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HOW
MUCH TO CHARGE
If you are selling
products that you obtain at
wholesale and sell at retail, the price may be preset for you. You may
have some latitude but it is much simpler to calculate than if you are
selling your own work. Setting a price for your work is always
difficult because there are so many variables. There is a concise
method for calculating the price of any product but all the variables
must be taken into account. Probably the most important question, and
one that is often overlooked, is: How much do I want to make from this
product or service. How can you possibly decide how much to charge
without answering this critical question.
Start with an hourly
figure so it can be applied to
any project or product. Remember, this should be the figure you want to
make for yourself before taxes. Do not consider material or overhead
cost. Try to balance reality with desire with this figure. That is,
what you want balanced with the reality of what is possible.
Let’s say
you want a minimum of $30 per hour for your time. Please remember that
you must decide this figure. It can be more or less depending on what
you feel is right. There is no wrong answer.
The next step is the cost
of your location. You may
be fortunate and use your own garage or utility building. Even if you
do, consider the cost of business space. When you go into business,
your garage and driveway may become busy. Neighbors may complain and
local regulations may force you to move the business into a commercial
location.
To determine this cost,
check out commercial spaces
of similar size. Use this figure to calculate the monthly rent and add
for utilities such as electricity, water and telephone. If you don't
have a separate line for your business, use a portion of the home phone
cost. For example, take twenty percent of a total rent (or mortgage
payment), electric and telephone bill of $1,000.00. The total would be
$200.00 per month. For the sake of simplicity, assume you will be
working 160 hours per month. Divide the $200.00 rent figure by 160 for
a total of $1.25 per hour.
Your business may require
tools or equipment. Some
may be large stationary equipment while others are portable. Still
others may be hand tools. This equipment not only involves an initial
investment, but it must be maintained in good working order. Over the
years it may require replacement with newer or better models.
All these costs must be
considered. The simplest
way to deal with the cost of replacement is a depreciation schedule.
Equipment and tools should be depreciated over several years for
replacement and income tax purposes. Long after a piece of equipment
has been depreciated for income tax purposes, the depreciation schedule
should continue to ensure that funds are available when a tool must be
replaced. For example, a good piece of equipment may serve you for
twenty years with proper maintenance. The easiest way to do this is to
establish an annual depreciation figure based on the total cost of the
equipment and the years you expect it to last. Let's assume that this
figure is $2,800.00 per year. This means that you should be putting
aside $233.00 a month for the replacement and maintenance of equipment.
Using the 160-hour figure we established earlier, this would require
$1.45 per hour.
The same thing goes for a
work vehicle, plus you
must consider maintenance and fuel. First you must take into account
the cost of the vehicle. This cost is handled as depreciation. Let's
assume that your vehicle cost $15,000.00 and you expect it to last for
five years. Divide the $15,000.00 by 60 months and then divide that sum
by 160 hours. This gives us a total of $1.56 per hour. The best way to
determine your maintenance and fuel cost is by keeping good records.
Let's assume that it will cost $300.00 per month to keep your vehicle
properly maintained and fueled. This would require $1.88 per hour.
Insurance is a high cost
item that must be
considered. This includes keeping your vehicle properly insured, plus
fire, theft and liability insurance for your business, your location,
job sites and completed products. Health insurance is also costly
causing many self-employed persons to remain uninsured. This is a
decision you must make but I recommend that you maintain at least major
medical insurance coverage. It is unlikely that you will be able to
obtain all this insurance for less than $450 per month requiring $2.80
per hour.
We all face federal income
taxes and it is not
uncommon for small businesses to have problems with the IRS. These
problems often occur because no provisions were made to set aside funds
for the payment of income taxes. If possible, pay your taxes quarterly
as required by the IRS. If not, at least open a savings account to save
a portion of your income to pay your taxes. This amount should be at
least ten percent of your gross income. Ten percent may seem low but
remember that we are working from gross income not from income after
deductible expenses.
It is difficult to
estimate the exact amount of
your income taxes but you will probably pay from twenty to thirty
percent of your net income. Social Security alone will require a
payment of fifteen percent. A net income of $30,000.00 per year could
cost you $8,000.00 and this would require at least $4.20 per hour. This
figure can vary considerably depending on your allowable deductions but
it is better to save too much than not enough. And, don't forget your
State income taxes.
