How to Charge Clients Correctly for Your Services (Part II)

how to charge clients correctly for your contract services

In a previous post, we discussed the first two components in developing a successful pricing model for your contract business. In this next post, we’ll provide further insight on establishing pricing structure that’s competitive, rewarding, and valuable to you and your clients. To achieve this, let’s identify the remaining three key components for correctly charging customers for your contract services: calculate, competition, and compare.  

Part II:

Calculate

In the last post, you gathered the cost number and identified the value you offer your customers and clients. Now, it’s time to begin calculating what to charge your customers.

You can crunch the numbers by dividing your costs from above by 12 to see how much your monthly costs would be and then divide that number by the total billable hours you plan to work that month to get a minimum hourly rate base. This number would just cover your costs to run your business.

To that minimum hourly rate, add what value you think your customers will pay for your service in addition to the hourly rate. Think back to the plumber example from InfoEntrepreneur.org we discussed in Part I of this series. Your clients are paying for how much they value your service. Let’s look at this visually:

Cost ÷ 12 (months in a year) = Monthly Costs

Monthly Costs ÷ Total Billable Hours for one Month = Minimum Hourly Rate Base

Minimum Hourly Rate Base + Value to the Client = Hourly Rate to Charge Clients

If you’re not after an hourly-rate approach, that’s fine. Many small businesses and independent contractors opt for flat-rate pricing or project-based pricing. You can still utilize the above calculation of your hourly rate to estimate how much a flat-rate charge might be. For example, if your client’s project estimates 100 billable hours, you can multiply that above hourly rate by 100 to get a flat-rate price for that project. The above formula is just a tool to help.

An alternate approach to calculate pricing would be to use your experience as a starting point. Consider your experience with previous employers who provide similar services. In fact, you can use your former salary with that employer as a base, if you believe it reflects and represents the work you will be providing as a small business owner and/or independent contractor.

Competition

As a business, it’s important that you have pricing that’s comparable to others in your industry; they are, after all, your competition.

There are several ways you can determine what others charge for comparable services. However, be sure when comparing your services, you don’t undersell yourself. Businesses can approach pricing differently, depending on what is important to them, so use this information to enlighten and measure your pricing rather than to determine it.

Some ways you can discover what your competitors charge are listed below:

  • Ask for yourself—identify your competitors (i.e. similar businesses, independent contractors, etc.), and inquire about their pricing structure. You may be able to find this information on a website if they are transparent with their pricing, if they have flat rates for all customers, etc. Or, you can always reach out to ask them directly by phone call or in person.
  • Utilize common salary websites to get a pay range for similar services. You can usually specify your location, which can oftentimes affect pricing levels. If location is inapplicable for you and your business, these websites usually offer a nationwide average price/salary. There are many, but some websites you may find helpful are PayScale, Indeed, and, perhaps most common, Glassdoor.
  • Look to professionals to help you. According to NOLO’s Stephen Fishman, you can “contact a professional organization or trade association for your field” to get what local competitors are charging.

Once you have an idea of what your competitors charge, set this number aside as well, and we’ll use it in just a moment.

Compare

You have successfully identified what the competition charges for similar services, and you have calculated how much your services should be priced based on your costs, desired profit, and client value of your service. Now, you need to compare the two and adjust your pricing accordingly. Here are some things to consider:

  • Are you underselling your services? If so, consider increasing your pricing, which will help raise profits.
  • Are your prices too high in comparison to others? This isn’t necessarily a bad thing, and it doesn’t mean you have to lower your prices, either. It’s just something to be aware of, as you could attract clients looking for premium services or turn off price-driven customers.
  • Is your service more unique than the competition? Will it add more value to clients in some way? This is something to also take into account when comparing, as it could justify pricing discrepancies between you and your competition.

Ultimately, what and how you charge your customers is completely up to you and your business’s needs. These components are here to help simplify the factors that influence pricing services because we understand that it can be overwhelming. When deciding upon your pricing model, remember these five key components: costs, clients, calculate, competition, and compare.

Let the experts at Focus Financial help you navigate significant business decisions such as this. We offer a range of comprehensive financial services for companies of all sizes. Meeting with one of our financial advisors can help you manage your expenses and investments. Contact us today to see what we can do for you!