Steps to Starting a Small Business: #6 Setting Your Rates

A fast easy way to start a small business is to sell your services.  If you’re good at writing, you can become a freelance writer.  Have a knack for selling, you can freelance your services as a sales person or a telemarketer.  Think you know a thing or two about selling without meeting people in person (marketing), then you too can be a freelance marketing consultant.  The list goes on and one.

If you’re a service professional, then the big question you must answer before you begin practicing your craft is to decide HOW you’ll get paid for sharing your wit and wisdom with others.

Setting your rate is the biggest issue you’ll face in launching a service based business.

Unfortunately, setting your rates is  not a simple matter of “set your rates too low and you’ll be swamped – set your rates too high and you won’t make any sales.”  Ah, if only that were true!

Unfortunately, it’s far too common for people to evaluate your expertise by the rate you charge.  For example, I know of two Virtual Assistants – one charges $25 per hour and one charge $45 per hour.  When you hear what their rates are, do you automatically assume that  the one who charges $45 an hour is “better” than the one who charges $25 an hour?

Setting your rate is a lot more complicated than picking a pie in the sky number and setting that as your income goal.   Your rates HAVE to be based in reality if you want to succeed.

There are TONS of bullsh*t articles out there which will tell you to set your rates with the following formula:

How Much You Want To Make / 50 weeks (two weeks of vacation)/40 hours per week.

So, if you want to make $100,000 a year you simply divide and divide again to come out with $50 per hour.

OOPS!!!  This little formula tends to neglect that if you’re spending 40 hours a week on billable work, you’re probably putting in more than 60 hours a week at the job.  (This is a bitter pill to swallow in a world that buys into the idea of earning six figures in the course of the 4 Hour Work Week.)

So let’s “fix” this formula by substituting 30 for the 40 in the figure above so we can spend 10 hours marketing and promoting our services and 30 hours “working” at practicing our craft. Now the rate is $66.67 per hour.

It’s better – but still not good.  The flaw lies by starting from starting at the end (what you want to make) and working your way back to the beginning (what you need to charge to make what you want).

If you’re a Virtual Assistant and your income goal is $100K per year, you’re going to need to charge $67 per hour to hit the mark.

Here’s the “fly” in that ointment.  Remember when I told you that I know TWO Virtual Assistants – one charges $45 per hour and one who charges $25 per hour?  Did you notice how “similar” those rates are.  Now, if you’re a VA and you’re planning on charging $67 per hour – well, you’d better be able to do something those other two Virtual Assistants can not do!

In other words, you’d better have a Unique Selling Proposition or USP.  That means you better be able to provide a REASON for the rate you’re charging.

The first business coach I hired took me through this whole bullsh*t process.  We picked a pie in the sky number – did the math and VIOLA!    It worked great – on paper.  However, when I went out to drum up business, prospective clients would ALWAYS ask how much I charged.  I would reply by quoting people my “hourly” rate.

Invariably, the next question out of the prospective client’s mouth would be, “So how many HOURS will it take for you to do this?”

See, people didn’t care what my hourly rate was – they just cared how much their website was going to cost.

Oh, and by using the bullsh*t formula, I put myself in DIRECT competition with the hundreds of thousands of high school and college kids who created websites in between beer bong parties.  Fifteen years of successful advertising experience didn’t play a part in that calculation and the fact that I was fast wasn’t reflected in my hourly rate.

Since I’ve been doing this for a LONG time, allow me to share what I’ve learned about setting the rates for your services.

  1. No one cares about your hourly rate except you.  All your client cares about is how much this is going to cost.
  2. In the end, your prospective client is going to mentally measure whether the cost of the project outweighs the benefit.
  3. Your hourly rate should reflect not only the value of your time, but the value of your expertise as well.

The final advice I have on setting your rates is this: When you’re starting out – aim low.

The biggest struggle you’ll face as a beginning freelancer or service provider is filling your practice.  Set your rates too high and you’ll struggle to land clients.  However, if you price your services on the low end, you’ll fill your practice with clients who are DELIGHTED with the high quality of work you’re providing at a bargain basement price.  Before long you’ll  find yourself in the position of having to raise your rates to keep your waiting list reasonable.   Meanwhile you’ll have a STRONG portfolio of work and testimonials to share with other potential clients.