Consider overhead costs
for time spent estimating
projects, preparing drawings and bid presentations. This should also
include picking up materials, running errands, accounting costs and
related items. The will require some guesswork but the figure can be
adjusted in the future. Get paid for this time spent by including them
as part of your hourly charge. Start with $400.00 per month for an
hourly amount of $2.50.
Profit is critical to any
business. It is the
motivator for all businesses. There are two ways to calculate profit.
You can make the profit part of the hourly figure or calculate it
separately. A higher percentage must be used if it is part of the
hourly figure since the calculation does not include materials. If you
add it to the hourly figure, use at least twenty five percent.
Otherwise, twenty percent is acceptable.
Now, let's put all these
sample figures together to
get an idea of how to determine pricing. Start by using your drawings
and related information about the project to prepare a materials list.
Then, assign an accurate price to each item. If in doubt, price the
item higher rather then lower. Any mistake here will come out of your
pocket. You may need to contact some of your suppliers to get updated
prices. Also, remember to add a waste factor if waste is a
consideration in the kind of work you do. For this example we will
assume the materials will cost $650.00 and the work will take 28 hours.
Check out the table below
for a breakdown of hourly charges.
Let's calculate our hourly
charge by listing all the items discussed previously.
Since there is some
guesswork involved in setting
the various hourly amounts, round off the final figure to $55.00. Take
28 hours times $55.00 and it equals $1,540.00. Add this amount to the
$650.00 for materials for a total of $2,190.00,
which would be the total price of the job. If you prefer to add the
profit separately, use the $45.64 figure times 28 and that equals
$1,278.00. Then add the $650.00 for materials for a total of $1,928.00.
Calculate twenty percent of $1,928.00 and it equals $385.00. Add
$385.00 to $1,928.00 to total $2,313.00. Notice that the two total job figures are close.
There are several things
to remember about these
figures. They are not necessarily accurate for your area. Determine the
going rates for your area and use them. This is especially important if
they are higher as you may wind up charging too little for your work.
Remember the rule of
supply and demand. Your prices
can and should reflect the demand for your work. This is common
practice in many businesses. Check hotel rates during peak and slow
seasons to see how they vary. If you are getting more work than you can
possibly do increase your prices until the work levels off. This
formula shows how much you must charge to make a living. Your
customer's willingness to pay determines how much you can charge above
this amount. The right price for any project is the amount that a
willing buyer will pay a willing seller. Beyond that, there are no
limits.
For some reason, there is
a preconceived notion
that a self-employed person can only make wages. Further, that we must
be prepared to sacrifice a decent income, medical benefits and
vacations to do the work we love. If you believe this is inevitable, it
probably will be true for you. There is no question that it is true for
many self-employed persons. First hand experience has proven this to
me. It doesn't have to be that way. If you have the skills to produce a
good product and charge enough for it, you can make a good living as a
self-employed business owner.
 FINAL
NOTES ON PERCEIVED VALUE AND SUPPLY AND DEMAND
Don’t limit
yourself by what the competition
charges. You may be worth much more to the customer. Some people are
making $10.00 per hour while others make over $500.00 per hour. There
may be a significant difference in skills but what often makes the
difference is the value the customer perceives. A clear example of this
is the art world. One canvas may look beautiful and not be worth the
value of the canvas materials. Another canvas of the same size may look
worthless to you or me and bring thousands, even hundreds of thousands,
from art lovers. This is all value perceived by the customer who is
willing to pay the price.
This is really applicable
to a business that
produces a product. There are people who struggle to get a few hundred
dollars for a really nice product and others who are getting thousands
for the same thing. Plus, the one who is getting thousands has a long
waiting list. Perhaps one is much more skilled than the other but more
likely they are at similar levels. Perceived value is the key
ingredient. Use perceived value to your advantage. If people really
love your work, then charge as much as the market will bear.
If you want to be in
business in a free enterprise
system such as ours, you must remember that the price of everything is
based on supply and demand. The maximum price of any product or service
is the maximum amount that a customer is willing to pay for it. If you
have a problem with the idea of perceived value and supply and demand,
I suggest that you avoid running your own business because you will
probably not make much money.
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