Find out how much money you’re really making in your business, and how to adjust your prices accordingly.
Pricing your offers can be tricky, especially in the early stages of business. When I started working with clients on their pricing, I quickly realized that many were setting prices without much rhyme or reason behind them. I’ve heard everything from coming up with a number on a whim, to basing prices solely on what competitors are charging. Trust me, this is NOT the way you want to calculate your prices.
The problem with setting your rates this way is that there’s no backbone to your pricing.
[bctt tweet=” Your prices should be based on a logical and repeatable calculation, so that you can confidently share your prices knowing that they’re justified.”]
Today, I’m going to help you do just that.
I’m sharing the process I go through with my clients to help them understand their numbers, and make informed decisions about their pricing. 9 times out of 10, this process reveals that they’ve been undercharging, sometimes by a whole lot. By the end, they can see all the underlying time and monetary costs in their business, and confidently raise their prices knowing they’re justified. Sound good? Let’s get started.
Personal Expenses First
Before you start looking at you’re prices, let’s take a steps back. You need to know your personal expenses, and what you need to make each month to meet your personal income requirements. This is why you went into business in the first place right? You’ve got to take care of yourself first. Try to find both your NEED number, (the bare minimum you must make each month), and your WANT number, (enough to afford extras and have the lifestyle you want). You want to aim for the WANT number, but it’s important to know the non-negotiable amount that you can’t dip below.
A good way to calculate these numbers is to look at your expenses, and categorize how much you spend on different things. This process takes time, and you may need to pay track your spending for a month or so to get a clear picture of where your money is going.
Also consider how much you made in your previous job and the income you want to replace. Were you making enough to cover your expenses? Do you want to make more than that?
Whatever the number is, you need to know your personal expenses so you can pay yourself enough to cover them.
Next, Business Expenses
Now let’s look at the costs of running your business. Make a list of all of your overhead costs: subscriptions, software, rent, office supplies, payments to team members, everything you spend to keep your business running. If you’re trying to replace a corporate salary, be sure to include the benefits that your company paid used to cover – this usually includes things like health insurance and taxes taken out of your paycheck.
Add up your business expenses (don’t forget taxes!) + your personal expenses and you’ve got your minimum that you need to make every month. Calculating your expenses this way helps you see the full picture of everything you’re spending (or would like to spend.) How are we doing so far? If these numbers don’t reflect what you’re currently making, hold on. We’re not done yet.
Time = Money?
You’ll also want to consider the number of hours you work each week when calculating your prices. Don’t get me wrong, I’m not suggesting you charge your clients an hourly rate, or that you create a business model where you simply trade time for money. But you need to know how many hours you’re working and where that time goes, to get the full picture of how much money you make.
Do you know how much time you spend on the different tasks in your business? If you offer services, how much time do you spend on each stages of a client project? If you sell products, how much time do you spend making or curating your offers? Don’t forget about the marketing and admin work that keeps new clients coming in the door. While these aren’t things that your clients pay for directly, they’re essential parts of running your business.
You can use a free tool like Harvest to track time and break it into categories and see how much time you spend on different activities. Many of my clients, are apprehensive at the thought of tracking their time so meticulously, but it doesn’t have to be restricting. Think of it as an experiment. There’s no need to judge the time you spend on different tasks, you’re just getting an idea of where the time is going. And you don’t need to track your time forever. Commit to doing this for one week, and I promise you’ll gain amazing insights about your business and how you spend your time.
Also think about how many hours you’d work in an ideal week. Would it be less than you’re working now? You have your NEED and WANT number for your personal income, now calculate your CURRENT and IDEAL weekly working hours.
Crunch the numbers
You have all the info you need to look at your numbers and get an accurate view of where you are now, and where you’d like to be. Here’s a recap of the numbers to keep in mind:
- Average monthly revenue in your business
- Total of all business expenses
- Amount you NEED to cover personal expenses
- Amount you WANT to cover ideal personal expenses
- CURRENT work hours/week
- IDEAL work hours/week
Here’s an example of how to calculate what you’re currently making in your business: Say you’re business brings in $4,000 each month, you have $1,000 in business expenses, and you work 40 hours each week. Subtract the business expenses, and you make $3,000/month, or $750/week. Divide that by 40 hours/week, and you’re making $18.75/hour. If you’re feeling queasy because you just realized you pay your dogsitter more than you pay yourself, don’t panic!
Almost all of my clients are in shock after calculating their hourly pay (and $18.75/hour is high compared to some numbers I’ve seen.) No matter how shockingly low the number is, the good news is that you know where you are now, and can start making a plan to get to where you want to be. Play with these numbers and plug in your ideal salary, and ideal work hours to see what number you get. You’ll start to see how you could get closer to the ideal by raising your prices just a little.
Getting comfortable with these numbers is the first step toward raising your prices and getting closer to the ideal life and business you want.
If the idea of going through your numbers and tracking your hours feels overwhelming and tedious, I want to make it easier.
Many entrepreneurs struggle with facing their numbers and building the confidence to raise their prices. This is something I work on with my clients through my DIY Bookkeeping Program. If you’re ready to take control of your numbers, and work toward a price increase that supports your ideal life and business, I’d love to help you get there through the DIY bookkeeping program.
Schedule a discovery call to learn more about how we can work together!
