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.

Selling Nothing But Air

What are you selling?

Make the mistake of asking a door-to-door vacuum cleaner salesman that question and he’ll whip out his cleaning machine and be into his sales pitch faster than you can scream, “NO!”  If his sales pitch were a bullet, you’d be dead before you hit the floor.

Ask that same question of a doctor, or an attorney, or any other kind of “service professional” and you would probably be met with a blank stare followed by the response,  “I’m not SELLING anything.  I’m a [fill in the blank].”

Unfortunately, NOTHING and I mean NOTHING is further from the truth. If you’re in business, you’re selling something – PERIOD!

If you’re in business and you can’t pull out  a product to hand to a prospective customer for review, then chances are strong that you’re in the business of selling nothing but air.

  • Your education – nothing but air.
  • Your experience – nothing but air.
  • Your services – nothing but air.

Sometimes referred to as “knowledge professionals”, many of us who live and work on the web are selling nothing but air.  We are joined in the “real” world by dozens of service professionals whose services can not be wrapped and mailed.   The list of those selling nothing but air includes plumbers, dentists, attorneys, doctors, chiropractors, electricians, acupuncturists, realtors, writers, accountants – the list goes on and on.

If this were a paper for a professor in business school,  I’d be using the more “technical” term for selling “nothing but air” and I’d call it the intangible sale.  Then, I’d begin prattling on about the strong connection between MAJOR SALES and INTANGIBLE SALES.   I would point out that while not every Major Sale is an Intangible Sale, every Intangible Sale is by nature a Major Sale.

Thank goodness this isn’t a term paper on Web Marketing 101!

Just as a refresher, there are two types of “sales” your business can make.  There are Minor Sales which are sales that don’t warrant a lot of time or energy on the part of the buyer.   Almost anything offered for sale in a Wal-Mart would qualify as a minor sale.  Even the few items that are sold by Wal-Mart that would meet the criteria for a Major Sale are reduced to Minor Sale status thanks to Wal-Mart’s permissive return policies.

A Major Sale is one where the buyer’s financial and/or emotional investment is significant.  As a result, the purchase warrants significant time and research into alternatives. In the Major Sale, another key factor is that there is the potential for a long-term relationship between you and/or your business and the customer.

In other words, in the Major Sale – the consequences of making a purchasing mistake are high.

  • Choosing the wrong doctor can be a matter of life and death.
  • Choosing the wrong tax professional can mean the difference between business success and business failure.
  • Choosing the wrong divorce attorney can mean the difference between splitting your assets or turning them all over to your soon to be ex-spouse.
  • Choosing the wrong Realtor can mean the difference between buying a house the floods or buying one that is high and dry.

Our town of Port St. Lucie, Florida was making national news after Tropical Storm Fay rolled through.  We got  a lot of rain dumped on our fair city over the course of a few days, exposing to the world a critical flaw in our fair city.  Explosive growth combined with poor planning by city officials = exceptionally poor storm water drainage.  As a result, much of the city was shut down by extensive flooding.

I was getting a manicure last week and he conversation turned to Fay and the extensive flooding that resulted.  I asked my manicurist if she was affected by the flooding.  Her response, “We had a REALLY good realtor who told us when we began looking to buy a house up here about the problems the city has with drainage.  As a result, we purchased our house with the possibility of flooding in mind.  Our house sits high and dry thanks to our realtor’s advice.”

Attention: All Realtors – especially those of you who are “afraid” that the internet is going to replace you-  it won’t if you understand what it is you’re REALLY selling.

Three years later, a manicurist in a popular day spa is still singing the praises of her exceptional realtor – the one who guided them as they made a Major Sale Purchase and kept them from buying a home that was susceptible to flooding.

This is why when you’re in the business of selling nothing but air why it’s so important to build TRUST with prospective clients/customers.  We live in an age which can be defined as a “No Trust Zone“.  Building trust is an essential part of making the sale when you’re selling “nothing but air”.

Realtors – you are selling nothing but air  a.k.a.  – your expertise of your local housing market.

Attorneys – you are selling nothing but air  a.k.a.  – your expertise at negotiation and persuasion.

Doctors – you are selling nothing but air  a.k.a.  – your expertise of the human body.

Accountants, you are selling nothing but air a.k.a. – your expertise and knowledge of the tax code.

Once you recognize the fact that you’re selling nothing but air, it sets the stage for creating physical product you can put in someone’s hands.  Writing a book, an eBook or even a blog is a great way to “bridge” the trust gap and demonstrate your expertise.