Starting up a business can be daunting for many reasons, but knowing how much to charge for your goods or service can be one of the most challenging parts of setting up. How much you charge will have a huge impact on the following:
– Where you sit in the market when compared with competitors
– How much profit you make for your business
– How much you earn per hour
– Whether you want to be considered budget (and then potentially not so good) or elite (and considered overpriced and bad value).
– The business’ potential to grow and expand
Having a good look at your business plan (especially your Vision/Purpose) can be incredibly valuable as the first step. Closely examine what your intention is for your business, as well as its goals. If your vision is to be the most widely sought after lawn moving business in Sydney you may need to consider that there is a lot of competition out there and you will have to price your service accordingly. Consider that if your intention is to be very busy you can perhaps afford to charge a little less than the average lawn moving service to kick start your business and to get your name out there. Alternatively if your vision is to ‘Provide Exquisitely Manicured Lawns to the Most Prestigious of Properties Along the North Shore’ you can get away with being at the top of the market with your pricing. You may have less clients than the previous scenario but you will be providing a different service, creating a niche and charging a premium which should make up for the fewer clients. In terms of set up costs and product, both businesses are similar.
A good way to begin to work out how much to charge is to calculate the very minimum you need to earn per hour to cover your costs. You want to ensure you are receiving a basic enough wage to keep the business going. They say the first 3 years of running a business is the hardest, and the first 6 months is the hardest of all. So if you can manage to stay even in the first 6 months you are doing something right, but if you aren’t quite making a profit, if you have the financial support and a strategy to ensure you don’t get too deep in trouble, there may be light at the end of the tunnel. Speaking to an accountant can be good to have a solid financial strategy and back up plan to cover you while you find your feet.
A great tool is a ‘pricing work sheet’. This will help you work out how much you need to be earning on a per hour basis. So firstly, nominate your ideal weekly income after tax – this is how much you want in your hand. Don’t get too unrealistic here, but it can be a fun exercise to do a realistic figure and then your dream figure as a separate exercise – the second figure can be the figure you work towards as your business grows. For the purposes of this exercise lets aim to earn $800 a week after tax. Then you need to multiply this by 52 to get your annual income, in this case $41,600. The next step is to work out how many weeks you want as holidays, these need to be taken off the total yearly working weeks. For example if you want to have 4 weeks holiday you will only be available to work 48 weeks of the year.
The next step is to map out your ideal week. Think about what days you want off, as well as how much time you need to nominate to household tasks and hobbies. Then you have to set aside time to do work that doesn’t necessarily earn you any money but that is essential to the running of your business, such as accounting, marketing, ordering stocks etc. Whatever hours remain will be your actual paid working hours where you can charge a per hour fee. Once you work out how many hours you are available to do paid work per week then times that by the number of weeks you plan on working. For example if you want to work say 30 hours a week times 48 weeks (this takes into account your 4 weeks holiday) = 1,440. So this figure is your number of paid hours per year.
The next thing to work out is your ‘after tax and expenses hourly rate’, you can come up with an estimate by dividing your desired annual income by the number of paid hours. So we divide $41,600 by 1,440 which equals $28.90. So this is what you want to be getting in your hand after all expenses are paid in order to end up with a yearly income of $41,600.
To roughly work out your ‘pre-tax and expenses hourly rate’ use this formular: multiply your $28.90 figure by four and you get the amount you should be charging per hour to in order to earn your ideal wage. (Note: to multiply by four is just an estimate but is giving a generous margin for expenses and tax, but it gives you an idea.) So you need to be charging $115.60 an hour, and you will need to be moving lawns for 30 hours a week for 48 weeks to end up with $41,600 a year after tax and after expenses, plus you’ll get 4 weeks holiday. Well go on! You bet get started, there’s lawns to mow!
One important thing to remember is while you need to make money to survive, if you make your business about the money the business won’t last. It needs to be built on more than the desire to be wealthy and financially viable, it needs to be something you enjoy, and if you no longer enjoy it you need to still be passionate enough about it to potentially sell it to someone else.
Note: this article was inspired by a formula was given to me by John Baxter of Vision for Change who conducts a great Business Practise workshop every year at the Awareness Institute in Crows Nest.