How you calculate your pricing rates

How you calculate your pricing rates is vital for your business. Why should that be so? Firstly, it helps you achieve your goals. Secondly, it sends a message to your clients about you and your business. Above all, your pricing is there to make you profit. Moreover, it goes towards building you a sustainable, giving you time, choice, and freedom.

The podcast is part of my mission to help you get closer to your numbers, to appreciate the power of what those numbers can do. Improve your money mindset, help you make more profits, save taxes, and help you have the business you want and deserve.

Listen to find out more.

Pricing products and services

Pricing products and services share some things in common. For example, purpose, numbers, and psychology. There are also big differences. This episode is about services, a future podcast will talk about pricing your products. Still some great takeaways in this episode, whatever your sell.

Listen to find out more.

How to choose the right price.

You pricing will be between the ceiling and the floor. The ceiling is the most represents the maximum price that your customer will pay based. When it comes to the floor, that is the minimum you charge customers.

Your business purpose and goals, numbers, and psychology all play their part in How you calculate what to charge for your services. One size doesn’t fit all and you will have a range of prices to suit you and your customers – if you don’t, you should do.

Listen to find out more.

Your numbers are important.

Firstly, let us look at some key numbers you need to get hold of

How much time do you have available? Your time spent on marketing, accounts and admin needs to be considered. How many weeks will you be working? Lastly, don’t forget your costs and how much profit do you want to make?

Listen to find out more.

Pricing Calculator

Use our FREE and easy to use online calculator to see How you calculate your pricing rates . Let our calculator take on the heavy lifting of the number crunching. Our beautiful calculator shows you quickly what rates you should charge. It shows you a floor price, and one with your target profit in mind.

Type in your numbers to our calculator. See what the numbers say for your pricing.

Use the sliders to see the effect of changing time and money! We have got you covered with other calculators. For example, profit margin, discounting and break even.

Subscribe so you do not miss an episode of I Hate Numbers. For more business and finance, news, advice and tips

In This Episode

• Appreciating that pricing is multi-dimensional.
• Being aware that you need to know what your purpose and goals are.
• Understanding how your capacity and availability affect what you charge.
• Learning about the part that costs and profit play in pricing decisions
• Tips to share and jargon free talk
• Developing your own Numbers confidence and decisions
• Take more control of your numbers to help make you money, survive and thrive.

Links

https://podcasts.apple.com/podcast/proactiveresolutionss-podcast/id1500471288

https://play.google.com/music/m/I3pvpztpjvjw6yrw2kctmtyckam?t=I_Hate_Numbers

https://open.spotify.com/show/5lKjqgbYaxnIAoTeK0zins

https://www.stitcher.com/podcast/proactiveresolutionss-podcast

https://tunein.com/podcasts/Business–Economics-Podcasts/I-Hate-Numbers-p1298505/

You are listening to the I Hate Numbers Podcast with Mahmood Reza. The I Hate Numbers podcast mission is to help your business survive and thrive by you better understanding and connecting with your numbers. Number love and care is what it's about. Tune in every week. Now, here's your host, Mahmood Reza.

How much should I charge for my products and services? One of the more common questions that I've encountered in over 26 years running my business. Spoiler alert, the short answer is it depends. Hi folks. Welcome to episode 54 of I Hate Numbers, your weekly hit of business numbers and news to help you improve your money mindset, make profit, save time, and run the business that you desire.

This week's episode of I Hate Numbers is focusing on pricing. More particularly, answering that conundrum about how much you should charge your customers for what you provide to them. Now, your business may be making products, you may be a retailer. You may be providing a service to your end client. There is largely a common set of principles that we can take on board, to use to how we approach the pricing of those two.

You may be a business that actually does a combination. You may provide products, you may be a retailer, but you may also provide an aftercare service, or you may have an extension, or a pivot to your business. Now, we are going to set a framework in this episode, and I'm going to call it ONC. That's a three-tip framework here that's going to help us set the right prices for our customers.

I will point out at this juncture that there is no such thing as one price point, one pricing approach, and it really depends on a number of variables as to decide what we charge a particular customer or group of customers. The focus when we apply this will be on services. There's lots of takeaways for product businesses, but in a future podcast episode of I Hate Numbers, I'm going to be focusing particularly on pricing when it comes to manufacturers themselves.

So, let's crack on with the show. Now, before we dive deeper and look to see what we need to do as far as pricing is concerned, let's think about our purpose. Now, pricing represents to the outside world a message about what your business represents, about the brand that you are developing, and the brand that you're building.