Then, when you raise your rates – you can either raise them across the board or “selectively,”  meaning, you can grandfather in your favorite clients at the old rate and the “pain in the ass” clients will find themselves faced with a rate increase.  Personal note: A rate increase is the most satisfying way to fire a pain in the ass client!

In closing – the absolute WORST thing in the world you can do is to doubt your own worth.  If you don’t believe you’re worth $X per hour – then your clients certainly won’t think you’re worth that either.

Comments

  1. says

    LMAO Kathy – we’ve been charging a PITA surcharge for years! We call it the BF – bitch factor. You are so right, though, people don’t care how much your rate is, they want to know how much it will cost. As you become more proficient with what you do, you feasibly will do it more quickly. If you keep an hourly rate, then you’ll be paid less for more quality work? I don’t think so! Flat rate for repetitive tasks will keep income levels where you want them to be. Great post!

    Betsys last blog post..REAL

  2. Kathy says

    Betsy,

    My husband’s company calls it “G&A” Grief and Aggrevation – which is another way of saying bitch factor!

  3. says

    LAMO Kathy – but I really should be crying. My post that goes live in the next few minutes is also about setting rates. Luckily it’s not the same as yours.

    Also, I wrote one the other day that was too similar to one of your posts, so I set it to one side. I’m convinced we’re telepathic.

    I totally agree on the USP – you need a really good one to charge more. But I hate hourly rates. It’s a whole lot less hassle to offer a package, in the long run. It takes a lot of leg work at first but it can pay off.

    Admittedly, that may not be so easy for VA’s to do though. I hadn’t really thought about them and it may not be so easy for them to avoid hourly rates – especially if everyone else is charging them. I was thinking more on the lines of coaches and consultants.

  4. says

    “One of the joys of building your own business is deciding upon the rules. What you charge for your services is one of the rules.” You saved the best advice for last and that is indeed a joy.

    You succeeded in a no bullshit posting regarding rates.

    I have fun challenging pain inn the ass clients to scale new heights and if they can’t make it -then they fire themselves. But is is fun to be surprised once in a while.

    Tom Volkar / Delightful Works last blog post..Small Business Startup Checklist

  5. says

    Hi Kathy. I agree with most of this 🙂 However, a friend recently told me a story about a friend of her’s who was starting her own photography business. In her case, she started out with low rates, but ended up with clients who were nickle and diming her and trying to get the most they could for the little she was already charging.

    She upped her fees and her clientele started to come from within a different income bracket. They had more “respect” for their money and her services and the nickle and diming stopped.

    I have set my rates based on the industry standards for life coaching. And after I’ve been practicing for about a year they will go up. As well, my fees for proofreading are set within the industry standards. Last year, I was advised by an editor that I should raise my rates because I was so good 🙂

    Davinas last blog post..Video — Preparation Inspires Self-Confidence

  6. Kathy says

    @ Cath

    I’m tempted to just start posting “Ditto” and then scrape your feed! It would make my life easier! 😉

    @ Tom,
    It’s your J-O-B to challenge pain in the ass clients!!! :0

    Seriously, as a coach you do have the “pleasure” of allowing clients to fire themselves. It’s one of the many “perks” of being a coach!

    @Davina
    Your photography client’s experience is identical to mine in the rate setting arena. However, in photography and everything else, we need a portfolio to begin. Low rates means a quick portfolio build – which is then followed by the ever pleasant rate increases!!

    If she had started with high fees, she might not have had the portfolio to show to her new style of client. (At least, that was my experience starting out!)

  7. says

    Kathy – we could take turns doing that – alternate posts and copy. From what folk are saying now – there’s no penalties for duplicate content – so we’d be fine.

    Seriously – this is always happening to me. A few weeks ago I wrote a post but Akemi published something very similar first – so my post is still sitting in drafts.

    Cath Lawsons last blog post..Do You Have Business Questions?