Deal or No Deal?

October 29, 2006

No this is not about the current TV show.  Rather if you are either in the personal services business or considering entering this business arena, the question of pricing your service is bound to come up.  This is especially true in the early stages of your Company’s development… should you take projects for a “lower price” just to keep the lights on and get your “foot in the door”?  Thus, Deal or No Deal.

Let’s examine how best to price your service.  Start with how much money you feel you need to support your Company.  Let’s assume it is just you, your dog, and the phone.  And, let’s assume you would like to make $100,000 per year and your total costs including you, the phone, and the dog are $125,000 per year.  In order to make $125,000 how much do you need to charge your clients?  Most people starting out would simply divide the $125,000 by 52 weeks and thus assume you need to make $2400 per week or $480 per day given a 5 day work week.  Simple, straight forward but wrong! 

Why is it wrong?  Let’s start with the number of days you will work… yes, it is possible to work on a clients business for 5 days a week… but not for 52 weeks.   What about vacation?  What about holidays?  What about sick days?  So, instead of assuming 52 weeks times 5 days or a total of 260 days, I suggest you use 180 days which assumes 20 days of vacation, and 60 days for holidays and sick days.  Sounds like to many holidays and sick days?  It is only 5 days per month… don’t forget some holidays are more then one day (e.g.: thanksgiving, Christmas, New Years, etc.).  So, to be safe, assume 180 actual work days. 

Now as you can see, to generate the same $125,000 per year, you will have to charge $695 per day and not the $480 per day in or original estimate.   Let’s take it one step further… within the 180 days available you will need to be doing some non-billable work such as selling, administrative paperwork, visiting the bank, taking the dog to the vet, etc.  Thus you need to develop your best estimate for how many actual billable days you might work…  this is called the “utilization rate.”   Let’s assume that your utilization rate will only be 50% since you will be spending a significant amount of your time selling…especially in the early years.   On that basis, you will need to charge $1390 per day for your services.  So, we have gone from $480 per day to $1390 per day just to get you the revenue that you feel you need.

As you build your organization, the same factors are in play for each employee who is billable.   Thus you need to create a business model which provides leverage across the organization to begin to generate the income necessary to both operate the business including all overheads and generate a profit.

I once did this exercise with a client who was in the service business for about 3 years and demonstrated that at his then current billing rate, he would never make enough money to live.  With input like the above he changed his business model and became very successful and highly profitable within six months.

Your comments and questions are always welcome.

Rich

Bizvice:  Strategy, Marketing & Entrepreneurship

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