It sends a message and the short answer is the price that you charge your customers for either your services or your products, is between what's called the ceiling and the floor. The ceiling represents the maximum price that your client, your customer, is willing to pay based on what you provide to them, more of that later on, and the floor is the bare minimum you should be considering to charge for your services.

That said, we are going to be talking products as well, but the focus is when it comes to the application, we'll be on services, but there's a commonality of principles that we can apply to any approach. Now, the first thing is in this ONC, is you need to think about your purpose, your objectives in your business.

Typically, when we choose a pricing approach, we typically use that to support, reinforce, and achieve our end purpose, our end goals, our business objectives, our marketing objectives, if you want to use more common language there. Pricing is not just a numeric calculation, even though numbers are heavily involved in the decision process.

It's a combination of psychology. It's a combination of achieving end objectives. It's a combination of number work that goes into it. It's a question of communication of that price. So, it's a whole blend of things, and it takes businesses many years to try and come up with the right approach. Businesses are always iterating, changing, and modifying their pricing approaches, but they still fall back on basic principles.

So, the start point for me is you need to think clearly at the beginning. What is the purpose? What is the objective that you are trying to achieve? Now, let me show you an example here. If one of your objectives is perhaps for building up your customer base, for building up of your audience, making your services more accessible to a wider populous,

then that might move you toward choosing a pricing objective that gives that. So, it may not necessarily be the highest price you could potentially charge, because the higher the prices will mean the smaller numbers of clients that will engage with you, and if you want to build up audience numbers, and it could be some good reason you can cross-sell to them.

They can actually look at other things in your business that you might be wishing to sell to them. You may be in the social enterprise sector and, therefore, you want to have a wider reach in terms of the people you help and support. And therefore, your pricing objective is going to be there to support that.

If you are there to actually support a particular lifestyle business, then it may be that in terms of the time capacity that you might have, in terms of the hours that you wish to work, in terms of the limits that you put on yourself or your business, you don't necessarily want to conquer the world, then you might choose a slightly different pricing point.

So, think clearly about your purpose, the messages you wish to convey to your customers, your clients, what objective you wish to do, and this is all going to be underpinned by, one of my favorite things in business, which I always encourage all business owners to do, is to plan. Then, we're not talking about formulating a plan as a document, but that planning, thinking ahead, where you wish to end up in your business over the next, say, 12 months, two years, and beyond. Having thought clearly about what objectives you're trying to achieve, we then need to think about numbers, and numbers

you cannot price, in my opinion, without actually understanding numbers, and there's a variety of numbers that you need to connect with and understand fully if you're going to be choosing the right pricing approach. I will point out, folks, at this stage, if you're thinking Mahmood, this is going to be lots of numbers that we've got to play with.

It's going to be a heavy amount of mass. I'm not comfortable with numbers at the best of times, fear not. At the end of the show notes, I'll show you a link and we've got some wonderful pricing calculators that we're sharing with you that actually takes the heavy lifting out of you coming up with some figures to look at. Now, what are the key numbers that you need to understand in your business in order to come up with the right price?

And I'm using that term right price in a very loose sense of the word. First thing, you need to understand and identify what your costs actually are. So, what are the costs to you of running your business, of providing that service to your customers, of the infrastructure costs? So, you need to sit down and actually figure out what your costs are.

So, what I would recommend at the end of this podcast, if not during it, grab a sheet of paper and just scribble down what are the running costs in your business. For those of you who are relatively new to the podcast, if you check out previous podcasts, then there are episodes on costs. We talked previously about fixed and variable.

We've talked about the different samples, but let's give a reminder here. Sit down and write down a list of what the costs are that you encounter in your business. So, typically things like infrastructure costs, like website hosting, costs of marketing, costs of rent, cost of employing freelancers, cost to yourself.

Remember, you need to factor in paying yourself a wage out of your business. If you don't, your business will not be sustainable. Think about any utility costs that you might have, storage costs, and so it goes on. So, make a list and then put numbers by them. I would typically look ahead to think what your cost base might be for the next, say, 6 months to 12 months.

The objective will be, when you price, is that the customer is the one who's going to be paying you back for the costs that you've incurred. Also, think in terms of what's your own aspirations. Do you have an idea of how much profit you wish to make in your business? Now, the pricing that you choose will reflect recouping

those costs from your customers. So, customers pay you effectively for running the business, and they will pay you a premium above your costs. Now, how much that profit level actually is? That's for you to decide of the type of audience, the type of business, the type of proposition, but you need to factor in, I would suggest, a profit margin, a profit markup, something to add onto the cost.

