Establishing Your Rates
One of the most common questions people ask about starting a new service based business is “how much should I charge?” In many cases, it can be a difficult question to answer. I know this is off topic from going green content but as social media consultant, professional blogger and speaker I am asked this question so often by others just starting out I want to take time to address what I can never address in a quick email or conversation in passing.
Like I said, establishing your rates can be difficult to gauge. If you charge too much, you won’t get any clients, especially if clients can go to other service providers providing similar services for a lot less. In my industry of blogging and social media there seems to be a lot of competition but I’m sure many industries are like this!
On the other hand, charge too little and you won’t make enough. Even if you get clients, you’ll have to work so hard to make money that you’ll probably burn out. So how do you figure out the right balance? How do you charge as much as you possibly can, without pricing yourself out of the market? Let’s take a look.
Commodity or Value Service
There are two ways to sell services: Commodity sales or value sales.
A commodity service is one where you’re competing within an established market. For example, if you’re doing voice-overs on Voices.com, you’re competing in a commodity market. Since you’re competing with other voice-over people who’re charging $X per minute, you can’t charge a lot more than the same amount. What you’re selling is a commodity, even though it’s a service.
Value sales aren’t sold based on where the market is at. Instead, it’s sold based on what the service is worth to the client. For example, when a Fortune 500 company decides to re-name their company after a merger, they’ll often go and hire an outside naming firm to help come up with a name.
That firm isn’t going to be hired based on what other firms charge. There’s no bidding market. The client isn’t going to go out and look for the cheapest naming firm possible. No, they look for the best. And what the firm charges is based on what the value is worth to the client. That’s why just coming up with a name could be worth several million dollars. Do you have a million dollar value service or the resume and experience to show your worth the money you charge?
Even the same type of service provider can often reside in both commodity and value markets. In the commodity markets, you have designers on sites like eLance and oDesk that pretty much have to outbid one another to get jobs. On the other hand, you have high end designers that charge $20,000+ per job because they build value in their brands. You obviously want to have a value service and set yourself apart from your competitors.
So, before anything else, you need to ask yourself: Do you want to offer your services in an existing service market? Or do you want to try and sell yourself outside of that market and build value in your own service?
The former is much easier. You can make sales in hours or days, because you’re plugging into existing markets. The latter is much harder, but you can price yourself a lot higher once you’re successful. Most bloggers and social media consultants I know are finding themselves in the latter trying to build value in a special service and when they’re successful they make more money. I can list several bloggers I know that are now many great money because of their hard work, value added service and how they’ve set themselves apart and grown their network, expertise level and list of clients and testimonials.
Use sites like eLance and oDesk to figure out what other online service providers are charging. Look on internet forums in your industry and look at discussions of what others charge. In my industry there is a lot secrecy, bloggers don’t often reveal what they charge so it might be hard to determine this is you’re a blogger. My advice is to ask your close online friends for tips and advice or a range – some might be willing to share! I often download media kits to see what the rates are and by looking at their stats and my stats I can determine an average.
See if you can determine what the median is. Figure out what most people expect to pay. Then also figure out what the maximum amount charged seems to be. In other words, try to figure out the standard in the market, as well as the upper end of what people are willing to pay. This is all over the board for the blogging and social media industry with bloggers charging various rates based on influence, experience and what their total package offer is but it also various on what brands, PR and private business is willing to pay. I’ve learned from pitching and being pitched what ball park rates are but I also know what I’ll work for and have to set some boundaries for my self and my business to not undervalue my worth and services.
Supply and Demand
This is especially important if you have a specialty. For example, if you’re a finance writer who specializes in the energy industry, your services could be worth a lot to the right person. You’re a lot more valuable than just a freelance writer, because you have the background and experience to do a very specialized kind of work.
Look around and see if there are other people like you on the market. Are there people providing the kind of services you provide, with your specialty? If so, how much are they charging and is there a reason they are charging so much? A blogger or social media consultant with 5 plus years of experience, high influence and a large client list might have earned the right to charge so much but they might not have started out that high. Take these points into consideration when looking at what others on in your industry are charging.
Then look at the demand for your services. How many potential clients are there looking for services like what you offer?
The less supply and the more demand, the more you can charge. My advice is try to set yourself apart from the competition and find something the others do not offer.
