 7-10 Paid holidays
  • 7-28 Paid vacation days
  • 0-14 Paid days of medical or personal leave
  • Continuation education benefits
  
  Benefits vary greatly from company to company, but regardless of the level of benefit you are used to, there is an associated cost that must be taken into consideration.
• Do you have children?
  Typically, unless you have found a way to make the 4-Hour Work Week work for you, your home business will place more demands on your time than the old 9-5 did. With that in mind, you may expect an increase in child care costs.

Ok, let's wrap this up with a nice little formula to give you a way to think about how to price your services:

Let's define the terms of the equation.

• S = The desired salary or effective salary you need to replace.
• AC = The expected annual cost to be in business including licenses, phone, banking, insurances etc.
• B1 = The annual cost of your health Insurance benefits
• B2 = The annualized cost of other benefits you want to replace (i.e. $2,000 / year for certification / continuing ed)
• OE = Other expenses such as child care you may need to take into consideration
• PTO = Paid Time Off hours (i.e. 8 hrs. per day for each paid day off you want to replace
• CHR = The calculated hourly rate you need to charge to net your desired salary (S)

The Formula
CHR = (S+AC+B1+B2+OE) / (2048 - PTO) * .75

An Example

• S= $100,000
• AC = $1,000
• B1 = $12,000
• B2 = $2,800
• OE = $900
• PTO = 160 (2 wks vacation, 5 holidays, 5 paid days off)

CHR = ($100,000 + $1,000 +$12,000 + $2,800 + $900) / (2,048 -160) * .75
CHR = ($116,700) / (1,888) * .75
CHR = $116,700) / (1,416)
CHR = $82.41

Notes and Conclusions

Given the above example, your would want to start by pricing your services at $82.41 per hour. But this is just a starting point. You also need to consider what the market will bear. That does not mean your are limited by current market prices. But if you are too high, you must build exceptional value into your offering. By the same token, if your prices are too low, you may need to raise them to the appropriate level to garner the respect and reputation you want.

Also not taken into consideration in the calculation is your current business tax structure. If you are an LLC, you have more deductions than you would have as a sole proprietorship. If you are a C type corporation and work the system properly you can deduct a lot more, but risk double taxation if the corporation makes a profit. These are all topics you should discuss with your Tax Adviser.

If your down time between jobs or time required for marketing efforts is greater than 25%, then adjust the formula from .75 to whatever number represents your situation.

Finally, the 2048 is based on a 40 hour work week. Chances are you will will be working a lot more than that. So you may want to adjust to rate up to reflect overtime. Or not. It is just something to keep in mind.

So, when you run the numbers, are you charging enough?