Some people, if you're a new start business, you may see it as an equivalent, what you need to support your lifestyle. What you might do is to have it as a figure approximate to your previous salary. Again, if you are a startup, if you've left a reasonably well-paid job, it's going to be difficult, not impossible, to actually match that salary in the short term if you are a new startup business.

But set a level, and again, if you check out our pricing calculator link provided in the show notes, then the numbers that you need to type in are there and it's structured in such a way that it's going to be relatively easy to import. More of that at the end of the podcast. So, think about your costs. Think about profit margins.

How much profit do you wish to make? What's the figure above that? What's a sensible reward for you? You also need to think about other things. And other things are what is your own personal time availability, time capacity. Now, if you're a solepreneur, if you're a business that's heavily involved, how much time, if you are in services, do you actually have to deliver that service to your end customer?

If you're running a consulting business, if you're running a training business, if you're running any sort of advisory business, any services that you provide, what's your time availability and your time capacity? Now, that sounds very grandiose, and what we mean by that is in a typical working week, if we take it to seven days, there's 168 hours, it's going to be pretty impossible to work 168 hours, and your lifestyle, your circumstances, and your aspirations where you are in your business cycle

would mean that you may only have capacity for maybe 40 hours. Now, the second thing you've got to bear in mind is that might be the hours that you've got available to devote to your business, to delivering your services, to supporting and serving your clients, but that doesn't mean you are spending all that time in delivering those services and being able to charge that time.

All businesses will have a dimension of what's called infrastructure. Time that's being spent in terms of supporting the business, doing the administration, marketing, reaching out, developing new services, and that time you need to consider there as well. Now, if we take as an example, somebody who might have 40 hours available in a given week, it may be that they look at what they've got to spend time on in terms of administering, reaching out, marketing, support,

infrastructure, developing new services. They may be spending 10 hours a week on average in terms of their social media feed, the marketing, the admin, et cetera, et cetera. That means that's 30 hours you have available. The next variable I would consider, certainly in the context of services, is how many weeks of that year are you available to work?

If we can factor all those numbers together, take into account our costs that we've got to incur, the profit we wish to make on top, and the time available over a given 52-week period, we can develop a charge-out rate, and two numbers we can come up with. One will give us an idea of costs, what we need to charge to recoup our costs, and number two, what we need to charge to make a level of profit.

Now, folks, I'm going to go back to the calculator here. If you check out our free online calculator for working out rates on services, it enables you to do a number of what if scenarios. So, you could, for example, put in your cost, put in your desired level of profits, use the slider to configure how much time you have available, and it'll give you an hourly rate on those two variables.

If you decide compared to the marketplace, compared to what competitors are doing that that pricing point is too low, and you've got a proposition which delivers value to the customer, then you can change the target profit. If you find out that your charge-out rate is too high compared to what your proposition is, what customers are willing to pay, then you can use that as an incentive to challenge your costs.

So there's a number of variables that you can play around with to actually focus your mind clearly. Now, even though you might be looking at hourly rate, not all businesses are able to charge by the hour, and you may be looking to take on a piece of work from somebody and charge by the project, charge by the completion of that assignment, of that task.

In the back of your mind, you'll need to have some idea about time taken, so when you come up with a quote, the hourly rate will be embedded there. So, let's remind ourselves what we've talked about so far. We've talked about purpose, marketing objectives, and within those objectives you'll find you're going to be accessing a variety of pricing options and strategies. Knowing your numbers, and it's critical

whatever pricing strategies you adopt, your ultimate objective has got to be to build and develop and gain long-term sustainable profits. The price you charge your customer certainly sets out a message. From a business perspective, you are interested in the profitability that you generate. If you dismiss profits and you think that's not part of the equation, then you are not going to have a business on your hands.

Now, the third thing is choice. How do you know the actual pricing to choose? Now, typically pricing comes down to three big choices within which there are a number of variants to choose. So, you can either choose what's called a cost-based approach, which says, if I know what the costs are of providing my services to an end client, I'm going to take that, and I'm going to add a proportion to that.

It's what's called a markup, a cost-based approach. That's perfectly fine. The upside is it's easy to apply, easy to adopt, easy to understand. The downside is that it's not market led. You're not going to be challenging and keeping an eye on your cost to make them more efficient. You may end up being very uncompetitive in the marketplace.

It may not suit your customers either, but it's there. Now, market-based pricing, so things like value-based pricing is based on the transformation that you'll provide to your client. What is the solution you are looking to provide? What is the pain that you're trying to alleviate with your client, and therefore you can base that on the value and that transformation that you give.

