Every day I talk to entrepreneurs who are in their first year of business. And one of the most common conversation topics is about valuation.
How much should I charge for my product or service?
It’s a tricky question, and there is no one, easy answer.
But where the real trick lies, is that most entrepreneurs (especially those coming from a corporate job) have a very hard time accepting an hourly rate for their service that is significantly higher than their salary. (I’m especially talking to you, if you cringe at the idea of charging $100/hour, or $800/day or more for 1 days work)
And this is the killer.
Not getting this piece right is how I see client after client struggling 1 year, 2 years and even 3 years into their business.
Because they don’t take into account their business expenses. It’s as simple as that.
Too many entrepreneurs don’t create even the most basic business plan. Or, if they do, they gloss over the financials.
Gross Revenue is NOT the # to focus on for 1st time Entrepreneurs
And, as the year rolls along things crop up, bills need to be paid and they realize their initial price offering was too low. (I could get into the topic of the number of business owners that “fail” in the first year, but not today. We all know they’re depressing.)
Before starting a new business or before making another sale PROMISE me you’ll take 20 minutes, or even 1 hour (if you need it) to really look at your expected expenses for 2012 (you can use my “Are You Charging Enough” Hourly Calculation, if you need guidance). And then reverse engineer what your rates should be. And then, how many people you need to talk to (or be in front of) by week & by day.
It’s never as scary as you think it could be.
And it’s an easy way to success.
Action Steps (grab a piece of paper, or open an Excel spreadsheet if you’re comfortable with it):
- What are your expenses for 2012? (include those seminars you want to go to, office supplies, insurance, your cell phone bill, etc). This number is what we call “Break Even Point”
- What is your desired Income? (Net Income, after the expenses you calculated in step 1)
- What is your hourly rate, or how many products do you need to sell in order to reach your Desired Income?
- How many people do you need to connect with, in order to make this many sales? (it’s easiest if you already know how many people you talk to before you get 1 sale “conversion rate”. Or how many people sign up for your newsletter before buying a product, etc)
Knowing these basic numbers WILL give your mind something very tangible to work with. And as 2012 moves along you’ll be able to easily measure, without having to get deep into your accounting software, or spending countless hours analyzing anything.
It’s not as scary as you thought, right?
Brilliant post Loralee!
It simplifies something that so many people fear immensely.
I think the other major error first year entrepreneurs forget to take into account when pricing their products and services is the time spent on ‘backend chores’ i.e. bookkeeping, general administration. They need to include ALL of these hours to ensure the ‘salary’ they receive justifies the workload.
Cheers, Caylie
You’re so right! a 40 hour billable work week is creates a lot of general admin & bookkeeping work and of course, networking & bringing in new client work. What a delicate balance. Thanks for bringing this to the table.
This is great info Loralee — Definitely a must read for anyone in business contemplating changing rates or newbies looking to set them!
Thanks Melissa! I really appreciate your feedback. ~Loralee
Thanks for this Loralee – back to basics, but so much needed. I am very guilty of under-charging and not taking into account the little expenses that always crop up.
This is such a delicate one, isn’t it Jan? It can be a challenge to really step into charging enough. I applaud you for noticing. That’s a big step in itself. Best of luck.~ Loralee