A Quick Pricing Calculation
There are times when you can over-think financial decisions in your business, to your detriment. Pricing decisions and strategy is a topic that commonly causes business owners a few headaches. It can lead to procrastination in putting out your new offer or products, and can lead to uncertainty and under-pricing.
Below is my End-Goal Pricing Approach I use with clients when we need to get the ball rolling and choose a mindful price that will ensure the offer or product is financially viable, providing a living for them and they can feel confident in their pricing.
END-GOAL PRICING APPROACH
This approach is called the End-Goal Pricing Approach because in my mind, the calculations are linear and simple. Starting with the End Goal first, what you would like to earn.
*This is not the only method I use when devising a pricing strategy; it is one of a toolbox of methods. And this will certainly suit some businesses (but maybe not all).
1. START WITH THE END GOAL IN MIND
Start with how much you want to earn at the end of the day, week or month. Why? Because time is your most valuable commodity. Calculate how many hours you can physically work to earn that amount of money. By this I mean, client appointments or the components that you charge by, not support tasks like replying to customer emails, taking phone calls, writing up notes or planning for the month ahead.
For example, if you coach clients, how long is the appointment and how many appointments can you fit in a week? This is your base number of work hours. Say you want to earn $1000 per week and you can fit in 10 clients per week.
2. ADD IN YOUR RUNNING COSTS
Operating expenses may include:
- Office rent
- Website expenses
- Telephone/s and internet
- Products used in the appointment (even stationery)
Add all those things up and divide by week. I suggest having three lists – one for monthly, quarterly and annual bills to capture everything.
Ok, we’ve worked out that it costs approximately $1000 per month to keep your business running. Divide the monthly figure by 4, so that’s $250 per week. We now need to add that to the $1000 you’d like to pay yourself a week. So, we’re up to $1250 income required per week from those 10 clients.
3. ADD TAX (AND GST/VAT)
Let’s say your tax rate is 30% (everyone’s will differ). Add tax on top of that $1250 x 30% tax (or 1250 x 1.3) and we end up at $1625. This your minimum sales income for the week. This is the amount required to take home the ‘End Goal’ you chose above.
4. DIVIDE BY THE NUMBER OF CLIENTS
Now we can divide that by the 10 clients/week and you will therefore need to charge $162.50 per client. See how we got there?
Offering a few different services? Use estimates or averages of your different services. Estimate out the rate you will need to charge and ensure it equals back to minimum sales income per week required.
Recap of all those words above: End $ goal + running costs = sales required, then add tax. This minimum sales income per week is then divided by clients per week.
Recently I completed this task down to the hour with one client:
- END GOAL = $1000/week
- BUSINESS RUNNING COSTS = $1000/week
- INCOME TAX & GST/VAT = $2000 (end goal plus running costs) x 30% tax rate (2000 x 1.3) = $2600
‘How am I going to work out how to earn that?’ She says.
‘How many hours in a week can you charge clients, love?’ I say.
We grabbed her opening hours and took off her lunch breaks (‘What is that?’ most business owners say to me. I know you’re totally busy and there’s no time to eat!). So that’s 40 hrs/week.
We now work out the average rate she needs to charge per hour.
That’s $2600/40 hrs = $65.
She told me knowing this figure is a game changer!
Her most popular services take only 30 mins, so she knows for sure they need to be priced at $32.50 or more to cover the average rate she needs to charge. When we broke it down to the hour, she knew this was now achievable.
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