I recently sat down for a chat with Tania Cavaiuolo of See Marketing & Communications.
We discussed how pricing is a topic that comes up time and time again when working with our respective clients.
Interestingly, there are some common pricing-related challenges that we both see crop up regularly and Tania kindly offered to provide her views in a series of blog posts.
Here, she looks at how to price a service (rather than a product) and how calculating your break even point can be a game changer, something I am also very passionate about!
Q: I’m struggling to know how to price my service. On the one hand, I know I need to be competitive, but I don’t want to short-change myself. Where do I start?
A: If you sell a service like bookkeeping, counselling or training, your value is held in how you draw on your skills and experience to service the needs of your clients.
Typically, you charge either on an hourly rate for time spent, or a value-based package where you set a price that takes into account the time required to deliver the service and the perceived value of the outcome from the client perspective. Either way, you need to know your hourly rate. Here’s the approach I like to take.
First, start by thinking about the salary you might earn if you were being employed to deliver that service for a company. Let’s say the salary you would pay someone in that role is $100,000 a year including super. Divide this by the approximate number of days you might work in a year. For full time salaried employees, this is about 250 days but working for yourself probably means fewer days and factoring in jobs that fall through. So I like to work on 200 days. Continuing with our example, the hourly rate across 200 days would be $63.
This gives you a baseline. Next, factor in costs that are essential to delivering your service. This might include membership of your industry body, insurances, tools for the job and other relevant business experiences. Be thoughtful about it though. Include only expenses that would reasonably be required to deliver your service to the required standard. This probably means not including the rent on a swanky city office if your clients would not perceive it as a necessary component of your value proposition. (Your accountant or bookkeeper can be a great sounding board and voice of reason here).
You should now have an hourly rate that reflects your skills and experience, the variability of working days and necessary costs of delivering that service.
Your final step is adjusting for market context. Research what others in your industry are charging. People may not publish their hourly rate on their website, but you can do some sleuthing if they list any service with price. You should be able to look at it and reverse engineer the hourly rate by determining how many hours you think is involved (divide the advertised cost by your estimated hours). Keep in mind that introductory or discovery type sessions can go one of two ways – cheaper to encourage leads, or more expensive to deflect potential tyre kickers. Typically, people starting out will go cheaper whereas more established people will go expensive.
Finally, adjust your rate intuitively according to your relative levels of experience, training and time you’ve been operating. If you’re just starting out, you may want to set your rate a little lower to get runs on the board and gain testimonials to build your future business.
This will give a rate that takes into account capability, expense and market context. And don’t forget to add GST if you are registered!
Q: What is “break even” and why does it matter when deciding my pricing?
A: Vanessa said to me “so many small businesses price at less than what it costs them to produce their good or service and it’s important to understand what a percentage change in price does to your bottom line.”
The break-even point simply refers to the money you need to make to exactly cover the cost of being in business. It incorporates costs of raw materials, marketing, plant and equipment, insurances, salaries and other business costs.
If you don’t know how much it costs you to be in business, you won’t be able to make good decisions about what you sell, how you sell it and the price you set. You also will find it hard to identify opportunities to be more efficient and profitable by optimising your income and expenditure.
Sitting down with your accountant or bookkeeper is a great idea. They can help you determine your break-even point. They can also help you with modelling. For example, how much more profit could you make if you increased your price by 10 per cent or found 10 per cent in savings? Or both? Sometimes very incremental changes – such as changing the size of your labels or switching to batch postage – can add up to big results.
Being a business owner can be incredibly rewarding. But it demands so much from us too. Without knowing your break-even point, you could be leaving money on the table and have an unclear picture of whether the sleepless nights are worth it.
Tania Cavaiuolo is a Certified Practising Marketer and communications practitioner, who has led digital transformation and national campaigns including the most successful World’s Greatest Shave in its twenty-something-year history.
Tania founded See Marketing & Communications in 2016 to help organisations to be seen more clearly through strategic advice and tactical support.
She’s since advanced the interests of organisations including Carbon Neutral Adelaide, CSIRO, COTA Insurance, Department of Premier & Cabinet, Cancer Council Animal Welfare League and Bordeaux-based global network, Great Wine Capitals.
Approachable and insightful, Tania helps to clarify her client’s thinking so they can stride confidently forward and clients love her ability to communicate their value to the world in ways they love.
Tania enjoys her role as mentor within the UniSA Business School and she supports the empowerment of vulnerable women as a member of the Women's Legal Service SA Board.