Pricing your products or services is one of the trickier tasks in starting a home business. Price too low, and you won’t make enough money. Price too high, and you won’t attract buyers. To a certain extent, pricing involves trial and error. However, there are some considerations and math problems that can help you get your pricing in the right ball park.
Setting a price isn’t about picking a number out of thin air. You need to price according to the value you bring. Here are a few things to consider when setting your price.
1. The level of knowledge or experience required to run the business. Some businesses require additional education or training that increases the value of the product or service.
2. Your knowledge and experience. You can charge more for experience.
3. Your target markets’ payment threshold. If you’re offering Ferrari-level service or products to Ford-level customers, you’re going to have a difficult time making a sale.
4. The cost of doing business. Many first-time home business owners set their prices so low that they don’t make enough to cover their expenses, which leads to business losses.
5. What the competition is doing. What services/products do they offer and at what prices? You also want to research their level of service. For example, do they charge more for their products, but ship for free?
Calculating Your Base Rate
A good place to start your pricing efforts is by determining the minimum you need to make. Start by calculating your business expenses including materials needed to create your product or service, overhead costs such as Internet access fees, shipping and home office expenses. Don't forget to add in the value of your time.
Next, determine the amount of profit you want or need to live on and add it to the "cost of doing business" figure. For example, if it costs $1,000 a month to run your business and you want to net $2,000 a month in profit, add the two figures together for a goal business income of $3,000 per month. Just to be safe, add an additional 10 to 20 percent for unexpected expenses, turning the $3,000 per month to $3,600 per month.
Divide your goal income by your monthly billable hours or estimated product sales. For example, if you’re a virtual assistant who wants to work 20 hours a week, your monthly billable hours would be 80 to 84 hours a month (approximately 4.2 weeks per month). If you sell widgets, what is the number you can sell per month?
Next, divide your monthly income by your billable hours to come up with a base hourly rate. For example, dividing $3,600 by 80 hours equals $42.86 per hour. For a product-based business, divide your goal income by the number of products you plan to sell. For example, $3,600 divided by, say, 100, equals $36, which is what you need to charge for your products.
Increasing Your Rate
Once you have your base rate, you increase the price of your service or products based on your level expertise and training, as well as level of service you provide. For example, if you’re a web designer with ten years of experience, you can charge more than $43 per hour. However, if the only sites you’ve created are for your family and friends, you may have to stick closer to your base fee initially, and raise your prices as you get more experience.
Analyze Your Numbers
Your final step is to determine if your numbers are doable. Will someone pay you $43 per hour for your service or $36 for your product? If not, you need to tweak your numbers. One option is to work more hours in your service business. Working an additional ten hours a week (a total of 30), reduces your hourly rate to approximately $28 per hour, while still earning your goal income. For your product-based business, you can determine price first and set a goal number of units to sell based on the price. For example, if you want to sell your widget for $15, to make $3,600 per month, you need to sell 240 widgets (3,600 divided by 15).
What you need to avoid doing is lowering your price number without making adjustments in your billable hours or number of units sold. If you want to reduce your price to $15 per hour for your service, but you don’t increase the number of hours you work, you won’t make your goal of at least $3,000 per month. The same is true for products. If you reduce the price of your product but don’t strive to sell more units, you’ll fall short. Of course, the opposite is true as well. You can charge more and either earn more or reduce the number of hours you work or units you need to sell.
Depending on the type of service you run, there are different ways to price your work. Products usually will have a single price, but you might offer variances depending on customization or other unique features and add-ons. Service-based businesses can have a variety of pricing options including hourly and by project, and retainer or monthly rates. When pricing by project or retainer or monthly rates, you’ll need to estimate the number of hours the project will take and multiply it by your hourly rate. For example, if you know it will take 5 hours to build a website and you need to earn $43 per hour, you want to charge $215 for the project.
Testing the Price
Pricing isn’t a "set it and forget it" proposition. Once you come up with a price, use it for while to get a baseline of how well it works and then change it. For example, increase the price by 10 percent and see what happens. Does it bring in more customers or less? If less, is the 10 percent extra still earning more with fewer clients or sales than the previous price? Your goal is to find the sweet spot where your price is set to generate the most sales and lead to the most profits.