Determine Your Hourly Goal
This decision isn’t based on the market. It’s based on you.
How much do you want to make? For example, let’s say you’re replacing a current job at $50,000 a year with your service based practice. You’re prepared to work 40 hours a week, which comes out to 2080 hours a year.
If you divide the $50,000 by 2080 hours, you get $24 an hour. This is the amount of money you need to make in your business in order to replace your current income.
Figure out how much you need to make. This could inform how you market your services and how you price your services. If you find that your potential earnings are a lot lower than how much you want to earn, it could even help you decide whether or not to work in the industry at all. When I left my full-time career in the early childhood administration profession I had to look at the income I wanted to replace but also the life style I wanted to lead and where I wanted to be in five years. I factored all of this into my decision when making the career change.
The amount you need to earn on a per hour basis is not the same as what you charge your client. Remember: Running a business is a lot more than just client work. You need to manage a website. You need to market. You need to respond to emails. You need to respond to phone calls. Will you hire someone and if so what is your overhead costs? Oh and do not forget taxes, you have to pay taxes on the income you make and how about health insurance and liability insurance?
Figure out what percentage of time you’re spending on actual client work and what percentage of time you spent on unpaid business related tasks. Then figure out how much you need to earn from your paid work to compensate for your unpaid work.
If you don’t know how much time you’ll be spending on client work yet, assume it’s half. If you need to earn $25 an hour in total, then you need to bill your clients at least $50 an hour to make your earnings targets.
Are there costs to your business? For example, if your goal is to be a professional public speaker, you have to factor the costs of flying to your destination as well as accommodation in your prices. If you’re a piano tuning specialist, you need to factor the cost of renting (or owning) vans to move pianos into your costs. As a blogger and social media consultant I factor in travel, overhead for assistant or tech support, taxes, cost of hosting and web fees and business supplies such as cameras, items I want to review, a new printer, etc.
Don’t just look at how much you need to earn. Look also at how much you need to spend. Those costs need to be factored into your rates.
Knowing your target hourly rate doesn’t mean you have to charge by the hour. Often time’s your target hourly earning rate is just for your own information. The best way to charge for your services is to use the pricing model that’s most expected in your industry.
Nobody hires a copywriter per hour. Instead, they pay per piece for the copy, plus perhaps a percentage of earnings.
On the other hand, nobody pays a personal assistant on a per-job basis. Personal assistants are almost always per hour.
Content writers on the other hand are often paid either on a per-job or per-word basis.
There are a lot of different ways to charge for your services. Try to figure out what the norms are in your industry. Use your target hourly rate to inform how much you charge, but express your rates in a pricing model that makes sense. In the industry of blogging most bloggers charge based on the campaign, a package with multiple services or per service. Personally, I offer advertising spots, sponsored posts, hourly consulting, long term consulting with a long-term contract for financial stability, campaign options that include Twitter parties, promotion, conference travel, etc and list this in my media kit but I’m always open to discussing what the clients needs and customizing work. The industry is still new so I’m learning, revising and constantly tweaking to be serve my clients and my business needs.
Start Low, Then Raise Your Rates
When you’re just starting out, you should price your services relatively low but not too low you do not want to work for free or hurt those in your industry setting the bar too low. Look for the median of the market and either price yourself right at the median, or 10% to 20% below the median. Do not work for free because you’ll sell yourself short and those in your industry. This is a common problem with my industry because too many people work for free to start out! I experienced this myself but starting out seven years ago at $50 per sponsored post is nowhere near where I am today but I had to start somewhere and so do you.
Starting lower will help you get your first paying clients. This will help you fatten up your portfolio as well as get you your first batch of positive feedback from real clients. The feedback and the recommendation from your clients will help you justify raising your rates in the long run.
This will help boost your credibility for future clients. As your practice starts to fill up, start raising your rates. Anytime you hit 80% capacity, raise your rates.
To sum it up, start by determining whether you want to price yourself in a commodity market or to build value in your own brand. Next, research your market to see what others are charging and to find out how much supply and demand there is for your specialty. Figure out how much you need to earn, what your costs are and what pricing model makes sense. Finally, start low (not too low) and gradually raise your rates as you build more credibility and gain more experience.
Why not? Great tips for free!