How To Price Your Services

I constantly see versions of this question when working with those in the Ideation stage of starting a business. 

How much should I charge? Should I charge less to get started?  How do I calculate that? 

The simple equation is to consider the 3 basic elements of pricing a service: 

Labor + Time + Profit

Then, start to adjust the numbers to account for competitors’ prices, whether you're operating full or part-time, and your overheads to run the business.

For a more detailed equation, here is an AI version: 

P=(T×L+C)×(1+M) where:

P = Price of the service

• T = Time spent on providing the service (in hours or other relevant units)

• L = Labor rate (cost per hour of labor)

• C = Additional costs (materials, overhead, etc.)

• M = Desired profit margin (expressed as a decimal, e.g., 0.20 for 20%)

 Explanation:

Time (T): This represents the total time required to deliver the service. Be sure pricing reflects the effort involved.

Labor (L): This is the rate charged for labor, which should cover wages, benefits, and other associated costs such as skill level and experience of the labor required.

Costs (C): These are any additional costs associated with providing the service, such as materials, equipment, transportation, and overhead expenses.

Profit Margin (M): This is the percentage of profit you aim to achieve after covering your time, labor, and costs. It ensures that the business is not just breaking even but also generating a profit.

Example Calculation:

Suppose a service requires 10 hours to complete (T = 10), the labor rate is $50 per hour (L = $50), additional costs amount to $200 (C = $200), and you want a 25% profit margin (M = 0.25).

The price would be calculated as follows:

𝑃=(10×50+200)×(1+0.25)P=(10×50+200)×(1+0.25) 𝑃=(500+200)×1.25P=(500+200)×1.25 𝑃=700×1.25P=700×1.25 𝑃=875P=875

 So, the price of the service should be $875.

 Note: Product pricing is similar but with additional data to be included.

 Learn, Think, and Execute to your success – in business and in life.

 Tom

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