You can also look at things like premium pricing. So, if you provide a service, which is very unique, and you are sure, based on research, based on evaluation, that it's very unique what you offer, then you offer a premium beyond what competitors may be charging. Some people may be going by what's called competitor pricing, and they literally see in their sector, in their field, in their arena what others are charging, and pitch their prices at the same.

If you do it that way, it's easy, it's comparable. You still need to understand your cost base there, but you may find unless you can communicate clearly to the customer what your differential is, why you are different, then it's going to be very difficult to compete on that basis. The third option is literally break even.

So again, you may have an objective just to establish a market presence, to build up an audience base, and therefore, what you're looking to do is just to recoup your costs and not make any surplus on top of that. That for me, is a bare minimum figure, and obviously that is not sustainable. Now, within the

pricing toolkit, I'm just going to mention two or three other variants that we have, but to apply these, you still got to come back to what is your objective? What is your purpose? What are you trying to achieve in your business? Number two, you need to have a command of the numbers. You need to understand your cost base.

You need to understand the capacity. You need to understand your time availability, and if you don't have access to those, then you are pricing largely blindly, and that road leads to ruination. One approach used by many service businesses is to what's called discounting. Now, discounting as a term can have a very negative effect, a very negative interpretation, but discounting, if viewed correctly,

and discounting may not be the word you necessarily want to communicate to the customer is a valuable tool in the toolkit. So, for example, discount pricing may be very popular and a good tactic to use if you have lots of time on your hands. So, you've got a 40 hour week available, you don't have much demand, you don't have many people coming to you.

So, therefore, what that means is you can afford, I'll use that word loosely, to reduce your base price, to discount that because you'll be gaining more customers, you'll be gaining more access. Obviously, you might want to dress that up to clients as in terms of circumstances being such, you want them to get to know you better, introduce yourself to your own client.

So, reducing your prices, your discounting, as long as it's not below the cost price, can be a good thing to do. When we look at product pricing in a future episode, we are going to be looking at discount pricing that's used quite actively in terms of manufacturers and retailers here, and they use that to good effect,

and the level of discounts that they offer, they still need to reference it back to what their cost and profit base is. Bundle pricing. So, you may have a combination of services that you are offering to your clients. If you know what the relative margins are, the relative profitability, just like a supermarket would do, you could probably bundle them up.

So, if somebody buys service X at a certain price, you also allow them access to service Y. The additional cost typically of providing those additional services are what they call marginal. You have something called anchor pricing. Now, this is where the psychology comes in, as well as the knowledge of numbers and your objectives.

Now, an anchor price is where you communicate a front headline price. We've seen that probably when we're buying cars. Apple have done that to very good effect, and they'll publish a headline price, and then, they will cross that out, but that's the first price the customer gets to see, and then they reduce the price accordingly.

That's called anchor pricing. That's using psychology, knowing your numbers and what your objectives are. Okay, folks, so I'm just going to wrap up here. Let's remind ourselves of three things that we need to have in our toolkits. So, we need to be aware of what our objectives are, our purpose behind our business, what we want to achieve.

Pricing will help us get to that stage. We need to know our numbers clearly. We need to have a good grip on them, and as we've talked about on previous podcasts, you need to be able to catch those numbers. So, I'll give you a link in the show notes. Cloud, at the risk of boring everyone, is number one.

You've got to do that irrespective of the size of your business and then select the appropriate things in your toolkit. And as another example, if you are trying to illustrate that you are a very good high-quality service business, then the pricing point has got to match that offer as everything else does in that business.

If you're looking for audience gaining, you're looking for volume, you want to actually deliver those services to a wider base, for a number of good reasons, then it may be you go for a lower price point. As we see in airlines at the premium end to the Ryan Airs and the Easy Jets of this world, they're both using pricing slightly different, but they've got slightly different propositions to achieve.

Folks, I hope you've got some value out this particular podcast. Give me your feedback. Check the show notes out for that free online calculator, and there's two takeaways from today's episode. Make a note of the cost that you've got, jot them down, and think about how much you want to make in your business.

Does that fit then your objectives and your purpose? Check out our online calculators that will take the heavy number crunching away from you. Subscribe to the podcast and I'll see you guys next week. We hope you enjoyed this episode and appreciate you taking the time to listen to the show. We hope you got some value.

If you did, then we'd love it if you shared the episode. We look forward to you joining us next week for another I Hate Numbers episode.